Crash Proof 2.0 E-Book

Peter D. Schiff

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 536

Veröffentlichungsjahr: 2009

Beschreibung

A fully updated follow-up to Peter Schiff's bestselling financial survival guide-Crash Proof, which described the economy as a house of cards on the verge of collapse, with over 80 pages of new material The economic and monetary disaster which seasoned prognosticator Peter Schiff predicted is no longer hypothetical-it is here today. And nobody understands what to do in this situation better than the man who saw it coming. For more than a decade, Schiff has not only observed the economy, but also helped his clients restructure their portfolios to reflect his outlook. What he sees today is a nation facing an economic storm brought on by growing federal, personal, and corporate debt; too little savings; and a declining dollar. Crash Proof 2.0 picks up right where the first edition-a bestselling book that predicted the current market mayhem-left off. This timely guide takes into account the dramatic economic shifts that are reshaping the world and provides you with the insights and information to navigate the dangerous terrain. Throughout the book, Schiff explains the factors that will affect your future financial stability and offers a specific three step plan to battle the current economic downturn. * Discusses the measures you can take to protect yourself-as well as profit-during these difficult times * Offers an insightful examination of the structural weaknesses underlying the economic meltdown * Outlines a plan that will allow you to preserve wealth and protect the purchasing power of your savings * Filled with in-depth insights and expert advice, Crash Proof 2.0 will help you survive and thrive during the coming years of economic uncertainty.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Disclaimer

Author’s Note, Crash Proof 2.0

IMPORTANT FINAL THOUGHTS BEFORE GOING TO PRESS

Preface

Introduction

Chapter 1 - The Slippery Slope: Consumers, Not Producers

WHY THE GLOOM? THE GOVERNMENT SAYS THE ECONOMY’S FINE

HOW WE GOT INTO THIS MESS

WHAT’S TO WORRY ABOUT? WITHOUT THE UNITED STATES THE ASIAN PRODUCERS WOULD BE ...

THE ASIANS WILL BE BETTER OFF WITHOUT US

CHINA’S “WARTIME” ECONOMY

REBUILDING A PRODUCTIVE ECONOMY

COMPARING APPLES AND ORANGES: A CLARIFYING PARABLE

A Tale of Two Farmers

2009 UPDATE

Chapter 2 - What Uncle Sam, the Mass Media, and Wall Street Don’t Want You to Know

THE BALLOONING TRADE DEFICIT

INFLATION: THE CORE AND THE BUBBLE

THE DEFLATION RUSE

THE PRODUCTIVITY MYTH

GROSSLY PADDED DATA, OR AS WE KNOW THEM, GDP NUMBERS

CONSUMER CONFIDENCE: THE CRUELEST IRONY

2009 UPDATE

Chapter 3 - For a Few Dollars More: Our Declining Currency

FIAT MONEY: WHY IT IS THE ROOT OF OUR ECONOMIC PLIGHT

THE ORIGIN OF MONEY

THE ECONOMIC FUNCTIONS OF MONEY

THE FIRST USES OF GOLD AS MONEY

THE BEGINNING OF BANKING

THE ORIGIN OF THE DOLLAR

FEDERAL RESERVE ACT OF 1913 AND THE DEGENERATION OF THE DOLLAR

THE END OF GOLD AND SILVER BACKING

BRETTON WOODS, THE INTERNATIONAL GOLD STANDARD, AND RESERVE CURRENCY STATUS

THE UNRAVELING OF BRETTON WOODS

THE CLOSING OF THE GOLD WINDOW

THE BALANCE OF TRADE AND THE VALUE OF THE DOLLAR

THE FEDERAL RESERVE AND INFLATION

RISING GOLD PRICES—A VOTE OF “NO CONFIDENCE” IN THE U.S. DOLLAR

THE GOVERNMENT’S CURIOUS COMPLACENCY

HOW IT IS LIKELY TO PLAY OUT

FAIR WARNING

2009 UPDATE

Chapter 4 - Inflation Nation: The Federal Reserve Fallacy

WHAT INFLATION IS AND ISN’T

HOW INFLATION CREATES ARTIFICIAL DEMAND

WHY INFLATION IS THE GOVERNMENT’S SILENT PARTNER

WHY THE GOVERNMENT WANTS ITS SILENT PARTNER SILENT

BUT DOESN’T INFLATION THIS PERVASIVE HAVE TO SHOW UP IN THE CPI AT SOME POINT?

