Forty years of prescience

Eamonn Fingleton has repeatedly been vindicated in predicting everything from the 1990 Tokyo financial crash to the disaster of post-Saddam Iraq. He confines his predictions to his areas of maximum expertise. These include East Asian economics and politics,  advanced manufacturing, and certain areas of international finance.

Here, in reverse chronological order, is an account of his prescience.

On Donald Trump’s rise

Fingleton was early to recognize Donald Trump’s electoral potential. As far back as December 2015, when Trump’s run was still widely regarded as a joke, Fingleton launched a series at Forbes.com with the running title, “Why Trump is winning.” He went on explicitly to call the general election for Trump in a commentary on February 21, 2016. The headline: “After South Carolina, Here’s Why Donald Trump Will Be America’s Next President.” Fingleton based his prediction mainly on familiarity with “flyover” state rage at failed trade policies and Washington’s indifference to the collapse of the American industrial base.

On Chinese supergrowth

“Sophisticated” opinion has long held that China risks economic stagnation, if not implosion, if it does not soon embrace free trade and other American ideas of good economics. It is a view that has been promoted by such English-language authors as Gordon Chang, Minxin Pei, and John  Lee. 

Fingleton has consistently opposed this view which, he argues, greatly serves Beijing’s propaganda program (because, among other things, it fosters procrastination and complacency in Washington in the face of Chinese mercantilism). He laid out his full case in In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony (New York: St. Martin’s Press, 2008). He showed that, far from being a drag on the economy, Beijing’s avowedly authoritarian economic system is actually far more effective at generating growth than the American free-market system. (The argument cannot be summarized in one sentence but one way authoritarian controls help is in suppressing consumption. This boosts the savings rate and thus funds a fast rate of investment in ever more efficient manufacturing processes. China’s export-led growth strategy, in combination with a policy of doctrinaire free trade in the United States and many other parts of the English-speaking world, does the rest.)

The results are now in. The fact is that the Chinese economy remains as tightly regulated as ever and the  big banks and most other key elements of the economy are government owned. Yet growth has continued at more than 6 percent a year – one of the fastest sustained performances of any large economy in history. Meanwhile exports have soared from $1,221 billion in 2007 to $2,143 billion in 2015, representing growth of 7.3 percent a year — a particularly impressive performance given that already by 2008 conventional wisdom held that world markets were becoming saturated with Chinese exports.

On U.S. financial deregulation

Fingleton was one of the earliest commentators to predict the American financial system’s problems of 2006-2008. In Unsustainable: How Economic Dogma is Destroying American Prosperity (New York: Nation Books, 2003), he wrote that the then fashion in Washington for radical financial deregulation was misconceived. Far from rendering banks and insurance companies stronger and more efficient, as most commentators believed, many of the new financial instruments deregulation had spawned were seriously flawed and their proliferation represented “the economics of the cancer cell.”

He added: “The development of increasingly complex derivatives in recent years has been a particular boon to financial criminals. In a typical pattern, securities firms deliberately concoct instruments that are so complex that most institutional investors cannot fully understand them. Moreover, the market in any particular type of instrument is typically extremely thin, and thus prices can be readily manipulated by the securities industry.”

Subsequent events bore him out. The sub-prime mortgage boom imploded in 2006 and after the demise of Lehman Brothers in 2008, the entire U.S. financial system came within a whisker of collapse.

For Fingleton’s full analysis, click here.

On the U.S. invasion of Iraq

In the run-up to the Iraq war of 2003, Fingleton described the Bush administration’s plans as “badly misconstrued.” He ridiculed suggestions that a defeated Iraq would react in the resigned and calm fashion of Japan after the atom bombings of 1945. Relying on the Japan precedent, neoconservatives assumed that the occupation and reform of Iraq could be accomplished quickly and Iraqis might even welcome the invading Americans.

In an editorial-page article in the International Herald Tribune on March 18, 2003, Fingleton wrote: “The trouble with the Japanese precedent is that few of the conditions which made it possible apply to Iraq. Even in defeat Japan was an orderly nation; the same is unlikely to be true of a conquered Iraq…. Japan played the role of model prisoner, gracefully putting up with many indignities the sooner to regain freedom. For people to behave like this requires a sense of far-sighted discipline that few nations have shown in defeat. Yet post-war Iraq will lack even the most basic decision-making structures necessary to enforce such discipline.”

On America’s dot.com bubble

In In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity, Fingleton exposed the mistakes and wishful thinking that underlay America’s late-1990s dot.com boom. Published in September 1999, the book received this commendation from James Fallows: “[Fingleton’s] skeptical look at the software/Internet boom is important while the boom is going on and will seem even more intriguing once it is over.” The book went on to be named one of the ten best business books of 1999 by Amazon.com. The bubble burst in March 2000, swallowing up the savings of millions of unwary American investors.

On the outsourcing of the U.S. aerospace industry

Almost entirely overlooked by the mainstream American press, the American aerospace industry has become deeply hollowed out in the last three decades. Fingleton was early to spot the trend. As far back as 1995, he reported that a consortium of three Japanese precision engineering corporations (members respectively of the Mitsubishi, Kawasaki, Fuji industrial groupings) was making “rapid progress” in the industry.

