By DAN ACKMAN
January 14, 2005

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--and he says the thing to do is get out of the dollar. That means selling U.S. stocks and even real estate and putting your money into non-dollar investments.
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 says "Very bad," Schiff. 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.

 

A big problem is that people don't save and even if they do save they don't DIVERSIFY. You have to hedge against everything, rising or faling inflation, interest rates, real estate, stocks, bonds. People see a certain sector rising spectacularily and dump everything into it such as the internet boom/bust. I see the same thing happening with real estate although the end result won't be as bad. Everybody's out for the so-called easy buck well there's no such thing. There is no substitute for planning.

 

I see the dollars fall as Dubya's way to address the trade defaecate without having to do anything. He will not have to take any heat for rising consumer prices on imports. Nice way to dance around the issues. It seems as though his new economic advisor, A. E. Newman has imbued him with the "What me worry" management style.
In speaking with some friends from overseas the US is starting to look like a vacation paradise given the dollar has fallen from 1.35 euros to the dollar to <.79 dollars to the euro.
What scares me is what we are exporting. We are selling companies to foreign nations (IBM PC division sale to China) and exporting raw materials and commodities. This is the profile of an emerging nation not one of the most industrialized nations.
Bankers from all over Europe and the Pac rim will not support the dollars fall. This has huge implications for the future of our economy.

 

The international economy does not like a weak dollar because they all rely on our economy to keep theirs afloat. The French and Germans just LOVE us now because of it--they're po'd because our weak dollar isn't helping their 10%-12% unemployment rate, and shows how "efficient" their 36 hour work weeks really are, etceteras.

I have heard that one of the themes of the inauguration address will be a focus on the deficit, spending cuts, and similar remedies that will affect the value of the dollar. I'm not worried.

 

Not sure where you are getting that idea. Two thirds of the German exports are going to countries within the EU and are not dependent on currency fluctuations (at least not as much as you seem to think) -- it's all paid in euros.

German exports shrug off effects of strong euro

And while the value of the dollar may have some influence on international trade, I'd think these days the reason has more to do with the Chinese currency being pegged to the US dollar, which gives them another cost advantage (if the dollar in undervalued, the Chinese currency is undervalued as well).

 

I don't expect to see that much more of a fall in the dollar. I expect to see the trade deficit narrowing because of the cheap dollar over the next year or two - Boeing should start taking market share back from Airbus, for example, since their planes will now be so much cheaper.

 

The value of the currency is pretty much meaningless for that battle. Both manufacturers buy from the same suppliers, and so the prices tend to stay even relative to each other. Also, the airplanes are ordered years before they are delivered, so even if currency did play a factor it would be in terms of guessing what the exchange rate will be many years in the future.

 

My concern is a little more long ranged than the exchange rates in the next few years.

I hope that I am wrong. But the way I see it, if the current trends continue by the year 2050 (not a problem for me) we will have a economy like Brazil's or Venezulea's. There will be little or no middle class. Just the very rich and working poor. The economic divide continues to widen. The American corporate executive payscale is out of control with top executives receiving compensation that is not tied to performance in many cases and is now something like 1700 times what their lowest paid worker makes. Hardly the Ben & Jerry's model.

We continue to export manufacturing jobs, and the growth in the job market has been in the service and retail sectors. Largely due to retail chains having to cover 24 X 7 operation in many geographic areas. Ironically, this is due to the fact that many people have to work two jobs to make ends meet and the only time that they have to shop is when they should be home sleeping. Hence the popularity of Starbucks (and the explosion) of knock off "Expresso Houses" so that people can stay awake. On the other hand, these stores such as our local food store chain and X Depot are eliminating jobs with self service check out. The next thing that you know they will have us (the customers) unloading the trucks and stocking the shelves.

In the name of personal greed unlike Henry Ford, Sr. who had the wisdom to pay his workers enough to buy his products today's executives seem to be interested in their own "golden parachutes". IMO, like the CEO of US Air that wants his workers to donate their time. But as far as I know did not take a salary cut himself (please correct me if I am wrong). I foresee a time at the rate that we are going when the average American will not be able to afford to buy the goods that the average American company is selling. Because, it is out of reach to spend the average $25K on a car when one is making $6-8 per hour flipping burgers.

 

I keep lobbying Boeing to do the same, but so far they have refused.

 

Mike, I think that you may be one of the exceptions.