CURB YOUR ENTHUSIASM
By James R. Cook
Once you go beyond the flagrant optimism of Wall Street and the propaganda from Washington, and you begin to understand the true state of the U.S. economy, you should truly be concerned. Nobody wants a financial disaster. Nevertheless, after careful examination of the facts, it’s difficult not to conclude that the U.S. will inevitably experience a monumental financial and economic crisis. We briefly interviewed three respected economic thinkers who reinforced this view.
We caught up with Dr. Kurt Richebacher in the south of France.
Q Good morning sir. Do you see the economic recovery remaining on track?
A No. I think there was a one-time burst of stimulus from tax cuts and unrestrained credit expansion.
Q Have we peaked?
A I don’t see any new acceleration in the pipeline. Compared to past recoveries, this one is extremely weak and grossly imbalanced. I don’t think it’s sustainable.
Q Where do we go from here?
A Expect disappointing growth numbers. Employment figures are disastrous and have been for three years.
Q What about the dollar?
A The dollar was strong in the past because foreigners believed in the new paradigm and bought stocks. However, profits didn’t materialize, and a lot of what did came from creative accounting. New private investment into the U.S. has collapsed. The only thing staving off a dollar crisis has been Japanese and Asian buying of U.S. bonds.
Q That sounds tenuous. Will we have a crisis we can’t control?
A You have a catch-22. Any strength in the U.S. economy will raise interest rates and cause the bond bubble to burst. That will accelerate the collapse of the whole system. You have an economy without savings driven by overindebtedness and speculation. The whole American financial system is a monstrous bubble. Any rise in rates promises to kill off everything.
I reached Steve Puetz at his home in Indiana.
Q Steve, do you see the economic recovery remaining on track?
A No. The burst of economic activity during the third quarter of 2003 was related to tax cuts last summer and the refinancing boom during May-June 2003. Both retail sales and housing starts are running at extremely high levels. These high levels of consumption will be hard to sustain without long-term interest rates at lower levels than they were last year. Without continued stimulus from low long-term interest rates, the economic recovery will abort.
Q Has the economy peaked?
A Retail sales have been sluggish since August 2003. That’s the first sign that the recovery is running into trouble. Perhaps an even more ominous signal is the drop in consumer confidence in recent weeks. The first shock came when the University of Michigan reported a sharp drop in consumer sentiment during the first half of February. Another less widely followed indicator, ABC News’ Consumer Comfort Index, has dropped five weeks in a row. The consumer Comfort Index started to drop about the same time as the NASDAQ Index peaked in late January. So it appears that the economy has already peaked, and a retrenchment is already in progress. This new downturn is likely to shock the markets in coming weeks, as the evidence becomes stronger.
Q Where do we go from here?
A Because the U.S. economy is already consuming at unsustainably high levels, we have nowhere to go but down. A massive economic deflationary depression lies directly ahead.
Q What about the U.S. Dollar?
A The U.S. is the world’s largest debtor country. And debtor countries always end up with weak currencies when foreign lenders become fearful of getting their loans repaid. Once the U.S. economy weakens significantly, the greenback will collapse. In the short-run, the U.S. Dollar could have a technical recovery. In the long-term, it’s a currency that should be avoided.
Q Will we have a crisis we can’t contain?
A The next economic downturn will start with short-term interest rates already in the one percent area. In addition, any further lowering of short-term rates will cause an outflow from money-market funds. That’s because, after deducting expenses, money market funds already yield close to zero. The Federal Reserve is backed into a corner. It has very few stimulus bullets left to fire against an economic slump. With nothing left to stimulate the economy, the U.S. will fall into a tremendous depression once the recovery ends.
I contacted Doug Noland at his office in Dallas.
Q Doug, do you see the economic recovery remaining on track?
A Well Jim, last week Freddie Mac raised their estimate of 2004 residential mortgage debt growth to 12%. So we will have more than $1 trillion of new mortgage debt, along with more than $500 billion of federal borrowings, strong debt growth from state and local governments, and decent corporate borrowings. Most importantly, from an analytical perspective, the national mortgage finance bubble runs unabated, which should support the U.S. Bubble economy for now.
Q Have we peaked?
A At this point, I will venture that bubble dynamics have taken over. And after witnessing the technology bubble in the late-nineties, I will err on the side of not trying to predict the end of major bubbles. NASDAQ went to unimaginable extremes, and then doubled during 1999 and the first quarter of 2000 in the bubble’s terminal phase of gross excess. Today the mortgage finance bubble has the same feel to me. Lending excess went to ridiculous extremes over the past few years, and now with the proliferation of zero down-payments, interest-only mortgages and panic buying out in California, things have really spun out of control.
Q Where do we go from here?
A Both the economy and financial system remain acutely vulnerable. When the mortgage finance bubble finally runs its course, we’ll be face to face with severe economic and financial problems. The imbalanced economy has evolved to depend significantly on liquidity from mortgage credit and financial speculation. We can call it a “services” economy, or more aptly a “finance/asset bubble economy,” but the point is, it will not function well in reverse – when asset prices decline and borrowers and lenders back away. For now, this distorted economy functions only through enormous and unrelenting credit growth/inflation. Right now the authorities and financial sector are determined to keep the game going, and foreign central banks have been driven to absorb the dollar liquidity flooding the global financial system. It’s become a very dangerous game.
Q What about the dollar?
A I just have a very difficult time seeing how the dollar can find its way out of this quagmire without a major decline and likely crisis. I would strongly argue that we are in the midst of the greatest inflation of non-productive credit in history. This is anathema to a sound financial system and currency, and I fear the worst. Global trust in the dollar is faltering, and when a true crisis of confidence hits, our distorted economy will not have the capacity to manufacture the necessary tradable goods to support our standard of living.
Q Will we have a crisis we can’t contain?
A Our authorities refuse to deal with very serious and deepening economic and financial problems, choosing instead to paper them over with continued massive credit growth of dubious quality. Much of this credit excess is instigated by reckless mortgage finance and leveraged speculation throughout the financial markets. And now, the U.S. credit bubble has gone global. For me – studying credit and speculative excess, and recognizing the imparted ongoing severe structural distortions to the U.S. and global economy, this has been truly the worst case scenario unfolding before our eyes. I very much hope I am wrong, Jim.
