Investment Biker Page 11

  At the airport the next morning we worried that the bikes hadn’t made it onto the plane. We asked if we could see them in the cargo hold.

  Sure, no problem.

  I imagined what I would have gone through at Kennedy Airport to peer into a cargo hold. It would have taken seventeen bureaucrats seventeen hours to deal with such a simple request. There the bikes were, tucked away just as Tabitha had left them.

  We took off, leaving China, the country with the most people, and heading for Japan, the country with the most money.

  At Narita Airport we perplexed customs. Here we were, American citizens with German motorcycles flying into Tokyo from Beijing. It was a little too much for them.

  Using less sign language and more English, we made our needs known, but the customs officers hadn’t had much experience with carnets. These were bonds we’d bought from an English insurance company that guaranteed we wouldn’t sell our bikes within the countries through which we passed. Fortunately, we’d prepared for this eventuality back in London by obtaining the name of an official at the Japanese Automobile Association who would be familiar with them. The customs official called him and was filled in.

  What a difference from China, where most requests were met by mei you, “not have,” which could mean “not available today,” “not available for foreigners,” “maybe later,” “not possible because I’m on my break,” or “I don’t know anything about it, so I’m not taking any chances.” The Japanese met every request, whether they could carry it out or not, with a vigorous hai, “yes.”

  At this point it was five o’clock in the evening. Any minute now, I was certain, the customs officers were going to tell us they were closing and that tomorrow was a holiday, come back Tuesday.

  These civil servants, however, stuck with the job of processing us through till they finished, even though it took an hour or so of overtime. They presented us with a bill for the extra time, but I was delighted to pay and finish the hassle. If only border officials and bureaucrats in other parts of the world had the same can-do attitude! This is one reason the Japanese are rich.

  Grinning from ear to ear like fools, Tabitha and I drove to the Imperial Hotel in downtown Tokyo, across from the Imperial Palace. We pulled right up to the lobby—motorcycles muddy, spare tires hanging off our rear ends, fairings busted—and nobody batted an eye. Once we were in the sumptuous room, we were beside ourselves with disbelief and joy.

  On the road we often had been immersed in practical problems: how to get across the next border, what the road ahead was like, where to stay, would there be gas in the next town, could we buy tires, the logistics of it all. Although traveling through exotic locales had often made us gape with astonishment, we hadn’t awoken every single day and thrilled to our new location. But now that we had an interlude in a first-class hotel room in a First World country, we sank back and realized what we had just done.

  “My God,” I said, “we drove through the Chinese desert.”

  “All of China,” Tabitha said with a big smile, pleased with herself. “All the way from the Atlantic to the Pacific.”

  According to the folks at the Guinness Book of Records, no one before had ever done it by land.

  “You’re the first woman to do it,” I said, which made us both beam with pride.

  I was hoping the joy of accomplishment and the thrill of the exotic would rekindle her enthusiasm for the rest of the trip, because she had been making rumblings over the past few days of not being sure she wanted to go farther, that maybe she’d fly back to New York from Tokyo. Her bike was still giving her trouble, and she was weary of the road.

  But I didn’t say anything, figuring it best for her to rest a few days before we discussed it

  We both were amazed by the contrast of Japan, not just to China, but to nearly every other place in the world: how beautiful the roads were, in what good repair everything was, how clean the parks and buildings were. It wasn’t like driving into New York, Rome, or London, which in areas made you think you were in the Third World. Japan was run like a very tight ship under the eye of a hard-boiled skipper.

  We took our bikes to the local BMW dealer, where we told them to throw away our old tires and put on new ones. They would rebuild my carburetor and overhaul Tabitha’s engine.

  Back in January of 1990 I had predicted in Barron’s that the Japanese stock market would fall by at least 50 percent. A local financial journalist caught up with me in Japan and wanted to know what I thought about the market now that it was down from near 40,000 to 29,000. Was this the bottom? Should investors be piling in?

  A day or so before I had noticed that the front page of a local newspaper printed an index of the average price of membership in Tokyo golf clubs, the way back in the States newspapers published the Dow Jones stock index. It had hit a million dollars. A million dollars to belong to a golf club! This sounded like a speculative bubble to me, a financial feeding frenzy without intrinsic value, and the top of one at that.

  When you see a value as out of whack as this, stand back and ask yourself if something is wrong. Stop and think about it. Perhaps everybody around you is losing his head. In 1929 you would have seen the same speculative hyperactivity in stocks. In the real world, golf memberships can’t be worth a million dollars.

  I said the stock and real estate market had a lot further down to go, as it was clear nobody in the market was suffering any pain from this drop. In addition to sky-high prices for golf memberships, Japan’s real estate prices were still at cloudlike levels. The ground on which the Emperor’s palace stood was said to be worth more than the entire state of Florida.

  Moreover, I knew the Bank of Japan was tightening the money supply. It had announced that it wanted to get rid of the speculative bubble. When the Japanese central bank says something, it’s like the German Bundesbank. It means it. It doesn’t play around. But the guys in the Japanese market had never known anything but a bull market. They didn’t know things could change. All they knew about stocks was that they went up. Well, the real world didn’t work that way, but they weren’t going to listen to me.

