Forty years of foresight

Described by one commentator as a “bravely original minded writer,” Eamonn Fingleton has repeatedly been vindicated in bold predictions about everything from the 1990 Tokyo financial crash to the post-Saddam quagmire in Iraq. Here, in reverse chronological order, is an account of how events have vindicated his analysis.

On the dollar implosion of 2010

In the currency crisis of November 2010, the U.S. dollar dropped below ¥81, representing a stunning come-down compared to two decades earlier when the exchange rate ended 1990 at ¥144. It was only with massive support from the governments of China and other  East Asian nations that a complete dollar implosion was forestalled. A gradual but nearly irreversible decline in the dollar’s value against the main East Asian currencies had long been predicted by Fingleton, most notably in books published in 1995, 1999, 2003, and 2008. These books, whose analysis is discussed in detail later, had consistently argued the unfashionable thesis that it was the United States, not Japan, that was losing ground in the world’s most geopolitically important industries.

On the American financial meltdown of 2008

In an extended analysis in 1999 Fingleton predicted that financial deregulation would progressively enfeeble the American economy. Anticipating by nearly a decade the American financial meltdown of 2008, he showed how financial deregulation had already spawned the growth of highly dangerous new  financial instruments. Writing in In Praise of Hard Industries: Why Manufacturing, Not the Information  Economy, Is the Key to Future Prosperity, he described such growth as “the economics of the cancer cell.”

He commented: “The evidence is that as deregulation has proceeded, markets have become increasingly volatile and are therefore valuing assets more and more irrationally….Most fund managers are adrift in a sea of make-believe and self-delusion.” For Fingleton’s full analysis as published in 1999, click here.

On the rise of sharp practice — and worse — in American finance

The rash of financial scandals that broke out in 2007-2009 came as little surprise to Fingleton’s readers. Long a critic of  financial deregulation, he predicted it would lead not to fairer pricing in financial markets but rather the reverse — a potentially disastrous explosion in sharp practice and outright fraud. Here is how he put it in 1999: “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.”

Coining the term “financialism” to describe such activity,  he added:  “The financial sector can get away with this because the people ultimately paying the bill usually don’t know they are doing so. The beneficiaries of big pension funds, for instance, rarely have any knowledge of, let alone control over, how their money is invested.”

On the decline of Boeing

Fingleton was early to publicize the decline of the Boeing aircraft company, an issue that has now become a cause célèbre in Washington defense circles. See in particular this article published in  2005.

On Alan Greenspan’s discovery of real-world economics

Few policymakers have seen their public esteem plummet so rapidly as former Federal Reserve chairman Alan Greenspan. Previously revered as an economic magician, he has now become widely regarded as the principal author of the massive financial coronary the United States suffered in  2008. Greenspan’s personal reputational bear market  came as no surprise to Fingleton’s readers. In the introduction to Unsustainable, published in 2003, Fingleton spotlighted Greenspan’s failure to sound the alarm about America’s mounting foreign indebtedness. Pointing out that the problem was caused by soaring U.S. trade deficits,  Fingleton wrote: “Where trade is concerned, Greenspan and his officials have been almost entirely silent.”  Fingleton suggested that because Greenspan had failed to learn the lessons of the New Economy stock implosion of 2000, he should resign. Fingleton added: “By making a graceful exit now, Greenspan can hope to be remembered for his intellectual courage in admitting his mistakes…..If he hangs on, the result in the end will be certain obloquy. He will be fated to be remembered as the man who lost America.”

Greenspan belatedly acknowledged Fingleton’s point in November 2004. In a tone reminiscent of Emperor Hirohito’s admission that “the war situation has developed not necessarily to Japan’s advantage,”  Greenspan characterized America’s soaring trade deficits as a “problem.”

On the fiasco of the U.S. invasion of Iraq

In the run-up to the Iraq war of 2003, Fingleton pronounced the Bush administration’s strategy “badly misconstrued” and, almost alone among Tokyo-based commentators, ridiculed the then consensus that a defeated Iraq would respond like Japan at the end of World War II. In an editorial page article in the International Herald Tribune (March 18, 2003), he 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 the bursting of America’s dot.com bubble

In his book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999), Fingleton exposed the logical flaws on which America’s dot.com boom was based.  Early reviewers, writing in the autumn of 1999, found his analysis “far-fetched”  and for a while he had few intellectual allies (albeit, including as they did such acute observers as Ernest F. Hollings, Warren Buffett, and Rupert Murdoch, they made up in their reputation for prescience what they lacked in numbers). The book went on to be named one of the ten best business books of 1999 by Amazon.com. It received this cover comment from James Fallows: “His [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.”   Six months later — in March 2000 — the dot.com bubble burst and millions of unwary savers were caught in the subsequent crash.

