Beginning in the 1970's, Japan experienced a bull market in its securities that literally exploded. As investors saw their net worth soar, they came to believe their stock and bond portfolios were really worth the valuation placed on them.
Caution entered the equation at one point in time in the early and mid-1980's, and many of these investors put their paper profits, much of which came from brokerage accounts on margin, into the naturally booming Real Estate markets of Japan, again leveraging already leveraged gains, putting down only small percentages of the appraised values of the properties they were buying and investing in. At the bottom of this endless mountain of leveraged debts were the Banks of Japan, who in turn had leveraged loans based on their own borrowing from the Japan Central Bank.
In 1987, the Japanese economy imploded, and in a crash heard round the world, all world markets crashed hard, burying many here in the US who were already leveraged by previous multiple investments in tax shelters, which were blown up by the US Government in a grand scheme by The Tax Reform Act of 1986.
The real targets of the 1986 "Reform" Act were the assets of the banks and savings and loans of the State who had opted out of the Federal Reserve System in 1914. If there were later collateral damage issues, that wasn't, in their minds, their problem.
The Nikkei has remained depressed for over 20 years now, with no prospects of recovery. Each of the last 11 Prime Ministers of Japan have been elected on a platform of fiscal responsibility, only to be told by the country's banks that if they are forced to mark their accounts to market, they and the Central Bank of Japan would collapse, with awful consequences.
The United States has been through a horrific economic reversal with the Raid of 2000, and that was swung on expanded real estate investment by investors no longer rightfully trusting in our securities markets. They now face an implosion of Real Estate markets for the collapse of sub-prime mortgages, a collapse that could force liquidation of many investment and hedge funds assets to cover the shortfalls.
As recently as 2003, analysts have cited the major US banks that were upside down on their Real Estate loan portfolios. That has to be a bigger number today.
I smell a potential Japan scenario unfolding here. In a visit to New York last month, I was out with associates, and I noticed a vitality bordering on the frenetic, analogous to "Froth" in street slang.
As any one who has read my work for the last few years, I am a major proponent of both Nietzsche and Santayana. I invite all of you to watch the widely viewed presentation "Shift Happens" now available on the web. I have advised all of my friends to make sure their children's second language is Mandarin, and start them on it before they can speak.
It is Time not only to buckle up, but cinch it tight.
I am reminded of the Classic Chinese Curse:
"May you live in interesting times."
I am not sure we have any choice.