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Batra's Forecasting Record (from Ch 4, The Crash of the Millennium)


by Ravi Batra

\"raviIn 1978, to the laughter of many and the applause of a few, I wrote a book on world history and titled it The Downfall of Capitalism and Communism, predicting that both systems would collapse by or around the year 2000. Thus began for me a new career, riddled with land mines and booby traps, fraught with risks as well as acclamation, of a forecaster. In spite of its manifold hazards, I have continued to remain in that profession, and the current work is no exception. I have persisted with the business of predictions and written many more books since 1978. Some prophecies have been general and some specific. Here’s a menu of the forecasts I have made in recent years:

Table 4.1. My Forecasts: 1978-1997

Forecasts Made in 1978

1. Soviet but not Chinese communism will collapse around the millennium.

2. A revolution will occur in Iran in 1979 and the priesthood will take over.

3. Starting in 1980, there will be a seven-year long war between Iran and Iraq.

4. The rule of money, or monopoly capitalism, will come to an end in the United States around the year 2000.

5. Army commanders would become famous before the fall of monopoly capitalism.

6. Pornography, promiscuity, crime, and divorce will climb until the dominion of money ends in politics.

7. Income and wealth disparities will skyrocket.

8. Women would play increasingly active roles in business and politics.

9. Family values and spirituality will take a back seat.

10. The rule of money will give way to a global golden age.

Forecasts Made Between 1980 and 1983

11. The American economy will prosper for seven years between 1983 through 1989.

12. Inflation will gradually subside in the 1980s.

13. Interest rates will fall in the 1980s.

14. Share prices will break records every year between 1983 and 1989.

15. Farm and oil prices will plummet in the 1980s.

16. Bond values will soar in the 1980s.

17. Industrial mergers will surge around the globe.

18. European countries such as Britain, Germany and France will suffer a serious slump in 1986, facing post-war peaks of joblessness.

19. In 1989/1990 share prices will crash all over the world, leading to a seven-year-long depression.

20. Traditional values will make a comeback soon after the end of the rule of wealth in society.

Forecasts Made in 1988 for the 1990s

21. The US dollar will crash by the end of 1994.

22. Inflation and interest rates will tumble again in the 1990s.

23. Real estate values will plummet in many areas of the United States.

Forecasts Made in 1991

24. Every year of the 1990s will be a year of drama, marked by unprecedented change in government, economy or religion somewhere in the world.

25. President Bush will be defeated by a Democrat.

26. A third political party will start in the United States.

27. Japan will suffer great political instability. 

Forecast Made in 1992

28. NAFTA will depress the Mexican economy and U.S. real incomes.

Forecasts Made in 1996/1997

29.Stock markets will start crashing by the end of 1997.

30. The global speculative bubble will burst by August 1998.

31. The major battle between the bulls and bears will come in the summer of 1998.

32. The Fed Chairman Alan Greenspan will lower interest rates when share markets begin their fall in the United States.

33. Even as share markets crash in Asia and Latin America, the US domino will sustain itself and be the last to fall.

The First Ten Forecasts

Of the 33 forecasts listed in Table 4.1, if I am permitted to say so, only two have been partially or totally wrong. Contrary to my prophecy, the Dow Jones Index as well as the over-the-counter Nasdaq index were at all-time highs in January 1999; and the 1930s style great depression has not yet materialized. The table also includes predictions for which some time remains. Other than the two just mentioned, all the remaining prophecies have materialized in virtually the way I had foreseen. I will shortly return to this matter and argue that even my forecasting errors seem to dovetail with the pattern of those that have come true, and now appear to be on their way.

My forecasts have mostly relied on the premise that history follows a discernible pattern. I am not the first one to propound this view. I have august company from the likes of Arnold Toynbee, Oswald Spengler, Karl Marx, St. Augustine, and among others. These are the celebrated historians, and even though their ideas have been denounced by many others, their erudition dwarfs the scholarship of their critics. Their breadth of vision far outshines that of their detractors. The accuracy of most of my prophecies indicates that there must be something right about the ideas underlying them; there must be some validity to the philosophy of historical determinism that history follows a natural or providential design.

Let’s examine the first ten forecasts listed in the table above. Most of them appeared in Downfall. The Soviet empire has disintegrated right before your eyes; some critics say Chinese communism still stands, but my forecast excluded the Chinese variety, which is likely to persist for a while. The priesthood dominates Iran and has been doing so since 1979. Starting in September 1980, the country fought an eight-year war with Iraq. Thanks to the Gulf War, army generals such as Colin Powell and Norman Schwartzkopf have become celebrities. Similarly, women are more active than ever before, while income and wealth disparities have skyrocketed. Few worry about family values and personal integrity, even as crime, pornography and divorce have become rampant. Of course, the fall of monopoly capitalism and the golden age have not materialized, but their time has yet to come.