Returning to the subject in the American Conservative in 2005 (under the heading, “Boeing, Boeing,….Gone”), he wrote: “In a rerun of earlier American industrial implosions, Boeing has come to rely more and more on Japanese contractors for its most advanced engineering and manufacturing. Heavily subsidized by the Tokyo government, Boeing’s Japanese partners are delighted to lowball their contract prices and spend heavily on the sort of advanced research and development that in happier times Boeing would have eagerly—indeed jealously—reserved for itself.”

The hollowing out has continued apace in recent years — so much so that, on Boeing’s own figures, the total American manufacturing share in the latest Boeing, the 787, is a mere 35 percent. Moreover unofficial calculations by the aerospace experts David Pritchard and Alan MacPherson put the figure even lower. Meanwhile the Japanese are contributing 35 percent, and the rest of the plane comes from many parts of the world, not least Germany, South Korea, and France. By comparison the American share of the Boeing 747, launched in 1970, was 98 percent.

In truth the 787 is in key ways more a Japanese plane than an American one. Certainly it represents a triumphant advance over a mere 21 percent Japanese share of the Boeing 777, launched in 1995, and just 16 percent of the Boeing 767, launched in 1982. Crucially, the Japanese are making the 787’s super-light, super-strong carbon-fiber wings, which are its unique selling proposition. They reduce seat-mile fuel consumption by nearly one-fifth, rendering the 787 the most advanced passenger jet ever built. Traditionally Boeing had regarded wing-making as its core technology.

As of 2016, the news from Tokyo was that the Mitsubishi-Kawasaki-Fuji consortium was planning to become full risk-sharing partners with Boeing in developing future jets (hitherto they have been merely contractors). Meanwhile Mitsubishi was planning to launch its own 92-seater regional jet in 2018.

Thom Hartmann interviewed Fingleton on Boeing’s decline in 2014. The interview can be watched here.

On Japan’s war compensation policy

For many years after World War II the Japanese government imposed a news blackout on its parsimonious war compensation policy. American scholars and foreign correspondents alike were induced to censor themselves.

Fingleton was the first Anglophone journalist to break the taboo. As he pointed out in Blindside (p. 122 and pp. 365-366) in 1995, up to that time Japan had paid a total of a mere $1 billion to war-time victims. That compared with $72 billion paid by Germany.

Following Fingleton’s precedent, the late Iris Chang highlighted the issue in her 1997 book The Rape of Nanking. This became a best seller but she died by her own hand in 2004. In a suicide note, she suggested she was under surveillance by the CIA and add that she was being hounded by forces “more powerful than I could have imagined.”

The compensation issue finally came to be widely discussed after the complaints of the so-called comfort women — sex slaves recruited in Korea and elsewhere — became a cause célèbre in the late 1990s.

On high-definition television

In the mid-1990s a rash of stories in the American press told of a supposed comeback by the American television set industry. Zenith and RCA had reportedly “turned the tables” on the Japanese electronics industry by developing the world’s first digital version of high-definition television. Described by the New York Times as a “big blow” to Japan, the American system was widely assumed to have sidetracked a vast government-led 20-year Japanese investment in a so-called analog standard. 

Fingleton was almost alone in rebutting the story (which he did, for instance, in an interview on CNN with Irv Chapman in June 1995). As he pointed out, most of the Japanese industry’s new technology would work with any system. Meanwhile, having shut their U.S. factories, the Americans lacked independent supply chains to exploit their standard. Irrespective of which standard prevailed, the Japanese would, Fingleton predicted, dominate the industry because they would control the supply of so-called  producers’ goods such as the key components and production machinery.

To this day television set manufacturers in Korea, China and elsewhere depend heavily on the Japanese for state-of-the-art components and production machinery. As for RCA and Zenith, as the final stage of their death spiral, their brands were soon licensed respectively to Sony of Japan and LG of Korea. 

On U.S.-Japan manufacturing rivalry

During the “juggernaut Japan” years of the 1980s, countless commentators raised fears about rising Japanese competition in advanced manufacturing. The fears centered particularly on autos and leading-edge electronic components and materials.

Then came the Tokyo crash of 1990-1993. The commentaries suddenly switched from juggernaut Japan to basket-case Japan. Jubilant American commentators concluded that the Japanese challenge had been an illusion all along and that America’s system of free markets was always destined to win out over Japanese-style dirigisme.

The financial guru James J. Cramer led the charge with a cover story in the New Republic in 1992 entitled “We’re back! The Unsung Revival of American Manufacturing.” In similar vein, Karen Elliott House compared the Japanese economy to a children’s toy called “Shrinkies” that shrank before your eyes. In a commentary in the Wall Street Journal  she suggested Americans should welcome Japan’s supposed collapse by singing the Hallelujah chorus. Not to be outdone Forbes reported that the United States had become the world’s most competitive economy and added: “That’s why our foreign trade is booming and a trade surplus is within grasp.”

