January 18, 2005
The Perfect Economic Storm
Back in September of 2003, I wrote an article entitled, 2004 Election Issues (The Economy) in which I warned of the coming economic “perfect storm” in America’s future. Confidence in the Bush administration on domestic policy at the time ran contrary to the thrust of this article. Today, however, more economists are seeing the gathering storms coalesce on our economic horizon and are issuing the same stern warnings I did a year and a half ago.
Forbes sponsored an article on MSN, 4 Economic Prophets of Doom, in which highly regarded expert's warnings are becoming ever more dire. What will it take for the Bush Administration to begin to seriously address these warning signs? Economic collapse and severe economic depression cannot be averted upon arrival. Like the Titanic, it must be steered away from collapse long before collision is imminent, or the severe consequences will be inevitable. Below are excerpts which all thinking, politically active Americans should pay heed to.
Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, says:
"We are going to go through one of the most trying financial times in U.S. history, including the Great Depression,""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.
Chris Dialynas, a managing director and portfolio manager at Pacific Investment Management, warns:
U.S. nonfinancial business debt has roughly doubled since 1994. Over the same period, the U.S. current account deficit soared from approximately 2% of gross domestic product to nearly 6%. The gap is still widening, and Dialynas and other observers, Warren Buffett included, expect it will grow, perhaps to 8% of GDP in a few years.As a result, he calls for nothing less than a "new Marshall Plan." But unlike the first Marshall plan, the U.S. would be the beneficiary, not the benefactor.
Dialynas calls for not just a 40% revaluation of the Chinese yuan and other currencies but also "the renegotiation or even forgiveness of U.S. debt held by countries with large trade surpluses with America." The alternative, he says, is a "path to ruin and global conflict."
The effect of the debt is that the U.S. is in weaker political position negotiating with allies and other countries. The U.S.'s inability to garner much support for the Iraq war is just one example. Also, the emergence of China and other Asian countries has utterly changed what Dialynas calls the global economic architecture. As China and India start to beef up their economies, they will ultimately begin to assert military power as well.
"People don't build up claims without building up the ability to collect,"
Stephen Leeb, president of Leeb Capital Management and author of "The Oil Factor", warns:
The world economy has gotten fairly comfortable with oil at $45 a barrel. But how will it react to paying $100 a barrel three years from now? Or $150 in five years?... The result, Leeb says, will be double-digit inflation -- if we're lucky. If we're not, it will be a severe depression.
"The problem we have is that there are 2.3 billion people in Chindia," Leeb says, using shorthand for a combined China and India. "Today, China and India use 5,500 barrels of oil per person per year, while rich nations use 39. No matter how rosy your thinking is as to the global supply of oil, there is no way there is going to be enough to satisfy the demands of an extra 2.3 billion people coming online."
In her book "The Truth About the Drug Companies," Dr. Marcia Angell, a senior lecturer at Harvard Medical School, predicts massive suffering and poverty for America's aging population in the following way:
"Prices for the top brand-name drugs are now rising at over three times the inflation rate," Angell says. "At the same time, the number of life-saving innovative drugs has fallen dramatically, as the industry concentrates instead on 'me-too' drugs -- trivial variations of top-selling drugs already on the market."Drug companies say they need to charge ever-higher prices to cover their research costs, but they spend far less on research and development than they do on marketing and administration, and afterwards they actually keep more in profits. In fact, for over 20 years, this has been the most profitable industry in the U.S. (It fell slightly last year, from first to third place.)
"This represents an immense transfer of wealth from the rest of corporate America to the pharmaceutical industry.
"This is what I predict: Drug companies will continue their ballet of mergers, which mask the dwindling pipelines of new drugs. There will be fewer companies, and they will be bigger -- much like supernovae before they collapse. They will probably outsource most research and development and instead become giant marketing machines."
I am not pleased at all that my warnings in 2003 are now being taken up and championed by highly respected experts in economics. I have a daughter who is an American with her whole adult life ahead of her. I am not pleased at all that her future is looking far dimmer in America than mine did at her age in 1964. It is incumbent upon Americans to contact their representatives and hold President Bush to his promise not to pass on our problems to the next generation.
He simply must abandon his economic ideology and move to install practical, sound, and swift measures to 1) reprioritize America's spending, tending to American needs while ending deficits and reducing the national debt while there is still a window of opportunity to do so, 2) invest smartly and heavily in alternative energy and conservation measures to eliminate our future's dependency on oil, 3) reverse the falling dollar, invest in education and American inventiveness in a huge way so the U.S. will have something to export in exchange for our dependency on imports, and 4) increase the minimum wage while America can still afford to, which will enhance savings, stimulate consumer demand, and shore up the hope of the lower earning 1/3 of Americans to withstand the hard times ahead with a life sustaining minimum wage.
Posted by David R. Remer at January 18, 2005 09:40 AMDavid -
A lot of good points, and reasons for concern. This isn’t as new as it seems, though: we’ve been on the brink of collapse since 1973. That was the last year of the post-WWII boom. Incomes have fallen and not quite returned to their 1973 levels. Some of the economic hard times we experienced, such as the oil crisis and stagflation, have almost been forgotten now, but the conditions for their repetition are still extant.
