The Road to Ruin

Luca Pacioli (photo) was an Italian mathematician and Franciscan friar. In 1494. just two years after Columbus discovered the continent that has now reduced to a land for second-class nations such as the U.S., he wrote a book titled Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything About Arithmetic, Geometry and Proportion.)

Note 1: According to the most recent estimate, it's a matter of time that U.S. public debt tops $10 trillion.
Note 2: Japan ranks No. 2 only next to Zimbabwe.

For the U.S., China and Japan, I concluded that a comparative look at these figures doesn't tell anything, unambiguously, about the problems facing them, let alone their fates.

Even if I had been able to find reliable data for the accumulated shortfalls in these countries, that wouldn't have made the total picture any clearer except that when taking into account astronomical deficits which still keep ballooning in the U.S. and Japan, the situation would have looked even closer to catastrophe than the above figures indicate.

As to the Greece Crisis, analysts, pundits and many others are saying it has been more or less contained with the rescue funds offered by the EU and the IMF although they admit additional measures are needed to prepare themselves for another wave of crises possibly triggered when other member countries such as Portugal, Spain and Italy become insolvent.

But the fact of the matter remains that these bailout funds and newly-planned Euro-defending mechanisms are actually aggravating, rather than easing, the situation.

It's astounding to know nobody talks about punishing Andreas Papandreou, a Harvard alumnus, or stripping his country of its EU membership. (It is evident that the nation's accession to the precursor of the EU was approved in the 1980s based on largely falsified economic data.) Even Obama, another Harvard-educated moron, could force Rick Wagoner to step down in exchange for the huge bailout funds for General Motors.

Just like very few Americans missed Wagoner, no one would miss the Greek president because the ancient civilization that flourished there more than two millenniums ago will remain there representing the wisdom of mankind no matter what happens to the current statehood.

Once again European leaders have failed to learn their lessons from the crisis.

More specifically, they should have learned:
■ the more a government meddles in the domestic economy, the more the self-adjusting mechanism inherent to it is damaged, and
■ the more the governments are inclined to swim together, the more it is likely they sink together.

In relation to the first point, let me tell you one example of the self-adjusting mechanism of economy. These days participants in equity markets seldom talk about price-to-book ratios. But in fact, there is no reason to deny the stock price is primarily determined by P/B (price divided by the net-worth per share of the company) if you sometimes take into account off-the-balance-sheet assets and liabilities, as well. P/E (price divided by the net earnings per share) may also be an important criterion. But in principle, politics has, or should have, very little to do with the price mechanism.

Now it is quite obvious that the lack of learning ability on the part of these leaders is taking a devastating toll on people's well-being.

It's appalling that they still make believe it's the right thing to do to stay in the same (perhaps sinking) boat all together defying the fact that those multilateral frameworks for mutual cooperation such as the IMF, G-8, UNSC, FAO, WTO and NPT have all proved dysfunctional by now.

Fortunately, though, a growing number of the people in Greece, Germany and other EU countries have started learning their own lessons. Now they find the rules of the game totally unacceptable because it's always them that foot the bill for the incompetence of their leaders.

This brings me to the point the Franciscan friar overlooked, or needn't have pointed out, five centuries ago: there are values that cannot be accounted for in terms of money. In fact, qualitative aspects of life by far outweigh its quantitative aspects in an uncertain world such as this one.

Now it seems to me that the fates of European countries all hinge on the overall quality of these peoples, especially their awareness of the root cause behind the predicament they are going through.

The same holds true, or even truer, with the Pacific-rim countries.

Two years ago I was of the opinion that talking about the fates of China and Japan would make little sense. But now that America's decline has started to look totally irreversible under Obama, you need not be a prescient prophet or trained analyst to tell that sooner rather than later the Big 3 (only in terms of GDP) will tumble altogether. It's just a matter of commonsense.

Needless to say, other countries cannot afford to see any one of them collapsing. But they should not take it for granted anymore that the state-of-the-art life-support system will still work with the economic giants. It's quite unlikely that other countries can stop the U.S., Japan or China from falling, because these economies are 14-43 times larger than Greece.

I got a premonition that when the time comes for the U.S. and China, their own peoples will pull the plug on the current polities so they can start all over from a greenfield situation. I am not cracking a joke when I talk about Civil War II.

The fate of the Japanese is a different story, of course.

Shizuka Kamei, head of the People's New Party (a minor coalition partner of the Hatoyama administration,) has now been vociferously broadcasting that Japan is not Greece.

The banking and postal services minister says to the effect that in stark contrast with the situation with Greek public debt, more than 90% of the Japanese government bonds are held by Japanese people whose "financial assets" still total more than 1,400 trillion yen ($15 trillion.)

Kamei has a big say over where to invest the postal savings currently managed by Yucho Ginko (Japan Post Bank.) The balance sheet of the quasi-governmental bank shows its postal savings amounted to 176 trillion yen ($1.9 trillion) as of the end of the 3rd quarter 2009. And believe it or not, the bank invested almost 75% of the postal savings in government bonds that bear interest at a mere 1.32% per annum.

JPB is not alone; many other Japanese institutional investors have put virtually all the eggs in one basket which is rated in the range from AA to Aa2 by the likes of S&P - something that a sane fund manager would never do. In effect they are saying there's nothing wrong with taking high risk for low return because after all, Japan is their home country.

Because of the misplaced patriotism, they just don't see, or don't want to see, the other side of the coin. At any rate it's a weird thing to look at that the taxpayee is so deeply indebted to taxpayers.

Kamei's fellow countrymen, and surface-scratching analysts in the West alike, will soon start to say Japan is still quite OK because the country is largely "self-financed." I think these guys really need to look up the word in the dictionary.

In fact, though, it's not that the Japanese are a self-reliant people - far from it. Actually they always count on foreign countries, the U.S. in particular, to come to rescue when the other sides of the facts become unmanageable. It's as though Obama's America weren't equally, or even more fragile.

Once again fully prepared to commit double-suicide with their home country, the Japanese seem to have already crossed the Rubicon.

I know you think I am yet another doomsayer. But that's not what I am. I'm just saying there is no such thing as an unambiguously defined fact as Luca Pacioli seems to have pointed out 516 years ago. It takes a first-rate arrogance and ignorance, like Kamei's, to claim you have a 360-degree view of these multifaceted issues.

Time and again, I recall how quickly a partner of Tohmatsu Awoki (now part of Deloitte Touche Tohmatsu, one of the Big 4 audit firms) backed down on his "opinion" about the accounting gimmick his men had detected. All it took my Swiss boss was to ask the partner: "Are you sure you are prepared to lose a longtime client?"

By the same token, poor ideologues all over the world have to falsify the books of real life. Even so, I still believe that some, if not many, of ordinary people have not yet been fully deluded by their pre-Pacioli single-entry bookkeepers and are now waking up to the hidden reality.

It's totally inconceivable, however, that the brain-dead Japanese come to their senses before the imminent apocalypse.

Eventually, the divine dispensation will prevail. I don't know what elimination criteria God will use to decide who to perish and who to survive. But I'm quite certain He will never base His decision on ideologies or statistics. ·