The Next Ten Forecasts

Let’s now proceed to the next batch of ten forecasts, from 11 to 20, which were made in my other book, The Great Depression of 1990. Following a severe recession in the early eighties, the seven years between 1983 and 1989 were apparently prosperous, while inflation, interest rates, and oil and farm prices tumbled from their levels in the previous decade. Share prices broke records every year between 1983 and 1987, but then plunged in a stunning crash, which was anticipated in the second edition of Great Depression. Both bond prices and mergers jumped in the eighties. In 1986, France, Britain, and Germany suffered rising unemployment, which has yet to fall. All these forecasts were one way or another linked to the three-decade cycles of money and inflation examined in the preceding chapter.

The Next Eight Forecasts

We now turn to the next eight predictions, from 21 to 28. In 1994, thanks to the devaluation of the Mexican peso, the dollar collapsed although not until the month of December; thus this forecast barely came true. In April 1995, the dollar went on to hit an all-time low of 80 yen. Inflation and interest rates have been tumbling since 1990 and by 1998 were the lowest since the 1950s. In many large states, such as New York, California and Florida, real estate values crashed in the early 1990s. As regards my forecast about NAFTA, the devaluation of the peso in December 1994 catapulted Mexico into a deep depression. Real wages and GDP both plummeted in a hurry. Even in 1999 Mexican real earnings were below their pre-NAFTA levels. At the same time U.S. real incomes began to fall after rising slightly in 1993. As soon as NAFTA was adopted in January 1994, real wages in both Mexico and the United States responded in the way I had foreseen a year earlier.

Every year of the 1990s so far until April 1999 has been full of drama and intrigue. The drama commenced with the stock market crash in Tokyo on the first trading day in 1990, followed by Saddam Hussein’s invasion of Kuwait in August; barely two months later, East and West Germany were united as a by product of the collapse of the Berlin Wall. In January 1991, came the unprecedented Gulf War in which the puny army of Iraq was pitted against not just the US military might but the whole world. An overwhelming victory in the conflict took President George Bush to the height of his popularity, his public approval rating at better than 80%. Barely six months after the war, an abortive military coup in the Soviet Union started the breakup of its empire and accelerated the fall of communism. Soon after this, a third party movement, led by Ross Perot, emerged in the United States in 1992. He won an unprecedented 19 percent of the vote in the presidential election and contributed to Bill Clinton’s unexpected victory at the expense of the once invincible George Bush.

In Japan, the LDP government, ruling the country since 1950, collapsed in 1993 and paved the way for subsequent economic and political turmoil. In 1994, Nelson Mandela put an end to apartheid in South Africa and became its president. The same year witnessed the signing of peace treaties between implacable and ancient foes, the Jews and Palestinians, with slow but steady progress in coming years. This was followed by the Republican control of the House of Representatives for the first time in forty years. In April 1995, the dollar, as stated above, sank to its all-time low; the year also saw the start of a depression in Mexico and the longest U.S. government shutdowns lasting from November 1995 all the way to January 1996. All this and what immediately follows demonstrate that each year of the 1990s turned out to be a dramatic year.

The Final Batch of Forecasts

Let’s now focus on my predictions made since 1996. In July 1997 started the currency meltdown in Thailand and quickly spread to all the Asian Tigers encompassing eight countries; stock markets crashed, and overnight some countries such as Indonesia, Thailand, Malaysia and Korea slipped into a devastating recession. Then came the turn of Japan, which had been struggling ever since its share price crash in January 1990. Japan sank even deeper into the slump in 1997 and 1998.

Share price crashes continued around the world at the start of 1998, while the US economy and stock markets continued to flourish. However, when August came, the Dow Jones Index fell about 19% in one month, whereas the Nasdaq index tumbled as much as 25%. Many of the small cap stocks lost more than 50% of their value from their peak reached in July. Thus the global speculative bubble burst open in the month of August 1998, as predicted. In September and October, the financial world was in a panic. Just as Asia was reeling, Russia defaulted on its international debt, and Brazil was expected to follow suit. It is at that point, my 32nd forecast came true, and the Fed Chairman Alan Greenspan engineered a series of cuts in the rate of interest. Once that happened, my last and 33rd prediction came to pass, and that is where we have been ever since. Nearly half of the world was in recession by April 1999, and Europe was beginning to slow down, but the US juggernaut continued its steady march. The American economic pace in fact accelerated in the last quarter of 1998, as GDP climbed at 5.6% annual rate. Thus the American economy continues to be an oasis of prosperity in the midst of an increasingly depressed world.

