Is our economy fucked?

[Darth Wong]

An interesting article from Forbes about long-term trends:

Doom For The Dollar--And Everything Else
Dan Ackman, 01.10.05, 6:00 AM ET

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.

So what do you think? Just keep thinking happy-happy thoughts? Be optimistic? Or does this guy have a point, and are we overspending and undersaving ourselves into a gigantic hole?

[Melchior]

How much truth there is in the thought that the feeling of the incoming rapture has a role in Bush's administration lack of planning?

[Murazor]

As a pesimistic and an Economics student, I believe that there are truly dark times ahead and that one of the possible (and most likely) outcomes is a change in global balance, with a significative loss of importance of the American and European economies at the hands of China and India.

[Alferd Packer]

Interesting article. It occured to me while reading it that the situation may also be spurred on by the weakening dollar itself: Joe Consumer might now say, "Why should I bother to save? My money's gonna go further now than it is in a year, so I might as well get the new car and dining room set now," and he compounds the problem further. There may be a mass resignation of sorts to the inevitability of collapse, so people are simply getting as much as they can while they still can.

[BlkbrryTheGreat]

America is spending more then it is producing- right now someone else is footing the bill. When that stops you'll see, at best, a dramatic decrease in the standard of living. If, however, foreign governments and investors return the dollars they possess to the US you'll see something much worse- huge chunks of the US and the economy in the hands of foreign nations... and hyper-inflation.

[Chmee]

Well, we can take solace in the fact that if we go down, we're taking down all those people we buy from with us!

Hail the next Dark Ages!

[Bertie Wooster]

Sounds like I should be buying gold and silver.

[Iceberg]

The economy isn't fried.

It's Shake-n-Baked.

[SirNitram]

Not the first time I've heard it. Some economist friends of mine from the other side of the pond swear up and down this is the reason the EU is imposing such a sweeping economic sanction of the US... It provides a very limited cushion for the impeding economic crash-and-burn.

I fully expect a massive economic crash within our lifetimes, scarily enough. I'd like to move somewhere more stable by then, but that's unlikely. Worst of all is if the current trend of ultra-partisanship has continued along it's current route the whole time.

'THE EVIL SOCIALISTS CAUSED THE CRASH! GO, CHRISTIAN SOLDIERS!'

[MKSheppard]

The Dollar being cheap is good, from what I've heard as it allows
American exports to be competitive on the free market, while
the Euro is actually killing EU exports with it's strong showing,
as it prices them out of the market

[Stravo]

I take economic forecasts of doom and gloom with a pinch of salt. I've heard these arguments before over the years and have not seen the apocalyptic Great Depresssion II come. Just 15 years ago we had the Yellow Scare when economists were predicting the Japanese Juggernaut would end up owning most of the US and we a saw such classic films as Rising Sun respond to this fear and guess what? Nada. In fact it looks as if the Japanese have been in a recession for almost a decade now. So I'll reserve judgment on the beginning of the end.

That does not mean that we shouldn't be concerned by American inability to save. Its hard to do that with the consumeristic lifestyle we are encouraged to live - bigger and better TVs and Gadgets - Nice clothes - appliances, etc. In fact our president on many occasions has encouraged us to Buy Buy Buy. Never Save Save Save - unless of course you want to buy into his Social Security Personal account bullshit.

[Master of Ossus]

The US government, during the Bush administration, has responded correctly to the national trade deficit by enacting policies intended to lower the value of the dollar against foreign currencies. At the same time, America's real GDP has grown by over 3% per year--higher than Europe and even higher than many developing countries. While he has a point about the national debt, I seriously doubt that there will be a noticeable decline in American quality of life, since the nation only owes a small fraction of its total GDP, and could fairly easily make up for the difference.

[Robert Walper]

Just another reason to give up any delusions of raising a family, owning a new car or any other moderately ambitious endeavors in life. Just scratch out a living and try to have some fun before dying.

[Admiral Valdemar]

Economists, pfft. Somehow these guys are trusted more than weathermen and yet are about as accurate.

While I don't doubt the US economy is going to wind up going into freefall sometime in the future if the deficit isn't expunged, I'm doubting it'll be as bad as some make it out to be. When the US catches a cold, the rest of the world sneezes too, but I see America taking the full force of this problem in the end thanks to being burdened with a president devoid of any economic sense.

