Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
It’s a pretty hard image to forget: the bank run in “It’s a Wonderful Life.”
There was George Bailey, just married, rushing back to the savings and loan to placate a herd of restless depositors who absolutely insisted on withdrawing their money right there on the spot. Despite George’s reassuring charm, things would have gone badly had his Mary not hefted a wad of cash over her head – their life savings – that not only satisfied the depositors but kept the bank afloat, too.
Japan could use a George Bailey about now.
No, there aren’t any official runs on Japanese banks as of yet. But, as in the movie, depositors are starting to crowd bank lobbies, nervously eyeing each other like a jumpy herd of cattle just aching to get spooked. As we in America remain preoccupied with Enron and the largest business bankruptcy ever, the Japan economy, as a whole, is facing panic and default on a scale few in the West can imagine, let alone foresee. Rygi Musha, a Japanese strategist for the Deutsche Bank in Japan probably put the most ominous words to it. He said, “The world is heading for a once-in-a-century economic crisis.”
The last worldwide economic crisis
The last once-in-a-century economic crisis began with the Crash of 1929. Before that day, from 1921 to 1929, the percentage run-up of the American stock market was an astonishing 497 percent. A 1920s popular tune included the lyrics, “everybody’s doin’ it” – a statement that actually referred to getting rich quick. And fortunes in stocks really were made. Workers really did see a rise in wages. Industrial production really did rise dramatically.
Such abundant prosperity, however, led directly to wild-eyed speculation in the stock market. And this investing fanaticism proved the market’s downfall. It wasn’t enough to put a portion of one’s wages into the market – people started borrowing to invest in stocks. The buying of stocks on margin became chronic. Soon stock valuations became exaggerated, wildly so. It was in this lofty economic climate that the unthinkable happened. There was a crash. In the colossal depression and deflation that followed, it took 302 months (over 25 years) for the market to finally break even again.
The Great Japanese growth slowdown
Like America in the Roaring ’20s, Japan’s growth rate in the ’60s and ’70s was nothing short of miraculous. Based on the stunning rate of growth Japan experienced between 1963 and 1973, it was projected that the Asian country would easily overtake the United States in total output by 1998!
That never happened. The torrid growth rate of the ’60s and ’70s cooled considerably by the ’90s. In 1992, Japan’s per capita income was still only 83 percent that of the United States, and its overall output was just 42 percent of the American level. Beginning in that year – and bearing a curious similarity to the post-crash America of the ’30s – the country has been in and out of recession four full times.
The one redeeming factor that’s kept the Japanese picture from getting too dire, at least up to this point anyway, is that this is a nation of savers. There’s an impressive $11 trillion in individual savings assets in Japan. Normally, that would be enough rainy-day funds to see Japan through any tough times ahead. However, Japanese debt has been mounting in recent years, too. Some economists put that combined debt total at over $30 trillion, a figure several times Japan’s national output.
So what happened to Japan? What happened to the miracle?
Despite being second to the U.S. in economic might, Japan has not existed in its own little world. The adage, “When the U.S. sneezes, the rest of the world catches the flu,” particularly applies here. Being largely an export nation, Japan doesn’t do well when no one is importing, especially its main client. So when the U.S. is in recession, the Japanese people and their government have cause to mourn.
Another problem is the aging work force. Japanese society is graying faster than any other industrialized nation. Its population growth is slowing, too. Despite hefty financial rewards for women bearing children, the maternity wards remain empty. That’s because Japan’s younger women are less interested in being a wife and mother than in establishing a career. The drop in birthrate, now at 1.42, is well below what’s necessary to sustain Japan’s current population – a serious issue in a country that’s closed to immigration.
The crisis today
Regardless of what led up to this, a full-blown crisis is at the door today. Here are some specifics:
- The deflation that persisted through much of the ’90s and early 21st century continues to grow at an alarming 4 percent annual rate. A deflation is defined as “a reduction in currency value to effect a decline in prices.” For example, the Tokyo consumer price index in February fell 0.5 percent from a year ago. That marked a record 18 months of declines. The obvious problem here is that, as Japanese autos and products get cheaper and cheaper, the world has to cut their prices to compete. So this sustained deflation, this lowering of prices and profits issuing from the world’s second greatest economy, could actually begin a deflationary cycle that swells like a tornado and sucks in all of the industrialized nations.
- At the end of March, a long-standing policy of fully insuring bank deposits of more than $75,000 will cease. Unfortunately, that leaves an unthinkable $1.5 trillion of the Japanese public’s money – 40 percent of Japan’s gross domestic product – virtually unprotected in the banking system … and could very well trigger an It’s a Wonderful Life-type banking crisis. You can better imagine the public reaction to this if our own FDIC suddenly lowered its stated $100,000 protection of your bank account by 25 percent, due mainly to difficulties in the economy. Of course, bear in mind that all the gold ever mined since man first picked up a shovel – some 120,000 tons of it – has a collective value of “just” $1.3 trillion. Ominously, and as Forbes recently reported, “A recent drop in savings of 9.5 percent at smaller financial institutions (in anticipation of the end of these deposit guarantees) is a sign that this (crunch) may already have begun.”
- Tokyo’s main stock index fell 1.6 percent to a new 18-year low on Japan’s grim economic outlook. It was the Nikkei’s lowest closing since Dec. 15, 1983, and was due to flagging consumer spending, record unemployment and an obvious lack of progress in cleaning up huge portfolios of bad bank loans.
- Standard & Poor’s recently cut the credit ratings on seven major Japanese banks, citing their massive bad loans, poor earnings and shrinking capital. The outlook is beginning to draw comparisons to Russia, Latin America and the U.S. at the start of the Great Depression.
- Japan’s unemployment has reached a new record high of 5.6 percent. The December figure was the worst since records began in the early 1950s.
- Perhaps the scariest statistic is this: Japan is also the world’s largest creditor. For example, Japan’s four largest troubled banks claim assets totaling $3.7 trillion. Much of this is overseas in liquid instruments, such as $333 billion worth of U.S. Treasuries and bank loans to the U.S. If, in fact, George Bailey’s dilemma does hit Japanese banks, if there are huge runs on deposits, these overseas loans could be “called in.” And, if that happened, as Forbes puts it, an “economic contraction would sweep America and the globe.”
What this all means for gold
Are you getting the picture? The average Japanese citizen seems to see it quite clearly. As a preview of coming attractions, Japanese citizens demanded 54 percent more gold in the last quarter of 2001 than in the previous one. Should this gold flight continue – and lines have already started forming outside precious metals dealers in Tokyo – the price of gold will soar, too.
In just the past 12 months, the yen has fallen 21 percent against gold. Or, put another way, gold has risen 21 percent in terms of the Japanese currency.
If there’s no George or Mary Bailey around to stem a coming Japanese banking crisis, one that’s possibly arriving sometime after March 2002, if trillions in bank deposits are removed en masse, there could well be a stampede into the “asset of last resort” – gold. If only a fraction of the $1.5 trillion in unprotected banking assets migrate to gold, the price of the precious metal would go stratospheric – and not just in terms of the yen, either. Such a turn of events is not as outlandish as it may seem – gold offers a powerful psychological comfort, especially to a people ravaged by waning currency values.
At this point, the American media has chosen to ignore the Japanese problem, which means that the American investor is totally oblivious of it, too. Now, this article isn’t intended to be yet another “doom and gloom” story that scares you out of your money. On the other hand, though, if you knew that there was the realistic potential for an economic crisis, wouldn’t you take some precautionary measures just in case? Precautionary measures that could turn out to be especially profitable?
George Bailey would.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.