HOW THE GOVERNMENT OBFUSCATES THE REALITY OF INFLATION

HOW GOVERNMENT-CREATED INFLATION BECAME POLICY

HOW THE FEDERAL RESERVE DEFIED THE CONSTITUTION

THE NATURAL RELATIONSHIP OF BUSINESS CYCLES AND MONEY SUPPLY

THE MODERN FEDERAL RESERVE: AN ENGINE OF INFLATION AND A CREATOR OF BOOMS AND BUSTS

WHEN IS PAYBACK TIME FOR OUR MONETARY MANAGEMENT?

AN UNWELCOME IMPETUS: THE VELOCITY OF MONEY

THE BIG ROUNDUP: WHEN THE INFLATION WE’VE BEEN EXPORTING COMES HOME

2009 UPDATE

Chapter 5 - My Kingdom for a Buyer: Stock Market Chaos

HOW WALL STREET HAS MISLEAD THE AVERAGE INVESTOR

BACK TO BASICS

AVOID THE CURRENT U.S. STOCK MARKET

2009 UPDATE

Chapter 6 - They Burst Bubbles, Don’t They?: The Coming Real Estate Debacle

THE AMERICAN ECONOMY HAS NEVER SEEN ANYTHING LIKE THIS

HOW PUNCTURING ONE BUBBLE SET US UP FOR ANOTHER

SOME PERSPECTIVE: THE GOOD OLD DAYS OF A DECADE AGO

SECURITIZATION: THE ROOT CAUSE OF THE REAL ESTATE BUBBLE

THE GOVERNMENT-SPONSORED ENTITIES THAT BUY PRIME LOANS

WALL STREET JOINS THE FRAY

NONTRADITIONAL MORTGAGES

HOW HOME BUILDERS HELPED EXPAND THE BUBBLE

INDUSTRY LEADERS EXPLAIN PRICE RISES

WHY COLLAPSE IS INEVITABLE

THE ECONOMIC EFFECTS OF THE REAL ESTATE DEBACLE

LIFE AFTER THE BUBBLE

THE REVIVAL OF THE RENTAL MARKET AND THE FED’S DILEMMA

THE FINAL PLAYING OUT

THE IMPORTANCE OF LIQUIDITY

2009 UPDATE

Chapter 7 - Come On In, the Water’s Fine: Our Consumer Debt Problem

WHY AMERICA HAS GOT IT WRONG

HOW DID A NATION OF SAVERS BECOME A NATION OF BORROWERS?

GOOD DEBT AND BAD DEBT

WHATEVER HAPPENED TO SAVING UP?

HOME EQUITY AND STOCK MARKET APPRECIATION ARE NOT SAVINGS

NOTHING SAVED FOR A RAINY DAY

HOW WALL STREET FED THE CONSUMER CREDIT CRAZE

CONSUMER BORROWING DEPRIVES SOCIETY

COMMON MISUSES OF CREDIT

WHERE CREDIT IS APPROPRIATE

FLAWED HISTORICAL COMPARISONS

A WAY OF PUTTING CONSUMPTION IN PERSPECTIVE

“WE OWE IT TO OURSELVES, SO THE NATIONAL DEBT ISN’T A PROBLEM”

THE REAL NATIONAL DEBT

THE GOVERNMENT TRUST FUNDS

HOW SOCIAL SECURITY MADE A PIKER OUT OF PONZI

HOW MIGHT IT ALL RESOLVE?

PROTECTING YOUR OWN MONEY

2009 UPDATE

Chapter 8 - How to Survive and Thrive, Step 1: Rethinking Your Stock Portfolio

DEBUNKING THE MYTHS AND FEARS ABOUT FOREIGN INVESTING

IF ONLY YOU HAD DONE THIS IN THE 1970s

WHAT IF I’M WRONG?

GETTING DOWN TO BUSINESS: CREATING A FOREIGN PORTFOLIO

THE CASE AGAINST MUTUAL FUNDS, ADRs, AND PINK SHEETS

SELECTING THE RIGHT BROKER

PUTTING THE FOREIGN STOCK PORTFOLIO TOGETHER: A TOP-DOWN APPROACH

FINDING VALUE AND FINANCIAL VIABILITY IN COMPANIES

WHAT I HOPE YOU HAVE LEARNED IN THIS CHAPTER

2009 UPDATE

Chapter 9 - How to Survive and Thrive, Step 2: Gold Rush—Be the First Person on ...