  It all reminded me of how they’d gotten out on this limb in the first place. The Japanese have the largest foreign-currency reserves in the world, largely because they have had extremely large balance-of-trade surpluses over many past years. After the war, the way to get rich in many countries, Japan and Germany especially, was to get foreign—hard—currency, such as dollars, any currency that didn’t lose its value. Just the way it is today in Russia or China. The more dollars, marks, or yen you have in those places, the better off you are in those economies.

  So after the Second World War the Japanese said, “How do you get hard currency?” You export. You give the folks with hard currency something they want and they’ll give some of it to you. They learned—taught themselves—that what foreigners want is quality. They pushed their workers to make quality goods because they were desperate for foreign currency. Their country was devastated. They couldn’t buy anything with the local currency because it was basically worthless, or perceived as worthless outside their country because they didn’t have any foreign-currency reserves.

  What happened was the same thing that happens anytime an energetic people get an idea where the gold mine is. In California? Let’s rush out there. It can be a real gold mine or a Wall Street boom or oil wells in Texas or tourism in Xi’an or a pile of hard currency, but once industrious people see where it is, they’ll jump for it.

  The Japanese export boom was born from that. It wasn’t as though some evil Japanese minister said, “All right, guys, let’s start exporting and put the Americans out of business, refight World War II.” People say the Japanese copied everybody else. No, they just saw what the customers were buying. They saw that everybody wanted a TV, and they faced up to the hard truth that they had to make a cheaper, better TV or they wouldn’t be able to sell the ones they made.

  The results? Between 1957, when their pre-war economic
benchmarks were regained, and 1970, their economy grew 10 percent annually, several times faster than ours. By 1980 their automobile production surpassed ours, and by 1986 they were supplying nearly a quarter of our imports.

  What a difference between the Japanese attitude and that of the American government! We say, “Let’s let the dollar depreciate and devalue. We’ll be the low-cost producers and we’ll sell more because our prices will be lower.” Except for short periods, that policy has never, ever worked in the history of the world. You can sell only so far on price.

  And why not? Say Chevrolet and Toyota sell more-or-less identical cars for ten thousand dollars. If the United States devalues the dollar by 30 percent, the Chevrolet will still sell for ten thousand dollars but the Toyota will now go for thirteen thousand dollars. At first blush, this looks good. Finally American automotive workers’ jobs will be protected. How can it hurt us if we make it difficult for the Japanese to sell in our market?

  However, in the real world what happens is that under the umbrella of the devalued currency, Chevrolet, Ford, and Plymouth will raise their price to, say, $11,500, as now it’s easy to underprice the foreign competition.

  Well, some say it’s worth it if we keep our people employed, if we make America first. Unfortunately, it doesn’t work that way. Because the dry cleaner on the corner has paid 15 percent more for his Chevrolet—as has every one of his suppliers—he must raise his prices to reflect the increase. He and his suppliers must also collectively pay 30 percent more for all the things we Americans import, be they palladium, titanium, cobalt, chrome, tin, coffee, cocoa—the list is endless. Add these to the domestic increases brought about by devaluation, and its seemingly no-cost benefits disappear in a year or so.

  In addition, when you sell on price, you don’t innovate and make your products better; they get shoddier in comparison with your competition’s. You become fat and lazy and sloppy.

  Now inflation starts. The Chevrolet creeps up in price till it sells at thirteen thousand dollars or even fourteen thousand dollars. Toyotas sell for less, and Chevrolet loses more market share. As this scenario is repeated, a powerful noose tightens around the country’s financial jugular that it only rarely escapes. Your costs again catch up with you and you have to devalue again.

  Devaluation creates a never-ending, vicious circle. If it worked, Italy would not have a stagnant economy, political and economic corruption, and constant inflation. Zaire, with an economy that is one of the world’s basket cases, would be the world’s most efficient producer. After all, on a purchasing-power basis, the Zaire currency is wildly underpriced because nobody wants it.

  So, while our government today keeps saying, “Let’s sell on price,” no other country in the world will now even claim that devaluation is a good long-term strategy. The Brits excuse their devaluations by saying they need to buy some time, but they’ve been buying time now for decades. Thirty years ago the British pound sterling would buy eleven German marks; today it will buy less than two and a half. If the British don’t change this, in thirty more years the pound will be that much less valuable.

  Governments have only three choices in their fiscal management: be disciplined by spending no more than they take in from taxes, borrow to cover their deficits, or print new money. World markets made Zaire pay by depreciating its currency and refusing to lend it any more money, and so its currency has become worthless. The market will do the same to the United States if we don’t shape up, if we keep running a budget deficit and borrowing our heads off. The longer we put off correcting the financial mess the federal government has produced, the worse the pain will be.