Epoch-making events normally occur once in a century, but ever since the fall of the Berlin Wall on November 9, 1989, the world has witnessed a series of them. The crash of the Wall itself was a once-in-a-lifetime occurrence. Many more such events are likely in the near future.

Thus you see virtually all the predictions I made over the two decades between 1978 to 1997 have already come true. The only forecast that did not fully materialize is No. 19, because share prices crashed in Japan that year but not in the United States, and the world faced only a recession, not a depression. An interesting question now presents itself: When someone makes a great many prophecies, and almost all come true, then what happened in the one case where the accuracy was only partial. In other words, what happened to the great depression of 1990, the title of my work first published in 1985?

The US Economy: 1990-1998

According to official figures a recession started in the United States in June 1990 and ended 9 months later in March the following year. The nation’s output fell by a tiny fraction, less than 1%. Thus government figures display only a minor damage to the economy from the slump of 1990. But then you wonder why President George Bush, with an all-time high public approval rating of 84% in March 1991, lost in an electoral college landslide to Bill Clinton barely 20 months later. Our economists view recession as a decline in the nation’s output over two consecutive quarters. In this view, the recession was over in March 1991, the same month that produced the highest approval rating for the president, because the output began to rise. Now this is interesting. The president won accolades from his handling of the Gulf War, and the economy began to recover at the same time, yet he lost to a virtually unknown governor of a small state, Arkansas.

The truth is that the slump of 1990, though not a full fledged depression of the type in the 1930s, was much more serious than revealed by official figures on output. The public said so at the ballot box and threw a once untouchable president out of office.

If we apply the conventional concept of recession to the 1930s, as the output began to rise the depression was over by the end of 1933, a year when the unemployment rate hit 25% of the labor force, compared to just 7.5% in 1992. How ridiculous does that sound? Even in 1939, the jobless rate was over 15%. The point of this discussion is that the state of the economy is not just gauged by output figures alone. You have to examine the trends in many areas including joblessness, real wages and the climate of panic in society.

Take a look at how some others described the 1990 downturn. Harvard Professor Galbraith called it a recession cum depression; economist David Levy characterized it as a "contained depression." Lawrence Hunter, deputy chief economist for the US chamber of commerce, dubbed it as a "never-ending recession." Peter Peterson, Commerce Secretary in the 1970s, called it a "middle class meltdown," and Wallace Peterson , a distinguished professor at the University of Nebraska, titled it the silent depression. Even Massachusetts Senator Ted Kennedy, not a critic of Bill Clinton, described it as "quiet depression" as late as 1996.

According to output figures the US economy started humming in early 1991; then why did so many luminaries take issue with that characterization? Why did some well known economists vehemently disagree with the government’s assertions? In a poignant commentary on the state of the economy, Time magazine openly wondered in January 1992, "Well, why are Americans so gloomy, fearful and even panicked about the current economic slump?" The answer came from

the state of the real family income in America coupled with all the downsizing that had occurred in the early 1990s.

Since 1970, an increasing number of women have joined the labor force, so that the real family income has been rising in spite of stagnant real wages for individuals. According to the Economic Report of the President (ERP), median family income was $43,290 in 1989, just a year before the slump. In 1990, it fell to $42,400, and in 1996 stood at $42,300, not only below the 1989 level but also below the 1990 figure. Even five years after the recovery is supposed to have begun, median family income had not caught up with the pre-slump figure. This is exactly why Pat Buchanan defeated the front runner Bob Dole in the early 1996 Republican primary. Hear what journalist Jason DeParle, a staff writer for the New York Times magazine, said on that occasion: "Call it what you will, but class anger is back. Who could have imagined that a win in New Hampshire would come to a man who called the stock market un-American?" Or that Bob Dole would pose, even fleetingly, as a critic of corporate America."

The output figures told one story, but family income told another. Mark Twain used to say, there are lies, damn lies and statistics. It is clear now that the official spin on the state of the economy has masked its true character, created an impression of growing prosperity and made figures tell damn lies.

This, however, is only a speck of the distorted picture. As a result of the damn lies persisting with clock-work regularity since 1996, the world economy is now perched atop a precipice. Even the seemingly invincible US behemoth is extremely shaky, hanging onto the cliff by one fingernail. Why else would a Time cover page in February 1999 raise the specter of a global meltdown? The magazine brags about its "inside story" of how a global financial calamity was averted in August 1998. Let me give you an inside story of what actually brought about the seemingly unprecedented US prosperity in the 1990s.

After Japan suffered a stock market crash in January 1990, it responded to the crisis by slashing interest rates. The idea was that low borrowing costs would encourage businesses to expand their investments, households to purchase new homes, and cushion the banks from tons of bad debt, so that the effects of the share price debacle would be minimized. However, for a variety of reasons, which we will discuss later, the medicine failed and the country’s economy continued to sink at a slow but unmistakable pace.