WHY GOLD IS SUBSTANTIALLY UNDERVALUED AT PRESENT LEVELS

WHY DEMAND IS ABOUT TO EXPLODE

HOW HIGH COULD GOLD GO?

GOLD AND THE DOW JONES INDUSTRIAL AVERAGE

AS GOLD GOES, SO WILL GO SILVER—BUT EVEN MORE!

THE BOTTOM LINE: GET YOURS NOW

HOW TO OWN GOLD AND SILVER

STRUCTURING YOUR GOLD PORTFOLIO

BLENDING YOUR GOLD AND FOREIGN STOCK PORTFOLIOS

2009 UPDATE

Chapter 10 - How to Survive and Thrive, Step 3: Stay Liquid

HOW MUCH LIQUIDITY IS DESIRABLE?

INVESTMENTS PROVIDING LIQUIDITY

LONGER-TERM INVESTMENTS PROVIDING LIQUIDITY

DEBT AND LIQUIDITY

HOMEOWNER OPTIONS

THE ARGUMENT FOR SAVING

IDEAS FOR PENNY SAVERS AND OTHERS

OTHER CONSEQUENCES OF ECONOMIC COLLAPSE

PUTTING THE PLAN INTO ACTION

2009 UPDATE

Epilogue

Books for Further Reading

Glossary

Index

Copyright © 2009 by Peter D. Schiff and Lynn Sonberg Associates. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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eISBN : 978-0-470-55058-8

To my father, Irwin Schiff, whose influence and guidance concerning basic economic principles enabled me to see clearly what others could not; to my son Spencer, in whom I hope to instill a similar vision; and to his and future generations of Americans, who through hard work and sacrifice might one day restore this nation to her former glory

Disclaimer

Disclosure

Data from various sources was used in the preparation of this book. The information is believed to be reliable, accurate and appropriate but it is not guaranteed in any way. The forecasts and strategies contained herein are statements of opinion, and therefore may prove to be inaccurate. They are in fact the author’s own opinions, and payment was not received in any form that influenced his opinions. Peter Schiff and the employees of Euro Pacific Capital implement many of the strategies described. This book contains the names of some companies used as examples of the strategies described, as well as a mutual fund that can be sold only by prospectus; but none can be deemed recommendations to the book’s readers. These strategies will be inappropriate for some investors, and we urge you to speak with a financial professional and carefully review any pertinent disclosures before implementing any investment strategy.

In addition to being the President, Peter Schiff is also a registered representative and owner of Euro Pacific Capital, Inc (Euro Pacific). Euro Pacific is a FINRA registered Broker-Dealer and a member of the SIPC. This book has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation to buy or sell, any security or instrument, or to participate in any particular trading strategy. Investment strategies described in this book may ultimately lose value even if the opinions and forecasts presented prove to be accurate. All investments involve varying amounts of risk, and their values will fluctuate. Investments may increase or decrease in value, and investors may lose money.

Author’s Note,Crash Proof 2.0

In 2005 when I first proposed a book forecasting a collapse of the American economy, it was difficult finding a publisher willing to consider the project. After all, at that time the very idea seemed utterly preposterous; the economy was generally viewed as healthy, prosperous, and growing, and John Wiley & Sons was the only company willing to take a chance. I finished writing the book by mid-2006, and the first copies arrived in bookstores in February 2007. Yet even then, as warning bells began to sound, most would have considered a book about an imminent collapse of the American economy to be science fiction. More than two years later, in mid-2009, the business and investment shelves of bookstores were filled with new releases analyzing the calamities of the previous two years and offering various theories about the future. With all due respect to my fellow authors, however, most of them were writing after the fact and starting from the premise that the present crisis could not have been predicted.

More important, while most believe that the economic collapse is over, the reality is that it has only just begun. What we have witnessed thus far are merely the events that have set the collapse in motion. It will take some time for all the dominoes to fall. But fall they will, perhaps even more spectacularly now than how I initially envisioned back in 2005.

With respect to the format of Crash Proof 2.0, I decided it made sense to keep the original Crash Proof text unchanged and add updated commentary at the end of each chapter. My reasoning had partly to do with the time-honored rule of not messing with a winning formula. I have received voluminous feedback from readers who praise it as a uniquely easy-to-understand treatment of a complex and intimidating subject.

