by J. Taylor
Global Research, September 23, 2007
J.Taylor’s Gold, Resource & Environmental Stocks Newsletter and USAGold.com – 1999-08-05
An Interview with Dr. Ravi Batra
from “J.Taylor’s Gold, Resource & Environmental Stocks” Newsletter
Thanks to an introduction via the internet with a friend of economist and famed best selling author Dr. Ravi Batra, we have for you the transcript of an interview that took place between your editor and Dr. Batra. He has graciously agreed for me to interview him and permitted me to publish a transcript of our 1-1/2 hour discussion mostly about his views and forecast for the American and global economies. What I have discovered since meeting Dr. Batra is that his views on the global economy are very close to my own as first discussed in January 1998 at a Cambridge House Conference in Vancouver. At that conference I warned investors that the global economy was awash in far too much supply and not enough aggregate demand and as a result, we are likely to sink into a depression in the not too distant future. I am flattered to know that a man of Dr. Batra’s stature generally agrees with my position. But as a professor, scholar, economist, he explains in great detail and in a logical manner, much better than I, why we our stock market and the American economy are inevitably headed for the abyss. His new book, “The Crash of the Millennium” ties together the thoughts of his previous books, many of which have been international best sellers. Dr. Batra thinks the greatest bull market in stocks the world has ever seen is likely to end before 1999 draws to a close or at the very latest by the first month or two of 2000.
What does he suggest you do to prepare for the carnage that lies ahead? Dr. Batra is by no means a gold bug, but he told your editor that the only long-term investment he now recommends is gold and gold shares. Why? Because Dr. Batra believes that what lies ahead for the U.S. is not only a depression, but also considerable amount of inflation. Some of the thinking that underlies Dr. Batra’s predictions is presented in the following discussion, but I urge you to purchase his book to gain an appreciation for the soundness of logic that goes into his forecasts. I am predicting Dr. Batra’s latest work will be his 9th best seller. Previous works by Dr. Batra that made the best seller lists include: The Downfall of Capitalism and Communism, The Great Depression of 1990, The Myth of Free Trade, Ravi Batra’s Forecasts, The Stock Market Crashes of 1997 and 1998: The Asian Crisis and Your Future and Surviving the Great Depression of 1990. As our discussion took place on July 29, 1999, Wall Street analysts and CNBC talking heads were obviously confused about why interest rates were heading higher (in the absence of inflation) and why the stock markets were beginning to look a bit strained. The recent market action was no mystery to Batra. The U.S. has lived beyond its means for a long time by taking on huge amounts of foreign debt which can be expected to lead to much higher interest rates and most likely very soon, the implosion of our financial system.
TAYLOR: In your soon-to-be published book titled, “The Crash of the Millennium,” you reviewed your enormously positive track record in predicting major events and social trends. Between the years 1978 through 1992 you made some huge predictions, like the collapse of the Soviet but not Chinese communism. You predicted George Bush would not be re-elected and that a third party would arise in 1996. And you made a host of predictions related to various markets and the decline of morality in western society. By my count, some of your predictions may not have yet come true, but appear to be very much possible. I believe there are only 2 out of 33 predictions that you made that have not come true or that have only partly come true. Perhaps the biggest prediction that did not pan out was the prediction that we would suffer a global economic depression beginning in 1990. Japan entered a devastating depression about then, but the U.S. escaped it. Despite the fact that the U.S. federal debt grew exponentially during the 1980’s and into the 1990’s and despite a huge trade deficit the U.S. managed not only to escape an economic calamity, but to experience economic growth that continues even now. How do you account for the fact that the U.S. has been able to escape the depression you also predicted back in 1989 when you suggested that “share prices will crash all over the world, leading to a seven-year-long depression”?
BATRA: What happened was that I had assumed that once the stock markets began to crash, the Japanese money would stay home because they had already lost billions of dollars in the U.S. markets. They lost almost 12 TRILLION dollars in the U.S. market. So, if they lost so much money, why would they touch that market again? But, I turned out to be wrong.
