In the first three paragraphs, Dr. Richebacher assumes his readers understand
what money is, or capital as he puts it. He assumes everyone is aware the USA
is printing too many dollars, and its deleterious effects.
Even the govt managers cannot agree just what money is, or how to define it, but
you can assume Dr. Richenbacher assumes it is gold, or silver, or both (today
anyway). Once those dollars in your pocket were notes tradable for gold and
silver, but not anymore. I'll scare up some explanations of all of that soon
and pass it on. It is enough to know for now that what we have now is fiat
dollars, faith money, which lasts as long as people believe in it.
You cannot write checks to pay for everything, well in excess of your bank
accounts, for long without trouble. Neither can govts. You and i would get in
trouble writing such checks, long before a Bill Gates would get in trouble, for
two reasons: one, bill gates' checks would be backed for longer than ours;
second, belief that bill gates is 'good for it' would last a lot longer than for
you or me... long after bill gates was bust.
You and I would be like Argentina, who got caught early; USA is like Bill Gates,
still with some time to go... our disasters are much smaller than a bill gates
disaster would be.
What Richebacher is setting up, is the agreed on basics between him and his
regular readers, and then he is going to lay out where their analysis may be
wrong. It is the fourth paragraph where he lays out his analysis. What we need
to know as we read Dr. Richebacher is
1. Low interest rates are a bad idea in the measure the central bank sets
interest rates. In essence, a board of nine people cannot possible know what
the interest rate should be, so they are guessing. This leads to malinvestment.
2. Cheap imports support low interest rates; low interest rates support cheap
imports. As we shift manufacturing overseas, our costs go down, profits
supposedly widen, profits are widen so interest rates (risk premium) is lower.
What really happens is a downward spiral where people consume more and save
less, all the while the financial world is gaining massive profits off the
transaction required to effect these changes. (Think loan fees, currency
arbitrage, credit card transaction fees, etc).
Absorb this, ask anyquestions, and we'll proceed in the coming days with the
rest of his article...
**Dr. Richebacher;
The badly flawed consensus thinking about the implications of sustained large
U.S. capital inflow starts with the error that U.S. assets are uniquely
attractive to foreign investors. The reality is that U.S. investors are earning
far higher returns on their assets in Europe and Asia than foreign investors do
on their U.S. assets. European firms and investors who invested heavily in the
United States during the "new paradigm" years in the late 1990s are still
smarting from horrendous losses. The DaimlerChrysler disaster is by no means an
isolated case.
As to U.S. bond yields, they are just marginally above euro yields, but
considerably below the yields obtainable in emerging countries. What is more,
after inflation, they are the lowest in the world. A falling dollar is, of
course, a virtually prohibitive deterrent to foreign bond purchases. In fact, it
might induce selling.
This leaves the central banks of Asian surplus countries as the potential buyers
of last resort for the dollar, unwanted by private investors. They did heavy
dollar buying in 2003 and in early 2004, but never forget, the dollar purchases
by the central banks have a heavy price in turning healthy economies into sickly
bubble economies.
"In essence, the lower inflation rates allow a looser monetary policy than
domestic conditions justify. For Greenspan and many others wanting the loosest
possible monetary policy, this was certainly a highly esteemed effect of the
trade deficit. For us, it is insane."
Friday, December 31, 2004
Part 1 econ outlook 2005
econ outlook 2005
Re: [spiers] econ outlook 2005
Hi John and all folks from this group!
Happy all of us with Holidays and New Years!!!
This article is one of many precautious info from around the globe.Yes, many
depressed facts pop-up in foreign press. And on some kind of economic
conferences. Chaotic conditions of US economy is Very dangerous.... . John
I'm waiting for your review.
Alex.
Hrusha.
----- Original Message -----
From:
To:
Sent: Thursday, December 30, 2004 2:25 PM
Subject: [spiers] econ outlook 2005
>
> Folks,
>
> Here is a fascinating summary by a man who shoould know, and does, and
after a few days I want to take his article apart section by section with my
review of what it means for us at the small business level.