My other reason was that it lays out the basic economic way of thinking that underlies my accurate predictions. Anyone can be a Monday-morning quarterback. It’s another thing to call the plays Sunday afternoon. Leaving the original text intact enables you to see that our problems today are the consequences of pernicious fundamental trends that I have recognized and warned about for years. It clearly separates me from the “perma-bears,” chronic pessimists whose predictions, like a stopped clock, are automatically accurate at least some of the time. Nor, with my global view, can I even be called a bear. As the U.S. economy has steadily deteriorated, I have been very bullish on investments that have done extraordinarily well. I have equal confidence in my current predictions.

The Preface and Introduction remain unchanged as integral parts of the original Crash Proof. If you are new to Crash Proof, you should read Crash Proof 2.0 cover to cover. Previous readers will focus on the 2009 updates and use the original chapters as a handy reference.

Given how accurate the forecasts I made in Crash Proof turned out to be, Crash Proof 2.0 should be that much more compelling a read. If some of my predictions still seem improbable, just remember how improbable those that already came true looked when I originally made them.

IMPORTANT FINAL THOUGHTS BEFORE GOING TO PRESS

During the late spring of 2009, as I was completing the revisions you are about to read, well-established primary bear market trends in the U.S. dollar and bull market trends in foreign stocks, gold, and other commodities were still in a temporary reversal phase. In mid-2008, investors around the world had reacted to a collapsing American financial system by doing an about-face. Like horses running back into a burning barn, they dumped commodities and foreign stocks and poured funds into U.S. dollars and U.S. Treasury securities. Now, just as suddenly, there is a mad scramble to reverse those trades, and the primary trends have resumed.

What happened in 2008 was the result of several factors: A credit crunch that amounted to a global margin call caused forced, massive selling of gold and other viable assets that had high liquidity; our trading partners were instinctively inclined to prop up their best customer and continued buying American debt, regardless of its diminishing creditworthiness; and the dollar was falsely perceived as a “safe haven” by short-term investors waiting for the storm to blow over so they could resume investing in more viable economies.

The temporary effect of these technical moves—and the operative word here was always temporary—was a strong rally in the U.S. dollar and a severe pullback in foreign stock and commodity investments. Writing in March 2009 as these events still were happening, I advised readers to seize the opportunity to buy foreign stocks, gold, and other commodities at fire-sale prices and prepare to celebrate when primary trends resumed, as they inevitably would, and currency gains could be combined with capital gains and rising dividends again as the dollar weakened and basically sound foreign economies revived.

It is now summer and Crash Proof 2.0 is on its way to the printer. Though the opportunity to buy at fire-sale prices has passed, my arguments for getting out of the U.S. dollar and into foreign stocks and commodities are stronger than ever. The good news is that most foreign stocks still are trading at bargain, if not fire-sale, levels. The bad news is that the price-to-value gap is closing quickly; thus, it is urgent to act quickly in putting your plan into action.

In recent testimony before Congress, Federal Reserve (Fed) chairman Ben Bernanke claimed that aggressive Fed action and government intervention averted economic catastrophe. Not only is such a comment the equivalent of an arsonist taking credit for putting out a fire he started, but it is completely false. Recent market action proves that rather than being averted, the catastrophe I forecasted and that Bernanke denied was even possible merely has been postponed, and its severity has been worsened by the very policies Bernanke now extols. In fact, back in July 2005, as I began writing the first draft of Crash Proof, which included an entire chapter on the coming real estate debacle, Ben Bernanke was appearing on CNBC dismissing concerns over the housing bubble; he actually denied existed. He told Maria Bartiromo that a national house price decline was highly unlikely and that any future real estate-related slowdown would not cause the economy to veer from its full-employment path.

Like a compass pointing south, the Fed chairman’s prognostications of economic trends consistently have been dead wrong. Incredibly, however, for the critical role of systemic risk regulator (SSR) in the upcoming reform of the financial regulatory system, the Obama team is reportedly favoring, you guessed it, the Federal Reserve, the very group that failed to recognize and rein in the systematic risk that led to the current crisis. It is like making the Rolling Stones’ notoriously intemperate Keith Richards head of the Drug Enforcement Administration.

Whether Bernanke gets the SSR nod or not, familiar Pollyannaish reassurances continue. With all the talk of economic “green shoots,” one might confuse CNBC with the Garden Channel. Despite the optimism, the only light at the end of this tunnel is attached to an oncoming train.