I think what the Japanese did was irrational but here is what happened. When their stock market began to crash in early 1990, their banks were also under great pressure. So to help their banks, the government of Japan simply pushed their interest rates close to zero. With such low returns available at home, a lot of Japanese money went abroad to the Asian Tigers and to America. At that moment in 1990, the U.S. was in a recession and had a budget deficit of almost $300 billion, which was driving up the rate of interest. If interest rates had continued to rise, that recession could have possibly turned into a depression. But the Japanese money saved the day by pouring into the U.S., so interest rates. fell in spite of the huge budget deficit. The result was that our economy began to revive.
According to official figures, the recession was over by mid 1991 but according to many other people, the lingering effects of that serious recession went on until 1995. Even then it was very serious, but the Japanese money made such a huge difference. Then after 1996, more Japanese money came into the U.S. In fact the U.S. trade deficit was rising and a lot of foreign money began to come into the U.S. bond and stock markets because of that trade deficit. Even now the American economy is very strong mostly because all that trade deficit which puts dollars in foreign hands.
This benefits the American economy because all those dollars are coming back home. So what we in America have had is prosperity based on borrowed money. Therefore it cannot last forever.
TAYLOR: In Chapter 8 of your book, you said, “No question about it. We are trapped in the bubble of the millennium”. When Alan Greenspan was recently asked in Congressional hearings whether or not we are in a bubble economy, or whether the stock market was in a bubble, he said something to the effect that it is very difficult to know you are in a bubble until after you are out of it. In essence, Mr. Greenspan was saying he didn’t know if we are in a bubble or not.
Playing the Devil’s advocate here, what makes you so sure the United States Economy is in a bubble if the most worshiped Lord of Finance — perhaps in history of the world — says it is impossible to know if we are in a bubble? Do you think Mr. Greenspan in fact knows we are in a bubble but he is afraid to say so, lest we blame him for a crash? Or is it possible he really believes that as the Lord of the Financial Universe he can continue to navigate the U.S. economy successfully through the troubled waters that face our economy?
BATRA: Well, I think Greenspan believes that we are in a bubble because people from Wall Street and possibly Mr. Greenspan himself criticized the Japanese stock market in the 1980’s. They kept saying that Japan was courting a disaster because their stock prices were very high.
TAYLOR: The U.S. market may now be more overvalued that the Japanese markets in 1989, right?
BATRA: That’s right, we are now more overvalued than Japan was in 1990. So certainly most American financiers know we are in a bubble economy but they hate to admit it because they think that they are one way or another responsible for it.
TAYLOR: And to admit it, may not be good for business sometimes?
BATRA: Right, in fact Greenspan has changed his position many times. I think in 1996 he said stocks were overpriced. But then he was criticized for that so he changed his position to “not overpriced.” So either he himself is confused I think that is true because he used to believe Japan was a bubble economy now he is saying the U.S. is not, so he is showing confusion on his part. I can understand that because he has to please the financiers in order to be worshiped and get their adulation.
TAYLOR: People pay so much attention to what he says that if what he says shakes confidence, then he could be blamed for part of the problem as he was in 1996 when he talked about “irrational exuberance”.
BATRA: That’s right. Well in fact, I think he should be blamed for the problem of the bubble. He doesn’t want to rock the boat now I think.
TAYLOR: Assuming you are right and our stock market and our economy is in a bubble, what makes you think the current bubble is bigger than the 1929 bubble? After all, from its peak to bottom, the DJIA lost almost 90% of its value. If the current stock market were to fall by the same percentage, we would be back to about 1100 on the Dow Jones Industrial Average! Do you really think we could be in for a decline of this magnitude? Would not this be devastating for America? Might it not cause a civil war or lead to a dictatorship?
BATRA: I didn’t realize the decline (1929) was that large. Whether it is an 80% or 90% decline I don’t have a clue about that, but we are going to have tremendous financial losses in the stock market and they will be far more widespread this time because a huge percentage of the public is involved now than in 1929. With financial losses much worse, the resulting misery and depression could also be much worse. That could lead to a political revolution, but I do not believe it will lead to a dictatorship. I think we will see the rule of money end and that we (the majority of Americans and citizens around the world) will benefit by a tremendous revolution.
