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INC.: How much can bonds rally with rates as low as 9%?
SALVIGSEN: Low? Rates today are still twice as high as the 200-year average of interest rates in this country. We think 1981 was to bonds what 1932 was to stocks. Rates had gone to 15% and people were throwing bonds overboard. Now rates are 9%, and they say look how low the rates are.
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INC.: All free economies are highly leveraged these days. Does that mean they're all teetering on the brink?
SALVIGSEN: I view Japan as the big excess of the '80s. Japan is to the '80s as the United States was to the '20s. We were not the reserve currency then, but we were the economy that was taking market share from most of the trading partners. The excess liquidity -- trade surpluses -- found its way into the stock market. Our market in the 1920s went up much more than most of our trading partners'. That's what has been happening in the '80s. Japan's trade surplus built up at an incredibly fast rate, and it went right into the financial markets. As the financial markets rose, they pushed up real-estate values. Then many Japanese borrowed against that real estate, went overseas, and bought yet more real estate. The valuation of the Japanese stock market is very rich by traditional standards.
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INC.: Yet their economy is not as extended as ours, right?
SALVIGSEN: The debt in Japan is only about half GNP, whereas in this country it's close to three times GNP. There the excess is in price: real estate, stocks, goods. It's a rigged economy. When a cantaloupe costs $75, to us it's laughable. Wouldn't you think someone could ship them a melon for under 50 bucks? The deflationary risk to their domestic pricing structure is very great. I see the risk much greater in Japan than in the States.
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INC.: Could Japan collapse without dragging us with it?
SALVIGSEN: There would probably be a sympathetic directional move of most markets, since the Japanese market is so big. We could go down a lot, but not anywhere near what the Japanese market could go down. To go back to the parallels with the '20s, our stock market then fell 90%, but England -- which is like where we are today in relation to Japan -- went down only 40%.
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INC.: What would be the consequences of a collapse in Japan?
SALVIGSEN: What happens in a crisis like that is money goes to the safest haven. The dollar would turn up significantly if there were a crash in the Japanese market. The dollar turning up would make our market look particularly attractive; investors would say: "Hey, the value is relatively cheap and the currency is going the right way." That's one factor that will keep our market from participating.
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INC.: Even if the idea of growth in America has been sacred, can't we sustain a level that is flat just as well?
SALVIGSEN: The biggest growth element in the United States today is debt. Therefore the luxury of having the flexibility of settling for less rapid growth is out of the question. The only way this country is going to manage its debts now is to increase its output, not consume more services. Part of how we got here is we consumed too much. Standard of living is measured by consumption. It isn't adjusted for how much credit is used to gain it, which is absurd.
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INC.: Let's explore the response if things got real bad.
SALVIGSEN: If the system got real weak, the response of the government would be to print. And it wouldn't help. Once you go over the edge, the contraction in velocity is so great that they can print all the money they want, and it doesn't make a lot of difference. The other possibility is, let's say you had someone who was really sharp, and anticipated: "I think this system is going off the edge, so I'm going to print now to prevent it from happening." What would happen then is that under present circumstances, the dollar would drop like a rock, and that would bring on the deflation anyhow. If all of a sudden the purchasing power of the world's biggest customer fell 30%, vendors waiting to sell that customer something would feel as if a bomb had dropped. You would have effectively exported your deflation to them by running down your currency. Then there could be a worldwide depression.
INC.: What would you have us do, then?
SALVIGSEN: Don't get caught in the middle of the flock. We have discovered a zoological quirk that illuminates the matter. It seems that when a herd of camels finishes imbibing at the local oasis and then feels nature's call, rather than each wandering about in search of a quiet tree, they crowd together and relieve themselves at exactly the same moment. When the number of participants is large, it makes for quite a scene. Keeping in mind that one man's debt burden is another's green fee, we emphasize the necessity of making the shift from borrower to saver and from low-quality instruments to creditworthy and long-lived ones, before the entire herd stands up and lets fly.