  Right now we are the largest debtor nation in the world by a factor of seven times. Yes, if we did what it took now to set things right, it would be very painful. Lots of people who are feeding at the government trough would have to cut back. However, if we put off this housecleaning until we owe as much as all the other countries in the world put together—which may happen by 1999—it’s going to be that much more painful, not a bad dream but a nightmare.

  The only true cure is a rough, rough discipline that few countries’ populations have the guts for, but those who do come to call the tune for the rest of the world.

  The discipline? A country has to learn to compete and innovate. It must lower its costs. A manufacturer has to take another country’s tape recorder and say, “Okay, let’s put twelve new bells and whistles on it. Let’s make it work as well as the German tape recorder at a better price.”

  How can a government aid this? Over the past thirty years, the British government might not have printed so much money and might have maintained a balanced budget. This would have held up the value of sterling and forced the country to be more competitive, to make better products and to innovate.

  The government and the people should have taken the pain, borne it. Yes, the price would have been high: It would have cost them unemployment, even high unemployment. It would have caused some poverty, but it would have enabled the British people to come out on the other side, as have the French and the Chileans.

  In the seventies the British government under Prime Minister Callaghan came to the conclusion that Britain badly needed a semiconductor industry if it were to compete in the world of the future. That same government turned down establishing a British Silicon Valley because it would have created too many millionaires, and it was philosophically opposed to people getting rich. As the English learned for a while in the 1970s and the Italians are learning now, eventually the worldwide market in currencies and bonds is going to say, “Okay, guys, it’s over whether you like it or not.” Someday the world markets will refuse to buy more U.S. dollars and bonds. Can you blame them? Would you buy overpriced bonds and currencies?

  Unfortunately, it usually takes war, hyperinflation, depression, or some other grave calamity that impoverishes the populace to bring a people to the place where they’ll follow such a tough economic necessity. After all, Germany and Japan were forced into it by the devastation of World War II. The South Americans were forced into it by seventy years of mismanagement. Usually politicians cannot, will not, stay the course.

  Oddly enough, the French have maintained such a discipline. For thirty to thirty-five years after the war they continually devalued and inflated. They nationalized the banks and many large industrial companies. They imposed price controls to curb exorbitant profits and passed a large tax on millionaires, not only on their incomes, but also on their wealth. “We’ll have easy money, too,” they said, “which will bring prosperity and good times.”

  Of course it didn’t work. French growth stagnated as the rest of the world recovered. Not only did unemployment rise, but French politicians constantly devalued the franc.

  Of all people, the socialists under Mitterrand in 1983 said, “We gotta change this policy, it hasn’t worked. Now what we’re going to do is tie ourselves to the Bundesbank.” This was the German central bank, renowned for its monetary discipline and constitutionally required to maintain a sound currency. “We’re going to cut taxes, encourage investing, have low inflation, and make this country change into being an efficient producer of high-quality, competitive goods. We’re going to develop our economy for the long term.”

  To my amazement the French government did what was necessary. It stayed the course despite the social pain. Maybe it was able to do this because it was socialist. The French people might not have put up with the hard road if the capitalists had done it, because they would have thought the capitalists were interested only in helping their rich friends. If only a right-winger like Nixon could go to China, perhaps only socialists could insist on social pain.

  Keeping a rein on the money supply meant that the French businessman was hopping mad over the cost of capital. It meant high unemployment, which meant the French voters weren’t all that happy, either. But it forced the French to be more competitive, to be willing to go in and work hard for reasonable wages, the essence of increased productivity and
a more competitive product. Their economy became more efficient. The uncompetitive enterprises went out of business, merged, or adapted. The French figured out how to innovate and sell to the rest of the world.

  Politically speaking, the socialists were able to bring this about because their people were fed up. From the fifties on, there had been a constant turnover in government. The people themselves finally realized that they had to bite the bullet, take their economic pain, clean their house—sober up—if they were to straighten out their country. To a government in economic trouble, printing money and inflation look as appealing as does a fifth of whiskey to a longtime drunk, but it never makes the long-term situation better. There’s not a country or a people that has gone through what it takes to put its currency on a sound footing that has ever regretted it any more than an alcoholic who’s hit bottom regrets being sober after he’s been on the wagon for ten years.

  Actually, now the French economy is in better shape than the German: lower inflation, better balance of trade, better everything. They’ve been off the bottle for a long time, yet ironically the market still doesn’t believe them because it has a folk memory that runs, “Who’re these guys trying to kid? We’ve known the French for a hundred years and they always give in. They’re weak, they’re pansies.” Hitler thought that, and Kaiser Wilhelm thought that. The franc will come up against periodic pressure in the currency markets till the French convince them that they really and truly mean business, the way the Germans, Dutch, and Chileans have.

  What about the gold standard as a way to enforce currency discipline? Can we, should we, return to the gold standard? Under it, by law, you can turn in a certain amount of your paper money for an ounce of gold. It’s a way of making governments honest, of requiring them to keep a sound set of books.

  There are several cogent arguments against the gold standard, one being that the world should not be held hostage to two of the largest gold producers, Russia and South Africa, both of which are potentially explosive. Even if they stabilize, why give them a huge advantage?