To attempt to end the madness and take back our country, I am running for United States Senator in my home state of Connecticut. (See SchiffForSenate.com for details.) My goal is to put myself in a position to play a key role in the general election of 2012 and perhaps help prevent from coming true the worst-case scenario described in this book.

Preface

When I began this book early in 2006, I didn’t plan to have a Preface. My goal was to explain in a readably informal, easy-to-understand way why America’s persistent and growing imbalance of imports over exports—its trade deficit—would cause the dollar to collapse, forcing the American public to accept a drastically lower standard of living and years of painful sacrifice and reconstruction. Seven chapters would show the various ways the world’s greatest creditor nation had become, in the incredibly short space of some 20 years, the world’s largest debtor nation while the public’s attention was focused on other things. My challenge, as I saw it, was to create public awareness, where it didn’t exist, of an impending economic crisis for which I have been helping my clients prepare for years. My final three chapters would share investment strategies already being used successfully by my several thousand brokerage clients, so that readers could avoid the dollar debacle and position themselves to profit during the rebuilding.

That’s the book you are about to read. Why this Preface? Because as I write this in the final days of 2006, with the book scheduled for publication a month or so from now, everybody has started talking about the trade deficit. Virtually ignored for years, it has suddenly become a subject of public debate. And while there is a growing consensus that the problem is deadly serious, there’s a concurrently emerging consensus, mainly representing Wall Street with its vested interest in the status quo, making the opposite argument that trade deficits are a sign of economic health—that American consumption is the engine of economic growth. It’s this group that I want to take on at the very outset. Their arguments are self-serving nonsense. If I can convince you of that here and now, you can get the full benefit of the wisdom and guidance I humbly set forth in the coming pages.

I’ll get to some more comprehensive examples in a minute, but for sheer pithiness it would be hard to improve on a pronouncement made last week by Lawrence Kudlow, the genial host of CNBC’s daily program Kudlow and Company. Opening the program, Kudlow welcomed his viewers, and then brazenly intoned: “I love trade deficits. Why? Because they create capital account surpluses.”

In the way of background, the balance of payments, the bookkeeping system for recording transactions between countries, is made up, among other items, of a trade account, which is the part of the current account that nets out imports and exports, and a capital account, which nets investment flows between countries. Because dollars we send abroad in payment for goods and services are returned as investments in U.S. government securities and other assets, one account can be viewed as the flip side of the other. A country, like the United States, that is a net importer will therefore typically have an offsetting capital balance, the trade account being a deficit and the capital account a surplus.

But “surplus” as it is used here is a bookkeeping term meaning simply that more cash flowed in than flowed out. The reason cash flowed in is that an asset, say a Treasury bond, was purchased by a foreign central banker. But selling a bond doesn’t make us richer; it creates a liability. Sure, we initially have cash in hand as a result of the sale, but it’s money we are obligated to pay back with interest.

So the word “surplus” has a positive ring to it, but a capital surplus has the opposite meaning of, say, a budget surplus. Surpluses can be bad or good. A surplus of water in a reservoir during a drought is good, but when it’s in your basement during a rainstorm, it’s bad.

Now Larry Kudlow is a smart guy, and I’m not suggesting he doesn’t know what the word means. But in his opinion, a capital surplus is evidence of our country’s creditworthiness. The implication is that we can depend on that to keep the music playing. That’s where I think he’s wrong. Our trading partners are quite free to invest elsewhere, and that’s just what they’ll do when they realize the United States, with $8.5 trillion in funded debt ($50 trillion including unfunded obligations) and persistent budget deficits that add to that figure annually, is no longer creditworthy. It’s not as though they are getting higher yields by investing here; our markets are underperforming all the other major markets in the world, and that’s been true for six or seven years now.

The continued demand for U.S. government investments among central bankers has its explanation, I think, in robotic bureaucratic momentum. Private foreign investors steer clear. But for Wall Street and its media cheerleaders, who would get killed if trade deficits translated into market pessimism, “capital surplus” is a term coined in heaven.

Another, more comprehensive, argument that trade deficits are desirable was made in a December 21, 2006, Wall Street Journal op-ed piece titled “Embrace the Deficit” by Bear Stearns’s chief economist, David Malpass.