>
> As we start the new year, I'll say it again, being self-employed is about
supporting your chosen lifestyle... doing well and doing good. And by
lifestyle I am thinking along the lines of Maslow's heirarchy rather than
some particular orientation.
>
> Anyway, here we go,,,
>
> THE MISSING LINK
> by Dr. Kurt Richebächer
>
> The badly flawed consensus thinking about the implications of sustained
large U.S. capital inflow starts with the error that U.S. assets are
uniquely attractive to foreign investors. The reality is that U.S. investors
are earning far higher returns on their assets in Europe and Asia than
foreign investors do on their U.S. assets. European firms and investors who
invested heavily in the United States during the "new paradigm" years in the
late 1990s are still smarting from horrendous losses. The DaimlerChrysler
disaster is by no means an isolated case.
>
> As to U.S. bond yields, they are just marginally above euro yields, but
considerably below the yields obtainable in emerging countries. What is
more, after inflation, they are the lowest in the world. A falling dollar
is, of course, a virtually prohibitive deterrent to foreign bond purchases.
In fact, it might induce selling.
>
> This leaves the central banks of Asian surplus countries as the potential
buyers of last resort for the dollar, unwanted by private investors. They
did heavy dollar buying in 2003 and in early 2004, but never forget, the
dollar purchases by the central banks have a heavy price in turning healthy
economies into sickly bubble economies.
>
> The sustainability of the U.S. capital inflows is, actually, the totally
wrong question to ask from the American point-of-view. Far more important is
another question, concerning the effects of the trade deficit on the U.S.
economy, in particular on employment and income creation. We find that the
dogmatic belief in the mutual benefit of foreign trade has stifled any
reasonable discussion in this respect.
>
> The benefits for the surplus countries are obvious. Exports in excess of
imports create higher employment, higher profits and higher incomes. But
what are the benefits to the United States? Frankly speaking, we do not see
any true benefit of a trade deficit. What the American "mutual-benefit"
apostles fail to see is that a balance in benefits essentially presupposes a
balance in the underlying trade.
>
> Yet there is a widespread view that the flood of cheap imports, by keeping
a lid on U.S. inflation and wage pressures, fosters lower interest rates,
which tend to spur economic growth.
>
> For us, both effects are not beneficial at all, because the imports
implicitly distort both inflation rates and interest rates to the downside.
In essence, the lower inflation rates allow a looser monetary policy than
domestic conditions justify. For Greenspan and many others wanting the
loosest possible monetary policy, this was certainly a highly esteemed
effect of the trade deficit. For us, it is insane.
>
> Nobody seems to realize the enormous damages that the egregious trade
deficit has inflicted on the U.S. economy. Indisputably, it diverts U.S.
demand from domestic producers to foreign producers, and this implies an
equivalent diversion of employment and associated income creation from the
United States to these countries. That is the manifest direct damage of the
trade deficit to the U.S. economy, the obvious main victim being the
manufacturing sector, with horrendous job and income losses.
>
> Blinded by the dogma of compelling mutual benefits; policymakers,
economists, investors and the American public flatly refuse to see this
disastrous causal connection. The alternative explanation is that America's
extremely poor job performance has its main cause in the highly desirable
high rate of productivity growth.
>
> It is a convenient, but foolish explanation, reminding us of the early
days of industrialization, when people destroyed machinery for fear of
unemployment. For us, productivity growth that destroys millions of jobs is
definitely suspect as a mirage. Historically, strong productivity growth has
always coincided with strong capital investment involving, in turn, strong
employment growth in the capital goods industries.
>
> That is presently, of course, precisely the missing link in the U.S.
economic recovery. (As an aside, in a healthy economy with adequate savings,
cutting labor costs generally takes place through investment, not through
firing.)