Most of the Japanese banks survived as their deposit costs tumbled, but, in a nation shell-shocked by the debacle, there was little business and consumer demand for their loans. So they turned to other countries to expand their lending business or find lucrative investments. Despite a faltering home economy, they had plenty of funds to lend or invest, because the Japanese are among the biggest savers in the world. A part of their money went to the Asian Tigers in the neighborhood, but a substantial part came to the United States, which had a huge appetite for foreign funds to finance its gargantuan budget deficit. In addition to Japan, funds also poured into America from many other nations that had a bulging hoard of dollars acquired from their trade surplus. China alone had a $34 billion surplus in its US trade in 1995.

From 1990 to 1995, the federal red ink amounted to $1.5 trillion, of which about a fourth, some $400 billion, was financed by foreign funds. An equal amount went into other American assets such as stocks, factories and real estate. Thus about $800 billion of foreign money poured into the United States during the first half of the 1990s, and all the country could show for it was a declining median in family income. A median household is in the middle of all the families. A decline in median income meant that half of American households had suffered a loss of earnings. True, stock and bond prices had skyrocketed because of the foreign inflow, but a vast number of Americans had suffered lower incomes.

With Japan continuing to sink into the abyss and the world awash in dollars, the inflow of foreign funds accelerated after 1996. The US trade deficit had already become a blessing in disguise, and now it turned economic recovery into a full-blown boom. Normally, a country with a growing trade shortfall has to raise interest rates to attract foreign funds that in turn finance that shortfall. As a result, the economy and financial markets go into a slump, imports shrivel and foreign commerce moves into balance. This has been the experience of all countries all through recorded history. This was also the case during the 1980s, when high federal deficits sharply raised American interest rates, which in turn attracted funds from abroad and paid for the trade shortfall.

But in the 1990s, the laws of nature turned on their head. The US economy and financial markets actually benefited from the trade deficit. As the deficit zoomed, so did American prosperity. A rising deficit meant an ever increasing hoard of dollars in international hands; people abroad didn’t know what to do with all that foreign currency. Foreign governments or central banks ploughed the dollars right back into American assets, US interest rates fell again, and a virtuous circle, sparked by the 1990 crash in Japan, turned into a gusher. In 1997, Asian currencies went into a tailspin, spurring a big rise in America’s already enduring and large trade deficit. But that only helped the United States, because a larger inflow of external capital meant even lower interest rates.

The Asian crisis affected the US economy in two ways, one positive and the other negative. The negative effect came from surging imports of manufactured goods that generated further downsizing in major industries. The positive impact sprang from falling interest rates that continued to fuel a housing boom, especially as people moved into ever larger homes. When a person buys a residence he also likes to purchase many other things—appliances, furniture, paintings, rugs and so on. Thus a housing boom is the best thing that can happen to an economy. This way the salutary effect of the Asian crisis far outweighed the negative impact, so that the US economy and financial markets kept humming even as other nations took a bath.

On April 1, 1998, the United States orchestrated major financial deregulation in Japan ostensibly to cure the Japanese crisis. But its effect were the same as those of the Asian turmoil. Deregulation permitted the Japanese people and insurance companies to invest money abroad, a privilege heretofore available only to their banking institutions.

Uncle Sam, no longer rich but in desperate need of incoming largesse, has become the largest debtor in the world, but since the debt is not in foreign currency, its ill effects would take time to erupt. Foreign debt has already destroyed seemingly strong economies—Thailand, Malaysia, Indonesia, South Korea, the Philippines, and Brazil among others, whereas obvious laggards such as Mexico and Russia are simply gasping for breath. The United States is still standing tall despite its mountain of debt, but since its liabilities are not in terms of a foreign currency, it will be the last domino to fall. The country doesn’t need to raise interest rates to attract foreign exchange, which is what is killing the other debtors.

This is the inside story of America’s sizzling prosperity in the late 1990s, even as the rest of the world crumbles. As the federal deficit ballooned in 1990 and thereafter, the slump of that year could have turned into a full-fledged depression, but the inflow of Japanese money brought interest rates down and saved the day. In spite of that inflow, there was a good deal of suffering for six long years until 1996. After that, as the foreign inflow accelerated, a tepid recovery turned into a full-blooded boom. Is this a real boom or a mere postponement of the day of reckoning into something worse? With billions of dollars in loans even a pauper can become a tycoon and gloat about his riches. But one day the loans come due with interest, something that has already bedeviled many parts of the world. The US hour of judgement is almost here, and then the great depression, postponed in 1990, could make a ferocious comeback.

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