Mr. Malpass writes at some length, but his argument is pretty well summarized in his opening paragraph: “For decades, the trade deficit has been a political and journalistic lightning rod, inspiring countless predictions of America’s imminent economic collapse. The reality is different. Our imports grow with our economy and population while our exports grow with foreign economies, especially those of industrial countries. Though widely criticized as an imbalance, the trade deficit and related capital inflow reflect U.S. growth, not weakness—they link the younger, faster-growing U.S. with aging, slower growth economies abroad.”

With due respect to Mr. Malpass, I couldn’t disagree with him more. Although his point about demographics may have some limited validity, he ignores the fact that underlying the trade deficit is a shrinking manufacturing base, and relies heavily on the familiar but erroneous argument that declining savings rates are belied by high household net worth figures, which we know reflect inflated housing and paper asset values. He confuses consumption with growth and credits high competitive yields with attracting foreign investment, when we know major foreign markets outperform ours substantially when exchange rates are factored in. His view of inflation ignores past monetary policy. I could go on, but rather suggest that my entire book is a refutation of his point of view. His article is an exquisite example of Wall Street’s self-serving effort to gild the economic lily.

In general, the ridiculous notion that American consumption is driving the global economy is regularly reinforced by the mass media. On a recent airing of the Fox News business program Bulls and Bears the panelists were asked to nominate a “person of the year.” The unanimous choice: the American shopper.

In the same vein, I am always struck by how the televised media characterize the American economy by showing images of sales clerks frantically stocking shelves and shoppers swiping their credit cards. In contrast, the economies of Japan or China are portrayed with images of billowing smokestacks, busy production lines, robots assembling, and people actually making things. The most amazing part of the farce is that no one even recognizes just how ridiculous these segments are. If Longfellow was right that “whom the gods destroy they first make mad,” we must surely be on the eve of our economic destruction, as we are clearly a nation gone completely insane.

Fortunately, there are a few among us who still have their wits about them. Recently there has been increasing recognition from qualified and impartial opinion leaders that trade imbalances are in fact detrimental and that the resulting dollar decline could have serious consequences. Unfortunately, their cries fall on deaf ears and their warnings go unheeded.

In a December 11, 2006, Bloomberg article, former Fed Chairman Alan Greenspan, speaking now as a private citizen, was quoted as telling a business conference in Tel Aviv by satellite that the U.S. dollar will probably keep dropping until the nation’s current-account deficit shrinks. “It is imprudent to hold everything in one currency,” he was reported as saying. A Reuters report on the same conference quoted Greenspan as saying, “There has been some evidence that OPEC nations are beginning to switch their reserves out of dollars and into euro and yen [so a dollar moving lower] will be the experience of the next few years.”

Former Treasury Secretary Robert E. Rubin and former Federal Reserve Chairman Paul Volcker have reportedly expressed similar concerns about the dollar. Volcker was quoted in a November 1, 2006, New York Times article, “Gambling Against the Dollar,” as saying circumstances were as “dangerous and intractable” as any he can remember.

Warren Buffett had weighed in back on January 20, 2006, saying, according to an Associated Press report, “The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil. . . . Right now, the rest of the world owns $3 trillion more of us than we own of them.”

To my knowledge, nobody has ever asked Warren Buffett, “If you’re so smart, why ain’t you rich?” If he and the aforementioned think there’s a problem, it’s pretty good confirmation that there is one. In the following pages, you’ll learn why the U.S. economy is in real trouble and how you can avoid loss and enjoy continued prosperity.

INTRODUCTION

America.com: The Delusion of Real Wealth

When business in the United States underwent a mild contraction . . . the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. The “Fed” succeeded; . . . but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: . . . the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.

The above quotation is not a forecast of what might happen, but a summary of something that actually did happen. It was written more than 40 years ago in reference to 1920s America. The writer was a young economist by the name of Alan Greenspan. (The article was “Gold and Economic Freedom,” The Objectivist, 1966, reprinted in Ayn Rand’s Capitalism: The Unknown Ideal, New York: Penguin, 1987.)

The former Fed chairman’s words apply to current conditions as aptly as they did to the Roaring Twenties, but with a major difference. The difference is that as Fed chairman between 1987 and 2006, Greenspan acted even more irresponsibly than the officials he was criticizing. Rather than “sopping up the excess reserves,” Greenspan added even more, morphing a stock market bubble into a housing and consumer spending bubble of unprecedented proportions.