>
> The job losses from the soaring trade deficit have always been there. But
they did not show up in the aggregate for many years because the booming
economy - driven by extremely loose monetary policy - created sufficient
alternative jobs. But this alternative job creation has drastically abated
since 2000, and the soaring trade deficit's damage to manufacturing is now
surfacing in full force.
>
> Having said this, we hasten to add that the U.S. trade deficit must be
seen as one imbalance among several others, whether zero or even negative
national savings, a soaring budget deficit, record-low net capital
investment or sky-high consumer debt. They all derive from the same
underlying key cause: Unprecedented credit excesses that have boosted
consumption for years at the expense of capital formation.
>
> What governs the U.S. trade deficit is not the law of "comparative
advantages," but the careless depletion of domestic saving and investment
resources though policies that have recklessly bolstered consumption.
Essentially, employment creation through capital investment is out. Putting
it bluntly, the U.S. trade deficit, like all other imbalances, reflects a
grossly skewed resource allocation toward consumption.
>
> To American economists, this idea that over time, excessive consumer
spending leads to recession and worse, by crowding out capital investment
may seem preposterous. Widely unknown, it happens to be the central idea
that F.A. von Hayek developed in his famous lectures at the London School of
Economics in 1931.
>
> In essence, he explained in great detail that an increase in consumer
demand at the expense of saving will inevitably lead to a scarcity of
capital, which forces a "shortening in the process of production," and so
causes depression. Putting it in simpler parlance: Excessive consumption
inevitably crowds out business investment. As a share of GDP, consumption in
the United States is presently excessive as never before. And it keeps
worsening.
>
> Assessing the U.S. economy's prospects, it also has to be realized that
the bubble-driven consumer-spending boom represents artificial,
unsustainable demand. Apocalypse will follow when the housing bubble
bursts - which is sure to happen in the near future.
>
> As the Boston Herald recently reported: "[Stephen] Roach met select groups
of fund managers downtown last week, including a group at Fidelity. His
prediction: America has no better than a 10% chance of avoiding economic
'Armageddon'... Roach's argument is that America's record trade deficit
means the dollar will keep falling. To keep foreigners buying T-bills and
prevent a resulting rise in inflation, Federal Reserve Chairman Alan
Greenspan will be forced to raise interest rates further and faster than he
wants. The result: U.S. consumers, in debt up to their eyeballs, will get
pounded."
>
> We could not agree more. Our particular nightmare is that the huge carry
trade bubble in bonds will inevitably burst in this process. A fire sale of
bonds in unimaginable proportions would begin, with bond prices crashing and
yields soaring. With the prices of housing, stocks and bonds crashing, the
entire U.S. financial system would be at risk.
>
> It is typically argued that the U.S. economy is importing too much in
comparison to exports. Superficially, that is true. Yet on closer look, it
is a mistaken perception. Compared to other industrialized countries, U.S.
imports are very low as a ratio of GDP. The true key problem is abysmally
low goods exports, accounting lately for barely 7% of nominal GDP. This
compares, by the way, with a German goods export ratio of 35% of GDP.
>
> The next implicit question is the cause or causes of this extremely low
U.S. export ratio. The answer is strikingly obvious. It is precisely the
same cause that chokes productive capital investment - the progressive shift
in the allocation of available domestic resources away from capital
formation through saving and investment in plants and equipment, and toward
immediate consumption.
>
> That is the supply-side problem. Yet there is a demand-side problem, too.
Greenspan and others like to boast that America is creating growing demand
for the rest of the world. The ugly truth, rather, is that U.S. monetary
policy has been excessively loose in relation to potential domestic output,
because Greenspan has wanted maximum economic growth for years. But lacking
domestic output capacity to meet the soaring domestic demand, an increasing
share of the demand creation from monetary excess exited to foreign
producers, resulting in the huge U.S. trade deficit.
>
> It is a flagrant policy failure that has created a monstrous,
unsustainable imbalance, both domestically in the United States and
globally. However, for years, American policymakers and economists have
glorified this deficit as America's great contribution to world economic
growth. But the day of reckoning is rapidly approaching.
