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While all the talk
at present is about economic corners turned and markets charging ahead, no
one is paying much notice to an American economy deteriorating before our
eyes. These myopic commentators seem to be simply moving past the now
almost-universally held conclusion that before the crash of 2008, our economy
was on an unsustainable course. If these imbalances had been corrected, then
perhaps I too would be joining in the euphoria. But evidence abounds that we
have not veered at all from that dangerous path.
Last week, the
Bureau of Economic Analysis reported that consumer spending as a percentage
of U.S. GDP has risen to 71%, a post-World War II record. This level is
notably higher than other wealthy industrialized countries, and vastly higher
than the levels sustained by China and other emerging economies. At the same
time, our industrial output is contracting, our trade deficit is expanding
once again (after contracting earlier in the year), and our savings rate is
plummeting (after an early year surge).
The data confirms
that government stimuli are worsening the structural imbalances underlying
our economy. The recent 'rebound' in GDP is not resulting from increased
economic output, but merely from the fact that we are borrowing more than
ever. That is precisely how we got ourselves into this mess. An economy
cannot grow indefinitely by borrowing more than it produces. Not only is such
a course untenable, but the added debt ensures a deeper recession when the
bills come due.
This
soon-to-be-called depression will not end until the pendulum of consumer
spending habits swings violently in the other direction. This will be a
jarring change, but it is the splash of cold water that we need to return our
economy to viability. I believe that consumer spending as a share of GDP will
need to temporarily contract to roughly 50% of GDP, before eventually moving
toward its historic mean of 65%. Such a move would indicate a restoration of
our personal savings, a decline in borrowing and trade deficits, and an
increased industrial output. That would be a real recovery.
In the meantime, the
higher the spending percentage climbs, the more painful the ultimate decline
becomes.
Consumers and
governments must spend less so their savings can be made available to
businesses for capital investments. Businesses, in turn, will produce more
products and employ more people - increasing domestic prosperity. However,
rather than allowing a painful cure to return our economy to health, the
government prefers to numb the voting public with a toxic saline-drip of
deficit spending and cheap money.
The primary factor
that enables our government to peddle economic snake oil is the dollar's
unique role as the world's reserve currency, and our creditors' willingness
to preserve its status. By buying up dollars and loaning them back to us
through Treasury debt, productive countries give American politicians carte
blanche to play Santa Claus.
Ironically, as
foreign governments finance our spending spree, they are simultaneously
scolding us for our low savings rate. At the recent G20 meeting in Pittsburgh, all agreed - including President Obama - that resolving the global economic
imbalances was a top priority. By definition, this would require Americans to
spend less and save more. However, with foreign central banks continuing to
buy our debt, the President has shown no political will to encourage this
change.
Normally, if
politicians run up the government deficit, voters soon suffer the unpleasant
consequences of higher inflation and rising interest rates. Yet, if foreign
central banks keep supplying the funds, these consequences are indefinitely
postponed. As a result, there is no need for American politicians to ever
make the tough choices required to solve our problems.
Instead, the burden
may fall squarely on the citizens of those governments doing all the lending.
The conflict is that within the creditor states, a vocal minority actually
benefits from this subsidy (owners of Chinese exporters, for example) while
the overwhelming majority fails to make the connection. Thus, foreign
politicians have the same incentives as ours to keep playing the game.
The bottom line is
that foreign governments can lecture us all they want about the need for
prudence but if they keep lending, we'll keep spending. Any parent knows that
if you give your child a curfew yet never impose any penalties when it's
violated, it will not be respected. My gut feeling is that foreign
governments are tiring of our conduct and on the verge of finally imposing
some discipline. That means the dollar's days as the world's reserve currency
are numbered, and the days of American austerity are about to begin.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
Also
by Peter Schiff
For a more in depth analysis of the tenuous position of
the American economy, the housing and mortgage markets, and U.S. dollar
denominated investments, read my new book : The Little
Book of Bull Moves in Bear Markets" (Wiley, 2008).
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