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The Asian economic crisis of 1998 is reviewed by economist Ravi Batra.

  How will the Asian crisis reach the shores of America and Europe? The currencies of the Asian tigers and Japan have declined sharply in recent months. Their exports have become cheaper abroad and imports have become expensive at home. They have also seen business closures and layoffs. Asian consumers have been cutting back on their household spending. Expensive foreign goods and falling demand will sharply trim imports; but lower prices will stimulate exports. Thus, in the months to come, Europe and the United States will see a sharp increase in their trade deficits with Asia.

Companies in Europe and North America will suffer sales losses; their profits will fall, and that means crushing losses in share prices, which have been soaring from the promise of ever-increasing corporate profits.

At first, shareholders in Europe and North America will be complacent; they will be advised by Wall Street brokers and bankers not to panic, because the US fundamentals are supposedly very sound. Bill Clinton and Alan Greenspan will reassure the public and possibly lower the interest rates. The experts will sing the glories of long-term investing to the public. As a result, after each downturn, stock markets will recover somewhat.

But the global supply-demand gap will not disappear, and we will continue to see crashes in the financial markets. At some point the public or institutional investors will panic. That is when a thunderbolt will strike the New York Stock Exchange, perhaps in the summer of 1998, or around Christmas, and definitely by the end of 1999.

The thunderbolt could come in one massive jolt or, as with Japan in 1990, in a series of weekly market declines. America, after all, is a giant version of Thailand. As with the Baby Tiger, the United States has a mountain of foreign debt coupled with a vast trade deficit. The US economy and share markets have prospered from hefty capital inflows from abroad. The internal debt in America is also high. The US economy will collapse just as fast as the Thai economy. Nature is not partial to any nation or people. When natural laws are violated for so long, the end result is a Shakespearean tragedy.

First the peripheries fall, and then the center. When the center disintegrates, the outer areas suffer some more. The thunderbolt in New York will then send shock waves around the world. Stocks will crash, once again, from Tokyo to London to Toronto to Sydney.

The Fall of the Business Empire

Like any other empire, the American business empire will also fall. The question is not if, but when.

A close look at any society reveals that there are three possible sources of political power--military, intellect and money. Religion may also yield social influence, but priests dominate society through their mastery of scriptures and rituals. In other words, they also utilize their intellect to control and influence people. Thus, there are only three sources of political leadership. As a result, through the pages of history we find that society is sometime dominated by warriors, sometime by intellectuals (including priests) and sometime by the wealthy.

What is more interesting is that the age of the military, in which the army rules, is followed by the age of intellectuals, wherein the educated bureaucracy reigns, and then by the age of the affluent or acquisitors, in which money rules. Eventually, the acquisitors acquire so much wealth that other groups of people have to spend most of their time at work just to earn a living. That is when people get fed up with the rich, and overthrow the rule of money and the institutions associated with it. After that warriors dominate society again and the cycle of social evolution begins anew. In other words warriors come back to power, followed by intellectuals and acquisitors and so on.

This is the law of social cycles authored by my late teacher, P.R. Sarkar. For instance, the Western world and Japan have passed through two such cycles  since the birth of Christ. In Western society, the Roman empire was an age of warriors, the rule of the Catholic Church was an age of intellectuals, and feudalism was an age of the wealthy. This completed one rotation of the social cycle.

Another rotation began when feudalism was replaced by the dominance of army generals who founded kingdoms and dynasties; this was followed by the rule of prime ministers and diplomats, or another age of intellectuals. Today, and since about 1860, the capitalistic West is in another age of acquisitors. The prominent role of the American business empire suggests that much of the world today is in the era of the wealthy.

In 1978, I wrote a book entitled The Downfall of Capitalism and Communism, in which I explained the law of social cycles and predicted that both capitalism and Soviet communism would collapse by the year 2000. My reasoning was that Russia and its satellites would move from the age of warriors to the era of intellectuals, whereas the West would move into another age of warriors. The future era of the military would be one where army officers are democratically elected as top political leaders without any help from the wealthy.

At the end of the era of acquisitors, there is extreme debt and poverty, because the rich elites have acquired much of the nation’s wealth. That is the point where feudalism met its death knell and that is where we stand today. Just one percent of Americans own more than 40 percent of wealth. Half of all Americans have less than a thousand dollars in the bank. Consumer debt is at record high.

The acquisitive era or capitalism is about to end, the same way Soviet communism collapsed right before your eyes. And the beginning of the end will start in 1999, soon after the thunderbolt strikes the New York stock market.

The US business empire seems to be following the same pattern that the Roman empire followed in its final years.. Rome had colonised many nearby and distant territories, extracting taxes from them to finance its trade deficit. Later, warriors from these very territories began invading the empire. First, the peripheries fell, then the nearby provinces, and finally the capital itself.

The US business empire is now being invaded by businessmen in the peripheries. They have already captured many markets inside the United States. The country no longer produces certain products that it invented and pioneered. Television, VCR, consumer electronics, textiles, ship-building, etc., are some of the US industries that have practically vanished under the fierce assault of imports.

A vaster flood of imports, bolstered by Asian devaluations, is about to inundate the remaining American industries. By itself, the flood would not cause enough damage to bring down the system. True, the living standard or real wages would fall some more, but the system would survive. However, America is in the midst of the fattest speculative bubble in history; it is also, as stated earlier, the world’s biggest debtor with a giant trade deficit, a deadly combination that has already devastated some Asian tigers.

Eventually, the import invasion would do to the American business empire what the so-called barbarian invasions did to the Roman empire. After the demise of Rome’s domains, a new era was born. The same pattern will unfold in the West, starting at the end of 1999.

Interest Rates

How would interest rates behave in 1998? With each stock market crash, interest rates could actually fall in America. In Japan, they cannot fall any further, having bottomed out already. Investors today are exposed to great risk around the globe. Once they are bitten by tumbling share prices, they will rush into relatively risk-free securities such as US government bonds. When the peripheries begin to fall, people run to the center for shelter. Similarly, investors will rush into American government bonds, bringing US interest rates down.

Interest rates could also fall in Europe, especially in Britain, France and Germany. Even the debt-ridden Italy could see a decline in bond yields, but they will rise in the third world and, at least initially, in the economies of Asian tigers.

These will just be the immediate effects of stock market crashes. Once the New York exchange suffers a melt-down, capital will flow out of the United States. US interest rates could then rise.

Ravi Batra is a professor of economics at Southern Methodist University in Dallas, Texas.  He is the author of two books on international trade theory as well as several popular best-sellers including, The Great Depression of 1990 (Simon  & Schuster, 1987).  This article is an excerpt from his current book, Stock Market Crashes of 1998 and 1999 (Liberty Press, 1998).  He may be reached c/o Venus Books, 2355 Trellis Place, Richardson, TX 75081, USA.

This article was published in New Renaissance magazine Vol. 8, No. 1