>
> Regards,
>
> Kurt Richebächer
> for The Daily Reckoning
Thursday, December 30, 2004
econ outlook 2005
Folks,
Here is a fascinating summary by a man who shoould know, and does, and after a
few days I want to take his article apart section by section with my review of
what it means for us at the small business level.
As we start the new year, I'll say it again, being self-employed is about
supporting your chosen lifestyle... doing well and doing good. And by
lifestyle I am thinking along the lines of Maslow's heirarchy rather than some
particular orientation.
Anyway, here we go,,,
THE MISSING LINK
by Dr. Kurt Richebächer
The badly flawed consensus thinking about the implications of sustained large
U.S. capital inflow starts with the error that U.S. assets are uniquely
attractive to foreign investors. The reality is that U.S. investors are earning
far higher returns on their assets in Europe and Asia than foreign investors do
on their U.S. assets. European firms and investors who invested heavily in the
United States during the "new paradigm" years in the late 1990s are still
smarting from horrendous losses. The DaimlerChrysler disaster is by no means an
isolated case.
As to U.S. bond yields, they are just marginally above euro yields, but
considerably below the yields obtainable in emerging countries. What is more,
after inflation, they are the lowest in the world. A falling dollar is, of
course, a virtually prohibitive deterrent to foreign bond purchases. In fact, it
might induce selling.
This leaves the central banks of Asian surplus countries as the potential buyers
of last resort for the dollar, unwanted by private investors. They did heavy
dollar buying in 2003 and in early 2004, but never forget, the dollar purchases
by the central banks have a heavy price in turning healthy economies into sickly
bubble economies.
The sustainability of the U.S. capital inflows is, actually, the totally wrong
question to ask from the American point-of-view. Far more important is another
question, concerning the effects of the trade deficit on the U.S. economy, in
particular on employment and income creation. We find that the dogmatic belief
in the mutual benefit of foreign trade has stifled any reasonable discussion in
this respect.
The benefits for the surplus countries are obvious. Exports in excess of imports
create higher employment, higher profits and higher incomes. But what are the
benefits to the United States? Frankly speaking, we do not see any true benefit
of a trade deficit. What the American "mutual-benefit" apostles fail to see is
that a balance in benefits essentially presupposes a balance in the underlying
trade.
Yet there is a widespread view that the flood of cheap imports, by keeping a lid
on U.S. inflation and wage pressures, fosters lower interest rates, which tend
to spur economic growth.
For us, both effects are not beneficial at all, because the imports implicitly
distort both inflation rates and interest rates to the downside. In essence, the
lower inflation rates allow a looser monetary policy than domestic conditions
justify. For Greenspan and many others wanting the loosest possible monetary
policy, this was certainly a highly esteemed effect of the trade deficit. For
us, it is insane.
Nobody seems to realize the enormous damages that the egregious trade deficit
has inflicted on the U.S. economy. Indisputably, it diverts U.S. demand from
domestic producers to foreign producers, and this implies an equivalent
diversion of employment and associated income creation from the United States to
these countries. That is the manifest direct damage of the trade deficit to the
U.S. economy, the obvious main victim being the manufacturing sector, with
horrendous job and income losses.
Blinded by the dogma of compelling mutual benefits; policymakers, economists,
investors and the American public flatly refuse to see this disastrous causal
connection. The alternative explanation is that America's extremely poor job
performance has its main cause in the highly desirable high rate of productivity
growth.
It is a convenient, but foolish explanation, reminding us of the early days of
industrialization, when people destroyed machinery for fear of unemployment. For
us, productivity growth that destroys millions of jobs is definitely suspect as
a mirage. Historically, strong productivity growth has always coincided with
strong capital investment involving, in turn, strong employment growth in the
capital goods industries.
That is presently, of course, precisely the missing link in the U.S. economic
recovery. (As an aside, in a healthy economy with adequate savings, cutting
labor costs generally takes place through investment, not through firing.)
