American Consumers are Losing their Crown
Submitted by Reinhard on Fri, 2007-09-14 12:00.
With the U.S. Dollar Index breaking decisively below its long-term support level, the sun is finally setting on the golden age of American consumption. As America's economic dominance fades, so too will the faith in the central thesis that has explained its apparent success and has shaped the majority of recent economic theory.
At issue is the belief that a nation can grow and prosper by borrowing from abroad in order to consume imported goods. To consume at the pace that it has, America exchanges income producing assets, such as companies or property, or interest bearing IOUs, such as Treasury notes or mortgage-backed bonds, for foreign made clothes, toys and electronics. Economists call these transactions "growth". But rather than discovering a new path to prosperity, America has simply stumbled on a short cut to financial ruin....
For the complete article see http://www.321gold.com/editorials/schiff/schiff091407.html
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Our comment:
Peter Schiff makes quite a daring prediction regarding the falling U.S. economy. He projects a falling dollar and falling GDP, both setting the U.S. far behind on the list of countries on per-capita GDP. While it is certainly possible for the dollar to drop due to money creation, chronic trade deficits, and loss of confidence in the world reserve currency, I would not go as far as to predict GDP dropping 20% in addition to that. GDP would more likely rise due to most import and export prices doubling. GDP will not itself double due to a contracting economy and sticky domestic prices and wages, but it might still go up 30% in nominal terms instead of down 20%. This would leave the U.S. with a 35% loss in per-capita GDP against Sweden (which is currently about equal), and not a 60% drop as Peter predicts.
Per-capita GDP should be in my opinion less dependent on the currency, but rather on the effectiveness of the average citizen on the world market. Industrialized countries have higher per-capita GDP, because one citizen can harvest one bushel of corn, whereas in another country it takes more people. This makes me hard to believe that other countries (like Sweden) could achieve 2.5 times the per-capita GDP of the U.S. Granted, if the U.S. takes all the wrong measures and tries to protect its non-productive banking/mortgage workforce, it could happen. But with the current course it is more likely that, with the drop in currency, people will once again re-orient themselves to innovation and production, and the drop in per-capita GDP (and stock market) compared to other industrialized countries would not be that extreme.
good assessment
Good assessment, Reinhard. I think where I part ways with the super-bears like Schiff is that while I agree with him on the underlying problems, I think folks like him vastly underestimate the adaptability of "the system" and the willingness and ability for its participants to keep things limping along. I just don't see it playing out where the US experienced an effective depression -- our govt and the system as a whole is good enough at pushing off problems that this stuff will unwind a lot more slowly than that, imho. I agree on the problems, to be sure, and I think they will unwind -- but over many, many years if not decades. (Of course, I am also puzzled why Schiff thinks that the Us could have a depression and the rest of the world doesn't even miss a beat. I read his book and his logic behind that call, but I just don't agree).
rich