I'm more worried about getting on the property ladder when I finally get a proper job after uni. They keep printing money, but no one's printing new land.

[wautd]

fuck and I still have a few hundred bucks cash lying around here. But its so stupid to trade euros for it if the dollar is so low. On the other hand, it probably drop further

[Coyote]

I do foresee a slowdown in the US economy, and some adjustments will be necessary, but I too have learned to be wary any time an economist tries to paint a picture with a wide brush: "crushing recession" or "record profits" is too black-and-white.

Besides, it is an unfortunate truism that if the US economy goes south, the world will follow. This is not jingoism, but sad truth. The same would happen if the Japanese economy imploded, or China.

Hard times? Sure. Survivable? Oh, yeah.

[Trytostaydead]

Hmmm, we could always go and invade other countries..

[Steven Snyder]

Hmmm, we could always go and invade other countries..

Well it wouldn't be without precedent...

[AMX]

fuck and I still have a few hundred bucks cash lying around here. But its so stupid to trade euros for it if the dollar is so low. On the other hand, it probably drop further

Unless, of course, ECB decides that "Europe has to stay competitive" and starts lowering the Euro...
In fact, there are a lot of people wondering why they haven't started already, and I suspect they are afraid it might be ... destabilizing...


That said, maybe we're just holding back, biding our time...
With correct handling of the eastern expansion, we might actually be cultivating a substitude market, limiting the impact a collapse of the US economy would have on us...
And then, when the time is right, the world economy at its most unstable point, we undercut the Dollar, triggering the collapse...

Do you not see?
Do you not hear?
Fear our master plan!
Fear our power!
Soon, the world will be plunged into darkness, and the only thing left will be THE UNION!


Sorry for the eurowank conspiracy theory, especially in a thread like this, but I simply couldn't help it.
Everything between the first paragraph and this one is the product of a seriously deranged mind.

[Dahak]

The Dollar being cheap is good, from what I've heard as it allows
American exports to be competitive on the free market, while
the Euro is actually killing EU exports with it's strong showing,
as it prices them out of the market

Not quite true.
Germany for instance, an export country, has seen yet another growth in our exports.

[Master of Ossus]

Not quite true.
Germany for instance, an export country, has seen yet another growth in our exports.

Right, but that's entirely because of new markets opening in Europe and the Middle East. German exports to the United States are down, while German imports from the United States are up. The EU isn't stupid, either, and they're doing what's best for their countries by attempting to open new markets. The EU should have plenty of new markets in India and China coming, too, but that doesn't mean that the relatively high value of the Euro against the US dollar is a good thing for them.

[Seggybop]

Hmmm, we could always go and invade other countries..

Ja! They stop giving us the money, we'll take it from them!!

[Darth Wong]

The falling dollar is precisely the solution that Schiff is talking about. He figures it will fall, it will continue to fall, and then it will fall some more, until it starts to really hurt. Then it will start clawing back as the US increases interest rates.

[Fuzzy]

Well. After reading this thread, I am convinced that I know NOTHING of economics. But i do know this.

[Darth Wong]

I take economic forecasts of doom and gloom with a pinch of salt. I've heard these arguments before over the years and have not seen the apocalyptic Great Depresssion II come. Just 15 years ago we had the Yellow Scare when economists were predicting the Japanese Juggernaut would end up owning most of the US and we a saw such classic films as Rising Sun respond to this fear and guess what? Nada. In fact it looks as if the Japanese have been in a recession for almost a decade now. So I'll reserve judgment on the beginning of the end.

Actually, one could easily argue that this was merely forestalled by the Dot-Com Boom, which has already run its course. Today, Asia does hold much of our debt, so in a certain sense they do own a lot of the country. When you have an economy based on optimism and borrowing, something has to give sooner or later. Bragging about how "hot" this hope-based economy has become is a dangerous mentality; America's collective complacence about fiscal irresponsibility at the government level is a big part of what got Bush back into office.

That does not mean that we shouldn't be concerned by American inability to save. Its hard to do that with the consumeristic lifestyle we are encouraged to live - bigger and better TVs and Gadgets - Nice clothes - appliances, etc. In fact our president on many occasions has encouraged us to Buy Buy Buy. Never Save Save Save - unless of course you want to buy into his Social Security Personal account bullshit.

That's not Save Save Save; that's Gamble Gamble Gamble