TAYLOR: I will get to that issue a little later toward the end of our conversation. There are some very encouraging aspects to your message which I want to be sure our subscribers understand when we get to that point. What I want to ask you now is how did we get into this mess we are now in?
BATRA: The main reason is that we don’t have a free enterprise economy. It is touted as a free enterprise economy but we really don’t have that. In fact, what we have are regional monopolies or a monopolized economy. Some people call it “Crony Capitalism.” The main feature of a monopolized economy is that the fruit of rising productivity goes to owners of capital, not to the employees. So there occurs a rising gap between productivity and wages. Wages are the main source of demand and productivity is the main source of supply so with the rising gap between wages and productivity there is a potential for a gap between demand and supply. And that has been occurring in the U.S. for many years now. So the question is how have we stayed afloat for so long with supply rising faster than demand? The answer is demand has remained artificially high through the creation of debt, either from government, consumers, corporations and foreigners. All this debt has combined to lift up demand to the level of supply. But debt created prosperity cannot last forever. So we have gotten into this mess by: First, allowing wages to lag behind productivity and secondly by artificially bolstering demand by creating a tremendous amount of debt. All we have done is simply postponed the problem. And, since this postponement has been going on for many years, the mess is potentially catastrophic.
TAYLOR: In your book, you suggest that we have been boosting demand via debt in the U.S. since the early 1970’s. Is that right?
BATRA: That’s right but at that time the wage gap was mostly due to the rise in the price of oil. Productivity did not fall, but wages did so the gap grew. But since 1980 productivity has risen significantly faster than have wages. So a potentially more serious problem has developed since then because rising productivity means rising profits and rising supply and that means rising stock markets, which suck more and more people into that trap. So the wage gap arising since the early 1980’s is potentially much more serious than the wage gap that arose in the early 70’s.
TAYLOR: We saw a lot of policy changes with the Reagan administration in the early 80’s. We saw the tax load switch income from the poor and middle class to the wealthy. And as you pointed out in your book we have had perennial trade deficits. NAFTA has become a significant problem along with the globalization of the world economy. Your ideal model of capitalism is one of a large number of competing producers, along the lines idealized by Adam Smith. You have been critical of the Clinton Administration for refusing to be more aggressive in using anti-trust law to boost competition. And, you point to Crony Capitalism as a reason for government not playing a role to enhance competition. You believe (as I do) that the large owners of capital have the ability to buy votes by financing elections. Thus they have positioned themselves to shape laws and regulations to their own advantage (as they see it) so that wages continue to fall behind productivity and hence their own stock market profits continue to rise. Right?
BATRA: Yes and that is exactly the way it is all over the world. It takes different forms and shapes in different countries, but in the end it is the power of money over politics that is creating problems. That power has increased sharply from the early 80’s as a result of tax cuts fueling the wealthy with extra cash, and then a rising wage gap created even more billionaires. These rich people in turn have had an increased ability to buy off elections. So their power has risen very sharply in the U.S. and also in the rest of the world. So Crony Capitalism, is ruling the world. One result of that we have already seen and that is the Asian turmoil. And it is now stirring up in Latin America as well. I think it is finally going to come to the United States.
TAYLOR: I have had a view that the Reagan supply side economic policy was desirable in light of the inflationary environment of the 1970’s. And I believed that Paul Volcker’s monetary policy of targeting the supply of money rather than interest rates was desirable in directing resources from the demand side to the supply side of the economy. I thought the Reagan program of redistributing wealth from the poor and middle classes, while not politically popular, was necessary to reduce the demand side of the economic equation while strengthening the supply side of the economy.
So I thought the “Reagan revolution” was positive until the Asian crisis broke out. At that time, I began to think that supply side economics had perhaps gone too far. However, based on what I read in your book, I gather that you would not agree with me that, at least for a while, Reagan’s supply side economic policies were desirable?