The job losses from the soaring trade deficit have always been there. But they
did not show up in the aggregate for many years because the booming economy -
driven by extremely loose monetary policy - created sufficient alternative jobs.
But this alternative job creation has drastically abated since 2000, and the
soaring trade deficit's damage to manufacturing is now surfacing in full force.
Having said this, we hasten to add that the U.S. trade deficit must be seen as
one imbalance among several others, whether zero or even negative national
savings, a soaring budget deficit, record-low net capital investment or sky-high
consumer debt. They all derive from the same underlying key cause: Unprecedented
credit excesses that have boosted consumption for years at the expense of
capital formation.
What governs the U.S. trade deficit is not the law of "comparative advantages,"
but the careless depletion of domestic saving and investment resources though
policies that have recklessly bolstered consumption. Essentially, employment
creation through capital investment is out. Putting it bluntly, the U.S. trade
deficit, like all other imbalances, reflects a grossly skewed resource
allocation toward consumption.
To American economists, this idea that over time, excessive consumer spending
leads to recession and worse, by crowding out capital investment may seem
preposterous. Widely unknown, it happens to be the central idea that F.A. von
Hayek developed in his famous lectures at the London School of Economics in
1931.
In essence, he explained in great detail that an increase in consumer demand at
the expense of saving will inevitably lead to a scarcity of capital, which
forces a "shortening in the process of production," and so causes depression.
Putting it in simpler parlance: Excessive consumption inevitably crowds out
business investment. As a share of GDP, consumption in the United States is
presently excessive as never before. And it keeps worsening.
Assessing the U.S. economy's prospects, it also has to be realized that the
bubble-driven consumer-spending boom represents artificial, unsustainable
demand. Apocalypse will follow when the housing bubble bursts - which is sure to
happen in the near future.
As the Boston Herald recently reported: "[Stephen] Roach met select groups of
fund managers downtown last week, including a group at Fidelity. His prediction:
America has no better than a 10% chance of avoiding economic 'Armageddon'...
Roach's argument is that America's record trade deficit means the dollar will
keep falling. To keep foreigners buying T-bills and prevent a resulting rise in
inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise
interest rates further and faster than he wants. The result: U.S. consumers, in
debt up to their eyeballs, will get pounded."
We could not agree more. Our particular nightmare is that the huge carry trade
bubble in bonds will inevitably burst in this process. A fire sale of bonds in
unimaginable proportions would begin, with bond prices crashing and yields
soaring. With the prices of housing, stocks and bonds crashing, the entire U.S.
financial system would be at risk.
It is typically argued that the U.S. economy is importing too much in comparison
to exports. Superficially, that is true. Yet on closer look, it is a mistaken
perception. Compared to other industrialized countries, U.S. imports are very
low as a ratio of GDP. The true key problem is abysmally low goods exports,
accounting lately for barely 7% of nominal GDP. This compares, by the way, with
a German goods export ratio of 35% of GDP.
The next implicit question is the cause or causes of this extremely low U.S.
export ratio. The answer is strikingly obvious. It is precisely the same cause
that chokes productive capital investment - the progressive shift in the
allocation of available domestic resources away from capital formation through
saving and investment in plants and equipment, and toward immediate consumption.
That is the supply-side problem. Yet there is a demand-side problem, too.
Greenspan and others like to boast that America is creating growing demand for
the rest of the world. The ugly truth, rather, is that U.S. monetary policy has
been excessively loose in relation to potential domestic output, because
Greenspan has wanted maximum economic growth for years. But lacking domestic
output capacity to meet the soaring domestic demand, an increasing share of the
demand creation from monetary excess exited to foreign producers, resulting in
the huge U.S. trade deficit.
It is a flagrant policy failure that has created a monstrous, unsustainable
imbalance, both domestically in the United States and globally. However, for
years, American policymakers and economists have glorified this deficit as
America's great contribution to world economic growth. But the day of reckoning
is rapidly approaching.
Regards,
Kurt Richebächer
for The Daily Reckoning