As someone with a certain amount of economic training, I personally doubt the worst-case scenario will play itself out. Our understanding of macroeconomics has come a long, long way from the rudimentary Keynesianism of Hoover and Roosevelt, so another Great Depression is unlikely.
More likely would be a downward correction in American lifestyles. We do produce a prodigious amount of goods and services here, and a period of high interest rates and low inflation (brought on by diminishing credit with falling wages) could lead to a revival of savings and more responsible spending choices by Americans.
Another likely scenario is, unfortunately, a more unilaterist approach to foreign policy. Since WWII, our policy has been one of cooptation. We are willing to make economic concessions to Japan, China and dozens of others in exchange for the benefits our transferred wealth has there. We’ve effectively become an ally to 90% of the world. Economic pressure at home, however, could force us to do some very mean things, like shorting the Yuan if China refuses to revalue it. This kind of economic policy would almost certainly hurt our long- and short-term foreign policies throughout the world, and would hurt the world economy, so the U.S. will (rightly) avoid doing something like that until the last possible moment.
Posted by: Chops at January 18, 2005 01:39 PMChops, thanks for the comments. You said: “A lot of good points, and reasons for concern. This isn’t as new as it seems, though: we’ve been on the brink of collapse since 1973.”
The one really dramatic and huge difference however between those periods and this, is the seemingly infinite full faith and credit status, then, as compared to now.
With the trade deficits deepening every year, (almost 2/3 of a trillion dollars currently) for many years now, and the escalating national debt and citizen’s personal debt, and states on the brink, and the huge amount of interest on our debt which has no place to go but upward with rising interest rates, our ability to dig deep and borrow our way out of calamities and troubles both domestic and foreign are severely diminished today compared to then. In previous decades we had a cushion. That cushion in the form of deficit spending our way out of trouble, is now seriously compromised, which is what more and more economists are waking up to.
Posted by: David R Remer at January 18, 2005 01:56 PMI read an interesting Krugman article about Bush’s Social Security privatization scam,
…The Wehner memo talks of borrowing $1 trillion to $2 trillion “to cover transition costs.” Similar numbers have been widely reported in the news media.But that’s just the borrowing over the next decade. Privatization would cost an additional $3 trillion in its second decade, $5 trillion in the decade after that and another $5 trillion in the decade after that. By the time privatization started to save money, if it ever did, the federal government would have run up around $15 trillion in extra debt.
For some reason, President Bush never mentioned that…
AP, that is because the President is trying to hide his real agenda, which is to bankrupt the SS system out of the belief that the government should not be insuring its citizens against poverty, reflecting his belief that those who work hard will be alright and those who suffer didn’t. At least that is the way it appears to me.
Can’t find the link at the moment, but an article this week outlines wealth splitting along ethnic lines again, whites getting most, non-whites getting less and less. This of course is the logical outcome of undoing “great society” programs, which created and sustained the largest middle class the world has ever seen.
Posted by: David R. Remer at January 19, 2005 08:51 AMIt never ceases to amaze me that a man who never really worked in his life would favor a do-it-yourself economy. Does anyone think Bush got where he is without Daddy?
Regardless, the American People voted for Bush. This is what Bush wants ergo this is what the American Public wants. You have no one to blame but yourselves. You voted for him.
Posted by: Aldous at January 19, 2005 11:56 PMIt never ceases to amaze me that a man who never really worked in his life would favor a do-it-yourself economy. Does anyone think Bush got where he is without Daddy?
The rhetoric is do-it-yourself. But the legislation they pass cuts taxes on stock market gains and the transfer of massive amounts of wealth from father to son - all the things wealthy people like President Bush make money on without ever actually working for it.
Ignore what they say. Watch what they do.
AP, exactly. It was mildly hopeful to see a number of Republicans warn the President that his throne is not as powerful as he thinks it is when it comes to SS reform and tax reform. The President is telling Congressional Republicans he will give them political cover for pushing forth the king’s agenda, but, then, the President said Iraq had no WMD and that our Mission was Accomplished, too! The President is losing credibility with his own party, and that is a hopeful sign.
Posted by: David R. Remer at January 20, 2005 11:38 AMLet’s hope some in the red party actually do stand up to challenge Bush.
PS - Don’t blame me, I voted for Kerry.
Posted by: Taylor at January 20, 2005 01:50 PMTaylor, one of the key Republicans on the Ways & Means Committee has already demonstrated many times that he thinks his own thoughts and represents his own constituency and is not about to take a SS reform bill handed down by the WH and rubber stamp it. He will likely take the WH’s recommendation TO reform, and draft his own bill that will serve his constituency and permit his reelection in ‘06.
We are about to witness the kind of hard ball politics that plagued the Democrats from inside their own party, be reenacted by the Republicans. Bush acts as if the Republican Party and its supporters are monolithic, he may even believe it, but, reality is about to smack him in the face.
Posted by: David R. Remer at January 20, 2005 02:06 PMFrom your mouth to God’s ear, David.
Posted by: American Pundit at January 21, 2005 07:51 AM
