VIEWPOINTS : Ah, Prophets : Listen Closely, Then Obey the Law of Opposites

Reading this commentary, an abbreviated version of an unbylined piece in the Economist magazine of London, could make you rich provided nobody else believes a word of it. So keep mum about its secret.

The human race, to which so many of my readers belong--said G. K. Chesterton in the opening sentence of one of his novels--has been playing since the beginning of time a game called “cheat the prophet.”

In the commercial version of this game everybody believes, at about this stage of every decade, that some easily expandable things (such as oil or computer-numerate young investment bankers or Japanese yen) are going to be desperately short or immensely profitable for ever and ever and ever, and that some particular areas such as Europe or OPEC or Latin America are immutably set on some particular course.

Then, in the next decade, the quite small movements in relative prices and salaries and exchange rates, necessarily--repeat, necessarily--caused by these fixed beliefs, send the things that are forecast to go into eternal shortage down instead into temporarily unsalable glut, and the areas that are supposed to be immutably set on some particular course to go on to precisely the opposite one.

This law of opposites proved valuable for heretics and speculators at the turn of 1946-47, or 1956-57, or (don’t be too tidy) 1967-68 and 1976-77. It is likely that the same is true today, so this article’s holiday gift to its readers is to tell you how to become very rich, provided that you are willing to be thought as nutty as a fruit cake.

1946-47 THE DOLLAR GAP

In 1946-47, the two most fashionable forecasts were for an eternal dollar gap and a lasting shortage of food in war-shattered Western Europe.

The difference between America’s superb industrial plant and Europe’s and Asia’s rubble suggested that nobody could conceivably sell competitive manufactured goods to America to bridge the dollar gap once Marshall Plan aid ended. Western Europeans should expect that luxury foods such as butter, and scarce fossil fuels such as coal, would be rationed for the rest of the century, so the unviable rump called West Germany and atom-bombed Japan had better concentrate via subsidies on making things like them.

In the first full calendar year after Marshall Plan aid ended in 1952, America went into a current-account deficit, and it has been pumping out net dollars in most of the 33 years since. By 1956, West Germany was leading an oil-and-coal glutted Western Europe into its fastest-ever industrial boom, soon marred mainly by growing mountains of unsalable butter, while across the world, Japan was booming even faster. The wisest millionaire of the first post-war decade should have stuck his head out of the rubble in Hiroshima in August, 1945, and said: “This atom-bombing will be very good for the industrial future of Japan, buy that real estate at once.”

In 1946, every conventional person assumed that America would have a trade surplus forever and Japan a trade deficit forever. Now, everybody assumes the reverse, although the changes in policy and exchange rates that will bring in the law of opposites have already occurred.

Democrats in their vote-losing 1978-85 thought votes were to be won by promising to increase government spending like crazy; they now think votes are to be conserved by promising to eliminate the whole budget deficit like crazier. In 1980-86, Republicans thought it patriotic to increase defense spending so as to walk tall; in 1987-92, they will think it patriotic to slash defense spending that ought to be undertaken by wimpish Western Europeans. By 1996, the United States will be running an undesirable budget surplus, low interest rates and its first large trade surpluses since 1975.

The disappearance of the previous lush excess of American spending will then be called catastrophic, but it won’t be. The other capitalist superpower is going to turn right the other way round. Japan will, after about 1989, go into a period of large payments deficits while it builds more and more factories abroad.

1956-57 KHRUSHCHEV DIDN’T BURY US

As the prophecies of 1946-47 had proved so wrong, conventional people in 1956-57 set about devising new prophecies that proved wronger. In that 1956-57, the Russians put their Sputnik into space, and academics determinedly said that the complicated future lay with planned economies. Unless the West established commissariats au plan and huge bureaucracies at Brussels, Khrushchev would bury it.

Actually, the complicated nature of the future since at least 1776 means that a planned economy is a device for ensuring that there is no nexus between what is produced and what is embarrassingly wanted. Although the Soviet Union has more graduate engineers than Japan and more graduate scientists than the United States, its planning turns these superb inputs into such stupidly low outputs that a Russian family is today only 1/13th as likely as an American family to have a car. Although the Soviet Union graduates more agronomists than any other country, it has through its 70 years had 70 disappointing grain harvests ascribed to 70 years of unusually bad weather.

In 1986-87, Russia is at last beginning to re-adopt some sort of market system, and the increase in marketable production from its very educated labor force will be large. When its scientifically planned agricultural policies are replaced by market prices for peasants, the empty granaries of the Ukraine will bulge into another damned grain mountain. Freed industrial prices will turn the Soviet Union into an exporter of engineering goods like South Korea, although eight times larger. Poor South Korea and Taiwan, especially as India and China will be emerging simultaneously. These whales among the NIC (newly industrializing countries) minnows will cause a grave glut of things usually produced by NICs. That is the more likely to happen because nobody, including Mikhail S. Gorbachev and any expert Kremlinologist, yet remotely believes it.

