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Best of Kurt Richebacher
ANOTHER LEG DOWN
By James R. Cook
For the past few months I’ve been interviewing candidates for sales positions with my company. Of the dozens of applicants, most have had their life changed by the recession. Consultants have lost their main clients, salesman have seen their commissions cut, small business owners have had to pack it in, sales jobs have disappeared when branch offices were closed or when companies went out of business. The damage appears widespread and insidious.
Yet, the government tells us the economy grew in the prior quarter. My anecdotal evidence indicates otherwise. A newsletter writer recently claimed the government lies about economic statistics. Juggled may be a better word. Fourth quarter GDP rose because capital investment in computers was figured at about fifteen times the actual amount. That’s called hedonic pricing. But the biggest and most dubious item was the decline in the GDP price index, which allowed falling prices to be counted as a part of GDP. Never mind that these are dollars that nobody spent and nobody received.
The economist, Dr. Kurt Richebacher, claims a deep and stubborn recession will soon reassert itself. He sees a credit crunch, plunging equity markets and a sharp dollar decline. According to him, there’s a real possibility for a collapse of the economy and the financial system. We are by no means out of the woods.
With Wall Street and Washington beating the drum for a healthy recovery, can this lone economist be right? I’ll give you my view. I started reading books on economics thirty years ago. I wanted a better understanding of the reasons for buying gold and silver. I didn’t want to sound like a self-serving coin dealer warning about the economy. In the beginning I read Harry Browne and Jerome Smith. That led me to the Austrian school and Ludwig von Mises. I poured through his opus, Human Action. Then I read the rest of his books (a couple I could only try to read). Then I read his students, Murray Rothbard and the Nobel prize winner, F. A. Hayek. My favorites were Hans Sennholz, Henry Hazlitt and Leonard Read. After that, it was easy to conclude that we were on the wrong track. One Sunday afternoon, while reading in my den, I had an epiphany, a clear vision and pure understanding of the evils and wastefulness of big government, the dangers of fiat money, and the certain outcome of our present course.
I read the classical economists and the dissenters like Keynes, on up through today’s liberals, like Thurow and Krugman. For me, it was no contest. Mises was irrefutable. In the 1970s the inflation warnings from the Austrians were right on target. In the eighties things changed. Specific economic criticism backed by statistical analysis from the Austrians didn’t exist. It was a long, dry spell. In the early nineties I came across an interview with Kurt Richebacher (former chief economist for the Dresdner Bank) that echoed the economic thinking that Mises expounded. His dire warnings blew me away. It was everything I believed to be probable. I contacted him and we began to talk regularly. I helped him build subscribers to his newsletter and we became friends.
As the decade of the nineties rolled by, Richebacher’s analyses got stronger and better. He began to be right, and lately he’s been uncanny. First he warned of a coming crisis for the Asian Tigers. In 1998 the Tigers turned into pussycats. You never hear them called Tigers anymore. He also envisioned the Japanese predicament becoming much worse. In 1999 he said the tech bubble was about to burst and the bull market would soon be over. Then in the fall of 2000 he predicted the U.S. economy would weaken and corporate profits collapse. He forecast a recession. Time and again he warned about financial tricks and cheating on corporate financial statements. Finally, he said that the V-shaped recovery was a myth, which it was.
With that incredibly accurate forecasting record, it’s necessary to give a lot of weight to his current views. For him, profits are the lifeblood of the economy. He thinks the factors that depress profits in the U.S. are permanent. Without profits, business investment in plant and equipment, so necessary to spark a recovery, grinds to a halt. If business investment doesn’t turn around, unemployment will rise, and both consumer incomes and spending will fall. Dr. Richebacher predicts that weakness in capital investment will worsen this year, pulling the economy into a severe long-term recession or depression.
He argues that consumers no longer have the financial muscle to turn things around. He predicts that the overvalued stock market will crash and destroy the wealth built up during the bull market. He insists that an imminent recovery is out of the question. He warns that the tremendous debt and credit excesses in the economy must first be liquidated and people will have to stop spending and start saving. He maintains that the dollar must fall sharply to bring the trade deficit into balance. He says the leverage in the credit markets will have to be wrung out and warns about the possibility of a credit collapse and waves of bankruptcies.
According to this insightful economist, the so-called profits miracle of the past few years came primarily from corporations cooking the books and from the quick profits found in mergers, acquisitions and downsizing. None of these add to our wealth, but negatively impact capital formation and reduce overall wealth. He writes that the U.S. has committed the greatest economics sins in history and that the damage from this will be severe.
Despite monetary easing and rampant money and credit growth, the economy still languishes. Most of this new money flows into financial markets. That’s why this recession is different than any other in the postwar period. Easing has failed. The world’s biggest economic and financial bubble has burst and contraction is inevitable. Wall Street and naive investors who constantly prattle about a recovery will see their pervasive denial evaporate with the ugly reality of a boom turned to bust. Dr. Richebacher argues forcefully that the U.S. cannot do what it has done with money and credit without suffering dire consequences. There is no way out but a precipitous drop in the economy.