Prophets Of Doom
Doom For The Dollar--And Everything Else
Dan Ackman, 01.10.05, 6:00 AM ET
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Doom For The Dollar--And Everything Else
NEW YORK - The stock market is up and economic growth has been steady, if unspectacular. But, an increasing number of economists are seeing serious storms build on the horizon. They point to ever-growing federal budget deficits, a record current-account deficit, increased consumer debt, a real estate market that looks like a bubble ready to burst, a surge in personal bankruptcies and the prospect of inflation.
Meanwhile, interest rates are on the rise, and if they increase much more, many of these problems could get dramatically worse.
Doomsayers tend to be ignored--until it's too late. This week, we give voice to five prophets of doom, starting with Peter Schiff, CEO and chief global strategist of Euro Pacific Capital.
Could the falling dollar mean we're in for a major financial disaster? He thinks so.
He has been warning about the currency's fall for a while now. Even though it lost a third of its value in the last two years against the euro, he believes it will decline even further. But, the dollar's fall is more a symptom than a cause. The real problem is that the U.S. is producing too little--and spending too much--and the result is likely to be far worse than the happy-talkers on Wall Street will ever let on.
"We are going to go through one of the most trying financial times in U.S. history, including the Great Depression," Schiff says.
Why Should We Care About The Falling Dollar?
"The basic problem," Schiff states, "is that Americans don't produce enough, and don't save enough." Indeed, over the past 15 years, the savings rate has fallen from over 6% to less than 1% in recent quarters. As a result, the goods that we are consuming are being supplied to us by foreigners. Not only are they producing the goods, but they are lending us the money to buy them, and, in doing so, are driving the U.S. deeper and deeper into debt to the rest of the world, Schiff says.
As American industry has lost productive capacity, it has become increasingly difficult for the U.S. to produce enough--and sell enough--to reduce that debt. The massive U.S. trade and current-account deficits, now at around 6% of the gross domestic product, mean that non-Americans are exchanging consumer goods today for consumer goods they will obtain in the future.
The U.S. doesn't have the ability to supply those goods, Schiff says. "We are using dollars that we print to exchange for goods that we don't produce. We have to borrow from abroad as there are no domestic sources of savings, so the value of those dollars will continue to fall."
How Bad Will It Get?
Peter Schiff, chief executive of Euro Pacific Capital
"Very bad," Schiff says. The dollar will fall a lot lower than it already has--dropping by perhaps 50% against the Japanese and Chinese currencies. How will the government respond? Could efforts to forestall the currency decline have a perverse--and ultimately negative--effect? No matter what the outcome, Americans will have to consume a lot less and save a lot more. Spending on cars, clothing and electronics will all drop dramatically--perhaps right out of the economy.
What Caused It?
"We are a society that has lived beyond its means for a long time," Schiff says, adding that while the trend has been evident for two or three decades, "in the last five years, it has gone off the deep end." Americans are relying on foreigners more and more to produce goods, rather than producing them themselves.
What Will The Results Be?
Americans will have to restrict future consumption or default on debt, whether directly or indirectly.
"I think something in the near future--maybe early this year--will make us realize the error of our ways," Schiff says. "Our creditors are going to stop. They are going to bite the bullet," which means realizing we can't repay them in the way they want and expect.
They will take a huge loss, but it will be necessary to check an unsustainable process. At that point, the people of Japan and other Asian nations will be able to consume a lot more, because they will send less of what they produce to the U.S.
"They will not be producing for us; they will be producing for themselves."
Meanwhile, to attract savings from abroad, the U.S will have to increase interest rates into the double digits. This will cause a serious wave of defaults in the real estate market and elsewhere.
"The further into the future this starts, the worse it will be for Americans," Schiff says.
When And Why Will It Bottom Out?
"I don't know. A lot will depend on the government," Schiff says. The debt to Japan, China and others has been building for a long time. The process will also take some time to reverse. But, the analysts on Wall Street don't want to say this.
"They pull their punches, because they don't want to be marginalized. But, the fact is we owe Japan a fortune; it's not the other way around." And that, Schiff says, means the dollar will be heading south for a while