In his 1995 book Blindside: Why Japan is Still on Track to Overtake the United States by the Year 2000 (Boston: Houghton Mifflin, 1995), Fingleton examined such claims and found them wanting. He showed that far from losing position during the crash, most Japanese manufacturers had actually continued to gain, and in many cases gain rapidly, on their American rivals. Indeed many had moved so fast that in more than a hundred instances itemized in Blindside they had established “chokeholds” – global monopolies – in key manufacturing categories. Such monopolies have been typically invisible to American economic commentators but are hardly less impressive for that. One example: Japan has long since monopolized the supply of silicon ingots from which the global electronics industry cuts silicon wafers. Each new generation of computer chip requires a higher grade of silicon and without constant Japanese breakthroughs in silicon purity, the global electronic revolution would long since have ground to a halt.

Fingleton went on to argue that Japan was moving so fast that by 2000 it would have surpassed the United States in almost every advanced manufacturing category. It would thereby succeed to the title of the world’s premier manufacturing power – a title the United States had held since the 1890s.

As the book showed, for a high-wage nation to pay its way in the world, there is no substitute for advanced manufacturing. By contrast the service industries on which the United States increasingly depended were disappointing exporters. This includes even the U.S. computer software industry, whose products can be readily reverse-engineered or simply counterfeited by foreign competitors, . 

Blindside also broke new ground in showing that most reports of weird post-crash Japanese economic dysfunction were grossly misleading if not fictitious. (An example is the story that Japanese government borrowing is out of control. If this were true, Japan would long since have succumbed to Zimbabwe-style hyperinflation.) The Japanese establishment has encouraged such reports because the image of a Japanese economy teetering on the brink of outright disaster helps dissuade Washington from pressing for the opening of Japan’s closed markets.

Did the Blindside prediction pan out? For anyone who looks beyond media myths, the answer is surely yes. Take, for instance, the Japanese auto industry. Little noticed in the world’s press (but rather more obvious on the world’s roads), the Japanese have considerably more than doubled their unit output since 1989. As for Detroit, don’t ask.

The larger trade picture also bespeaks a marked continuing loss of American position to Japan.  Japan’s current account surplus hit $107 billion in 1999, 89 percent higher than the already huge figure of 1989. Meanwhile America’s current account deficit soared from $104 billion percent to $339 billion, an increase of 226 percent.

Although the U.S. press has long since swept the trade story under the rug, America’s deficits have not gone away. The U.S. current account deficit in 2015, for instance, totaled $484 billion. No major nation has run such persistently high trade deficits since Italy in the early 1920s. In 1925, Mussolini seized dictatorial powers in Rome.

Addendum: The book predicted that in an attempt to pull American manufacturing out of its nosedive, the Clinton administration would drastically devalue the dollar by the late 1990s. That prediction did not pan out. Instead President Bill Clinton opted for a high dollar. This reduced the trade deficits in the short run but at the cost of greatly exacerbating them later on (by precipitating further factory closures). Ironically in a letter on July 11, 1995 to Senator Ernest F. Hollings, President Bill Clinton claimed to have skimmed Blindside. He pronounced it “a good book.”

For further reading on the Blindside prediction, click here, here, here and here

On the Tokyo crash

Fingleton was virtually alone among Tokyo-based economic observers in the late 1980s in predicting the Japanese financial crash of the early 1990s. His concerns were first aired in Euromoney magazine as far back as September 1987. In a six-page article, he showed that Japanese banks were lending heavily to a grossly overpriced real estate market (click here for that article). The cover headline was  “Why the Japanese Banks are Shaky.”

In a later commentary he examined the wildly inflated Tokyo stock market. He wrote: “After the current tax-driven boom ends in April, Tokyo stock market volume will slump — and a prolonged bear market, starting probably in the next six months, will make the woes worse.” Those words were published in the spring of 1989. The bear market finally emerged in January 1990 and turned out to be one of the most ferocious in world history. The crash proved so devastating precisely because almost no one anticipated it. The biggest losers were American and British savings institutions who had been assured that Japanese stocks would never fall. Supposedly  the Japanese government would step in to keep the market ludicrously overvalued indefinitely.

U.S. accounting standards

In 1983 Fingleton highlighted an accounting loophole that enabled many American software companies to inflate their reported profits. He showed how instead of expensing software development, companies misleadingly treated it as a capital investment. He argued that software development costs should be treated as a form of R & D — a change that would require deduction in full against current profits. His analysis, published in Forbes, was named the best accounting article of the year by the American accounting profession. The profession subsequently tightened U.S. accounting rules to eliminate the abuse.

On the American newspaper market

In 1982 Fingleton challenged a widely held view among American media professionals that the Gannett group’s new U.S. national newspaper would fail. Writing in Forbes, Fingleton pointed out that Gannett had a crucial edge in new technology that had not been available to a doomed previous attempt to launch a national newspaper. Gannett’s newspaper duly succeeded — so much so that it is now America’s biggest daily. Its name:  USA Today.

On the American television broadcasting industry

In Forbes in 1981, Fingleton broke the news that Rupert Murdoch, then little known in the United States, was planning a bold diversification from his base in newspaper publishing. Murdoch duly pressed ahead and the resulting business is now a household name: Fox Broadcasting.

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