BATRA: No, I do not agree that the Reagan supply side economic policies were desirable because “supply side” was just a euphemism for Keynesian economics. Keynes talked about cutting taxes that would spur demand which in turn will attract production and investment. But both of Reagan’s policies of cutting taxes (mostly for the rich) and raising social security taxes, which hit the poor and middle classes the hardest, did not increase demand and hence give a reason to invest. Without consumer demand why would anyone put any money in their business? So when Reagan cut income taxes and raised social security taxes he was in fact hurting business.
The Reagan economic policy was also Keynesian in the sense that the end result was a huge federal budget deficit. That is the main idea behind the Keynesian demand side policy. So in the end, during the 1980’s the budget deficit rose sharply and they simply called it supply side to try to distinguish it from Keynesian economics. In reality, it was the same Keynesian policy. But it had a negative bite to it as well. It was a budget deficit on the back of the poor. Demand did not rise fast enough therefore investment did not grow fast. So GDP growth during the 1980’s was in fact slower than in the 1970’s and certainly the 1960’s. Money went into the stock market, but that has not resulted in economic growth.
TAYLOR: But my belief has been that we had the inflationary 70’s partly from too much stimulation on the demand side of the equation. I also believed that was a carryover from the “New Deal” policies of the 1930’s that effectively redistributed income from the wealthy to the poor and middle classes. So I believed that the Reagan policies which reversed income back to the wealthy was needed to balance the supply/demand equation.
BATRA: Well, what Reagan was saying is true in a third world country. In those places they do not have capital and technology so that there is not enough supply at all and there is plenty of demand because of population. But in the United States, technology and capital are plentiful. The main limitation here is weak demand. What is important to understand is that supply growth will only be enough to match demand growth. Whenever demand does not grow fast, supply will not grow no matter how many tax cuts you want to give.
In the 1950’s our tax rates were much higher than in the 1980’s. For example, they were as high as 90% in the 1950’s. But with the Reagan tax cuts, the top marginal tax rate in the 1980’s was cut to somewhere between 28% and 31%.
Yet, during the 1950’s, GDP grew at a rate of 4% per year, while in the 1980’s it grew at a rate of less than 3% per year in spite of all those tax changes. So the Reagan tax cuts actually were associated with a lot lower economic growth rate than during the 1950’s when top rates were very much higher. The reason was that demand did not grow fast in the 1980’s. The Reagan tax cuts not only slowed consumption, but investment fell as well. People say “well, they will have more money to invest,” but why would they put more money into business if there is not enough demand?
TAYLOR: But we have had the greatest stock market ever!
BATRA: That is the main point. A booming stock market comes from a rising wage gap and rising wealth concentration. But that has nothing to do with productive investments.
TAYLOR: So investors put their money into this casino called the stock market and that does not necessarily result in direct investment in new plant and equipment.
BATRA: That’s right. They put their money into paper assets but not in real assets. Productive investments or investments that boost economic growth result when money goes into real assets.
TAYLOR: Do you then believe that we could have fixed the inflationary problem of the 1970’s simply with a tight monetary policy and that we did not need all this supply side stuff from Reagan?
BATRA: That’s right. We could have fixed the inflation problem simply with monetary policy. One thing that Reagan did that was good was to push for de-regulation and that helped reduce inflation too. Wherever regulation inhibits competition, it adds to inflation. So de-regulating airlines, trucking, and communications was good. But de-regulating the financial industry is something else. Actually most of the deregulation started under Jimmy Carter. Regan will be remembered mostly for his huge budget deficits.
TAYLOR: Fortunately for Mr. Reagan he does not remember much of anything given his illness. But getting back to the future, you are anticipating a stock market crash to take place this year or at the very latest during the first couple of months of 2000, is that correct?
BATRA: That’s right.
© Copyright J. Taylor, J.Taylor’s Gold, Resource & Environmental Stocks Newsletter and USAGold.com, 1999
The url address of this article is: www.globalresearch.ca/index.php?context=va&aid=6857