Debtor Nation

Wednesday, November 26, 2008

Almost two years ago, Peter Schiff, author of The Little Book of Bull Moves in a Bear Market, predicted that the financial markets were heading for crisis. At the time, he said, "We're on the verge of a major, major recession that's probably going to start by the end of this year, maybe early next year. The housing market is just beginning to unravel. We're seeing the tip of the iceberg here.”

In fact he went on to compare the economy to the Titanic, then added, “I am here with the lifeboat trying to get people to leave the ship.”

According to Schiff, investors believed asset prices, real estate prices, and stock prices would go up indefinitely. But, as you know, it was a bubble. Now, markets are correcting for these imbalances.

The housing glut with no buyers, the collapse of the mortgage & debt markets, which about to spread to commercial real estate, student loans, credit card and auto debt, the implosion of 40-to-1 leverage in financial derivatives instruments, credit default swaps with no underlying collateral, the freezing of the credit market, all have combined to bring us to the brink of an economic collapse, not just a financial crisis. For the past several years there has been a whole phony economy which is now collapsing around us--people thought we had a real economy and we didn’t. Instead, Schiff says, we had a bubble. All we did was borrow trillions of dollars from the rest of the world & we blew all the money on consumption. Now we cannot pay the bills. The asset bubbles that were inflated by reckless monetary policy are deflating around us and we are going to have to rebuild a viable economy, & it20won’t be easy to do. A lot of companies will go bankrupt & a lot of people will lose their jobs. During the deleveraging process, we have to go back to a sane economy where we actual make things.

As a consequence, we are setting up a major run on the dollar. We have to pay for our imports. We like these consumer products but how do we pay for them? As a nation we are broke. We cannot expect the rest of the world to produce all this stuff & then give them nothing in return. We have to be able to export to pay for our imports. Manufacturing goods is real wealth, but we have foolishly dismantled the industrial base of U.S. and sent manufacturing jobs overseas in a relentless race to the bottom seeking the cheapest labor markets (outsourcing), all with a misguided eye to short term profits at the expense of long-term economic gains (wealth creation). We manufactured ourselves into becoming the wealthiest nation in the world, and now we have consumed ourselves into bankruptcy.

We cannot expect people in other countries to do all the heavy lifting, nor can we expect the world to make all t he sacrifices, to do all the saving, to do all the production, and we just step up and eat the fruits of their labor. It does not work that way. The world is finding out that we cannot pay back our bills, and this phony economy is unraveling.

The dollar is rallying not because of fundamentals. The rally is temporary; it cannot last and the dollar is going to collapse. Look at the trillions and trillions of dollars that are being hoarded by foreign central banks. Importantly, China has announced it wants to do a $600 billion stimulus package. How are they going to finance it? They will start selling treasuries and they will stop lending us money. China has become America’s banker, and if it would stop buying our debt and lending us money, the United States would face disaster. The world has learned this valuable message: don’t lend America any more money.

The United States could not have maneuvered itself into a more dangerous position of dependency, completely against self-interest, and that we did it for the love of things (often junk), and spending beyond our means, is stupefying. We traded away our economic security for….nothing of any consequence, certainly nothing of comparable value. That a smart nation would do such a thing is astonishingly incomprehensible.


Does Wall Street's meltdown presage the end of the American century? Many commentators have warned that the past weeks' financial mayhem signaled a major political setback for the United States as well as an economic one. "Why should the rest of the world ever again take seriously the American free-market model after this debacle?" a leading British journa list asked Niall Ferguson. This crisis, he argued, was to economics what the Iraq war was to U.S. foreign policy: a fatal blow to the credibility of American claims to global primacy


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