On the implosion of American software jobs after 2000

Citing the early successes of the Indian software industry in a commentary in 1995, Fingleton debunked the then widely held view that Americans enjoyed a unique cultural edge in software. He added: “Increasingly America’s software workers are pitted in head-to-head wage competition with workers in other countries.…. Software know-how migrates quickly around the world via textbooks and journals, not to mention the reverse engineering of innovative products. Virtually the only thing needed to create software is brainwork. And these days brainwork is a commodity that can be sourced anywhere there are modems and telephone lines.”

On Japan’s war legacy

Fingleton broke new journalistic ground when in 1995 he contrasted how Japan and Germany had dealt with their respective World War II legacies. As he pointed out in Blindside (p. 122 and pp. 365-366), Japan paid a mere $1 billion in total to victims of its war crimes — a pittance compared to Germany’s $72 billion. This disclosure came at a time when other commentators tacitly fell in with a long-established pattern of self-censorship. When the subject of  Japanese war crimes came up, Japanologists followed the lead of the semi-official Japan Times in fiercely criticizing the wording of Japan’s apologies for war crimes, while making no mention of the national policy of sweeping the compensation issue under the carpet. This semantics-only approach seemed to imply that the compensation issue had long been settled and  thus it helped lessen the risk of  class-action suits from American lawyers on behalf of war victims.  Even Ian Buruma in The Wages of Guilt, a 1994  book whose theme was the differing approaches to war guilt in Japan and Germany,  failed to note the sharp divergence in the two nations’  compensation policies.

Following Fingleton’s precedent, the late Iris Chang highlighted the compensation issue in her best-selling book The Rape of Nanking in 1997.

On Japan’s victory in high-definition television

In the mid 1990s the American press predicted a supposed stunning comeback by the American television set industry. Zenith and RCA had “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 Timesas a “big blow” to Japan, the American system was widely  presented as having rendered almost worthless a vast 20-year investment in a rival standard by a government-led Japanese consortium. Fingleton was almost alone  in rebutting this interpretation (see in particular an interview he did with Irv Chapman of CNN in June 1995). As he pointed out, American corporations had no ability to manufacture to the new standard and, irrespective of which standard or standards prevailed, the Japanese would entirely dominate the high-end manufacturing tasks in making the enabling components. A month later Zenith, America’s last maker of television sets, was bought by the Koreans and soon thereafter the Japanese acquired the American technology for a knockdown price. As of 2008, their lock on high definition television extended not only across Asia and America but even into Europe, which up to the mid-1990s had tried to maintain an independent television manufacturing industry.

On  Japan’s cultural destiny

Beginning in the late 1980s, commentators in key American and British media began proclaiming the Westernization of Japanese society and “the end of Japan Inc.” Japan was supposedly opening up to free trade and would soon be forced to abandon such hallowed economic institutions as permanent employment (the somewhat inaccurately named “lifetime” employment system), the so-called keiretsu system, cartelization of production and marketing, and minute bureaucratic control of almost  every aspect of Japanese life. Fingleton was almost alone in rejecting the story. In his 1995 book Blindside, he showed that far from being “dysfunctional cultural remnants,” Japan’s distinctive economic institutions worked together in highly counterintuitive ways to further the central objective of Japanese economic policy: the domination of  the world’s most advanced manufacturing industries. Ridiculing the conventional view of a “Westernizing Japan,” he argued that Japanese leaders were determined to retain their special economic structures and arrangements — and that they would succeed. They did.

[Disclosure: As of this writing in 2010, many Western commentators continue to predict the imminent collapse of, among other things, the Japanese employment system. Such predictions are no more authoritative than countless previous ones going back to the 1960s. But if they  are false, why don't Japanese spokesmen frankly and authoritatively rebut them? Because it suits corporate Japan to keep Western observers in the dark. One reason is that the Japanese employment system cannot function properly without a degree of protectionism -- thus to say the system has a future is tantamount to saying Japanese protectionism has a future.   Another reason is that Japanese corporations use their workers abroad as the swing factor in their global employment policies. If  foreign workers knew  they were in effect second class citizens, corporate Japan's labor relations policies would be rendered more complicated.]

On Japan’s record trade surpluses

Fingleton has for more than two decades opposed the conventional view among English-language commentators that Japan’s trade surpluses would soon fall. He first made the case in the Atlantic Monthly in 1989, arguing that earning large and rising surpluses was central to Japanese policy-making. This was the same year that a future editor in chief of the Economist magazine premised an entire book (The Sun Also Sets) on the proposition that, on the strength of promises of deregulation, Japan’s trade surpluses were destined to disappear before 2000. The evidence is now in. Between 1989 and 2009, Japan’s current account surpluses soared more than three-fold. In the same period America’s current account deficits rocketed six-fold.