1968 HIPPIES TO YUPPIES

By the second half of the 1960s and especially by 1968, many of the West’s beautifully rich young people were proclaiming that the only legacy passed on by their parents was full employment, which would always be easy but of little use since it was all going to be in vulgar and fast expanding manufacturing. In universities such as the University of California, Berkeley, 18-year-old flower children in 1968 explained that the only jobs in which they would be interested were as corporate vice presidents in charge of environmental affairs. This view was said by their professors to mean that there had been a lovely turning point toward lasting left-wing anti-materialism and pro-internationalism in human aspirations.

Actually, it meant that by 1980, amid rising unemployment, America’s graduate 30-year-olds--those who had been 18-year-old flower children in 1968--would be voting 70% to 30% for Ronald Reagan as so-called yuppies, the most nationalist and worryingly Kiplingesque generation since Britain at the time of the Boer War.

Today’s yuppies--or young, upwardly mobile professionals--are upper-salaried people born in the high-birthrate years 1947-57. A present bad business mistake is to believe that firms will prosper by overpaying them and aiming at their market. Because the generation immediately behind a 35-year-old yuppie is better educated about computers, most of the yuppie-stuffed businesses (such as investment banks and Saatchi & Saatchi-type advertising agencies) will have to sack all their middle management in the 1990s, and so will the firms selling them Porsches.

The boom business will be meeting the market demands of what the 70-year-old Herb Stein calls grumpies--that is, grown-up mature people, born before 1925--who are going to live too long while drawing too large pensions and exerting too much market influence compared to any previous generation of dotards.

1976 THE CLUBHEADS OF ROME

By 1976, conventional prophets said that oil and all the raw materials wailed over by the Club of Rome were going to be short for ever and ever. This made it certain that by 1986 there would be the present oil glut, and that prices of other raw materials would collapse.

These trends are still working through, so it is not possible to make next-decade forecasts about them. The equilibrium price of oil is anywhere between $3 a barrel (below which even Abu Dhabi’s oil wells would be unprofitable) and $65 a barrel (above which customers would switch to proper energy conservation); the OPEC interlude has created enough overcapacity to keep prices in the bottom half of that range for awhile. But it is easy to forecast that, as Sir Bob Geldof sings “Feed the World,” wasteful food surpluses will mount up, especially in Africa.

All the rich and mainly industrial countries are paying their farmers too much, so they produce too much. Hitherto, most of the poor and mainly agricultural countries have paid farmers too little, so they have produced too little; but in the past two years they have suddenly been encouraged to pay their farmers too much also. The increase in food supply from lush tropical areas will be enormous. This will smash agricultural cartels such as the Common Market’s. Rich countries will go to free trade in food, hurting banks that overlend on rural real estate.

That will add to the general debacle in the financial services and other information industries.

Weirdly, today everybody prophesies that the financial services industry will prosper in three crowded square miles on 24-hour markets in Tokyo, New York and London. Since firms in the industry deal in information, which is a weightless commodity, they will all be undercuttable by personal computers from beach huts in peaceful tropical islands such as the Philippines. As a result, the West’s banking industry will go painlessly bust for the second decade running.

1987- THE MARKET CRASH IN WHICH TO BUY

In 1976-77, banks were taking on deposit the supposedly permanent surpluses of OPEC, and lending them to other oil producers such as Mexico, which was increasing its debt even while oil prices were unmaintainably high and which, therefore, obviously could not repay its debt when oil prices returned to normal. Since the loans to Mexico were higher than some big banks’ capital, this seemed worrying. The last time banks were swamped by bad debts, after the Wall Street crash of 1929, the Federal Reserve had ordered commercial banks to stop lending until their accounts looked more proper; this ban on much new lending quickly cut America’s total money supply by 30% and thereby precipitated the Great Depression.

When the bankruptcy of Mexican and other Latin American debtors became apparent in August, 1982, the Federal Reserve eased the American money supply and arm-twisted banks to poodlefake their accounts by lending to the Mexicans sufficient new money to keep paying the interest on their bad loans, which did not therefore have to be called bad loans in the banks’ balance sheets. This precipitated the great bull market.

Many banks’ capital in 1986 was again exceeded by obviously bad loans, such as those they have made to finance takeovers of firms at prices far higher than the market thought those firms were worth a minute before they had told investor Ivan F. Boesky or anybody else about their bid. When that bubble bursts, and the balance sheets of big banks are again revealed to be technically insolvent, expect a Black Friday on stock markets.

On the evening of Black Friday, buy, buy, buy. All that will happen is that some weekend meeting of central and commercial bankers in some pleasant watering place such as Bermuda will agree that banks can poodlefake their accounts some extra way else.

May some of these forecasts become the opposite of the truth? Instantly, if conventional opinion comes to believe in any of them. When it does, do the opposite of what this article has recommended.