On U.S.-Japan economic rivalry

Fingleton’s most controversial prediction was the subtitle to Blindside, his 1995 book on the Japanese economy: “Why Japan is Still on Track to Overtake the U.S. By the Year 2000.” The outcome was, of course, quite different, at least as conventionally measured. At market exchange rates, Japan finished the 1990s with an economy not quite half of America’s.

Although Fingleton acknowledges that Blindside‘s subtitle was way off, he points out that his error stemmed from a misreading of American politics, not Japanese economics. His bet was that a far-sighted Clinton administration would opt for a massive devaluation of the dollar – at least 50 percent against the Japanese yen – to pull American manufacturing out of its death spiral. Instead the Clinton administration chose a strong dollar, a policy that in the short term papered over American economic decline — but at the expense of massively compounding America’s long-run trade problems.

Those problems have duly compounded. As already noted, whereas Japan’s current account surplus increased threefold between 1989 and 2008, America’s current account deficit multiplied six-fold! At this stage the American manufacturing sector has become so hollowed out that no matter how drastically the dollar were to be devalued against the Japanese yen, the Chinese yuan, and other East Asian currencies, the United States could not  balance its trade in any reasonable period.

Basket case note: America’s 2008 current account deficit represented nearly 5 percent of gross domestic product. The only case of any other major nation exceeding this level outside a time of war or in the immediate aftermath of war was Italy in 1924. In January 1925, Benito Mussolini seized dictatorial powers in Rome.

On the Tokyo crash

Fingleton was virtually alone among Tokyo-based economic observers in the late 1980s in predicting the Japanese financial crash. His concerns were first aired in Euromoney magazine in September 1987. In a six-page article he showed that Japanese banks were lending heavily to a highly inflated real estate market (click here to read the article). The analysis was billed on Euromoney’s cover with the title: “Why the Japanese Banks are Shaky.” In the same magazine in February 1989 he made his first prediction of the coming Tokyo stock market crash. 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.” The bear market took a few months longer than Fingleton expected to arrive — it began in January 1990 — but its ferocity fully vindicated his fears. Fingleton’s late 1980s bearishness contrasted starkly with a generally highly bullish view among Tokyo-based securities analysts and “strategists.”

On the Japanese trade lobby

In 1989 Fingleton showed that world-renowned McKinsey consultant Kenichi Ohmae had systematically misled American officials, executives, and journalists over many years about the nature of Japanese trade policies. Although he posed as a partisan on behalf of would-be American exporters to Japan, he emerged in Fingleton’s analysis as a “deep cover” agent for protectionist  Japanese interests. He was quickly “let go”  by his embarrassed McKinsey partners after more than 23 years with the firm.  Once so prominent in the American media that he was described as Japan’s most famous citizen (and he was for many years the most frequently published outside contributor to the Wall Street Journal‘s editorial pages), he soon afterwards vanished from the field of U.S.-Japan relations and has never returned.

Ohmae’s key message — presented as a major theme in several books — was that the Japanese market was as open as that of the United States. The truth was officially admitted only years later when, in a devastating gaffe at the Foreign Correspondents’ Club of Japan in 2000, Mitsubishi Corporation president Minoru Makihara referred to the Japanese market of the late 1980s as “closed and tightly protected.”

On American 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. Fingleton 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 magazine, 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 expressed view among American media professionals that the Gannett group’s plans for a new U.S. national newspaper were misguided. Writing in Forbes, Fingleton pointed out that Gannett’s venture crucially enjoyed the benefit of new technologies that had been unavailable to a previous failed attempt by the Dow Jones company to launch a national newspaper. The new newspaper duly succeeded — so much so that it is now America’s biggest selling daily. Its name:  USA Today.

On the American television broadcasting industry

In an article in Forbes magazine in 1981, Fingleton broke the news that the then little known Rupert Murdoch 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.

On the Celtic Tiger

In his first job as economics reporter for the Irish Independent newspaper, Fingleton in 1971 sought out T. K. “Ken” Whitaker, a then unknown senior civil servant, and wrote a profile of him. It was the first significant press attention Whitaker had ever had. Whitaker subsequently became famous in Ireland as the father of the Irish economic miracle and in a poll conducted by RTÉ, the Irish national television company, in 2001 was named “Irishman of the 20th century.”

Comments are closed.