According to Greenspan, the Great Depression of the 1930s resulted from the unwinding of the speculative imbalances caused by the excess liquidity created by the Fed during the 1920s. Given that Greenspan created even more excess liquidity during his tenure and that the speculative imbalances that resulted were that much greater, what dire economic consequences might the Maestro, as journalist Bob Woodward dubbed the one-time professional saxophone player, believe await the United States today?

From Greenspan’s perspective, that question will likely remain rhetorical, as his monetary high-wire act continues under his successor, Chairman Ben Bernanke, with the same apparent confidence that it can go on indefinitely.

But I see things differently. In the following chapters I will not only answer the question myself, but I will provide the reader with a comprehensive financial plan to help weather the coming economic storm. Make no mistake; extremely difficult times lie ahead. Our nation’s character will be tested like never before. Whether it will rise to the occasion or be found wanting remains to be seen. While we can all hope for the best, the pragmatist in me suggests that we had better prepare for the worst.

For years I have been conducting workshops entitled “America’s Bubble Economy: Implications for Your Investments When It Finally Bursts,” helping thousands of my clients prudently invest their savings, while making sure they steer clear of Wall Street’s many investment land mines. I have never allowed popular delusion to cloud my judgment, nor fads to influence my recommendations.

During the 1990s, as most of my colleagues eagerly bought into the “new era” tech stock hype, I held steadfastly to sound investment principles, urging all who would listen to sell. The outlook for the U.S. economy today is strikingly similar to the outlook for Internet stocks in the 1990s.

Just as stock market analysts believed then that traditional measures of valuation such as earnings, cash flow, dividend yield, price to sales, price to book, internal rate of return, and return on equity no longer applied, economists today dismiss as passé the concerns we traditionalists have about such economic fundamentals as savings rates, manufacturing activity, federal deficits, unfunded liabilities, counterparty risks, consumer debt, and trade and current account deficits. To modern economists, we are now living in a new era where Americans can consume and borrow indefinitely while the rest of the world saves and produces in their stead.

This book aims to shatter that myth once and for all, and show that this so-called “new era,” like all those that preceded it, will fade as quickly as it appeared—that “America.com” is no more viable than any of the now-bankrupt dot-coms that once populated the investment landscape.

When reality finally sets in, those who have read this book and followed my advice will be well positioned to profit during the difficult times that lie ahead.

While most germane to investors, this book is also written for a broader audience. My goal here is not simply to provide an investment survival guide, but to expose and illuminate the grave economic weaknesses that make survival the issue. A proper understanding of the true state of the American economy is vital to investors and noninvestors alike.

For our nation to travel the road back to true prosperity, we must first rediscover the road and understand how we got so far off course in the first place.

Nations are not served by citizens who refuse to face the truth. Blind optimism, shrouded typically in patriotism, abounds and is going to lead us to disaster.

My warnings are based on realism, and the passion I bring to them is the greater because I love my country and have no higher goal than to see it thrive. But to be viable and to enjoy its traditional glory, it has to return to traditional values.

Arguments such as mine are sobering and not calculated to be popular. As such, they tend to fall on the deaf ears of a brain-washed public that understandably would prefer to feel good about itself.

Because my positions are so unconventional and therefore sensational, I am trotted out by the media with increasing frequency to balance prevailing opinion. CNBC has labeled me Dr. Doom and gives me the friendly needle for being a modern-day Chicken Little.

I take it all in fun, but recognize our economic realities are hardly a laughing matter. I strongly believe my arguments are demonstrably valid and will soon become the prevailing opinion. I only hope that by then it is not too late. Unfortunately, this may finally be a case where the little chicken has it right. The sky actually may be falling after all.

1

The Slippery Slope: Consumers, Not Producers

If the United States economy was a prizefighter and I was the referee, I would have mercifully stopped the carnage while the old pug still had his champion’s pride and all his marbles. But the mismatch has been allowed to continue, round after bloody round. Past glory can get in the way of accepting present realities.

The economy of the United States, long the world’s dominant creditor, now the world’s largest debtor, is fighting a losing battle against trade and financial imbalances that are growing daily and are caused by dislocations too fundamental to reverse.

I’m not talking abstract economics here. Unless you take measures to protect yourself—and this book will tell you what those measures are—your dollar-denominated assets are going to collapse in value and your standard of living will be painfully lowered. I can’t pinpoint the date this will happen—the government has been successful in hiding the problem and buying time—but there is going to be a day of reckoning and it’s already overdue.

In the short space of a couple of decades, and causing surprisingly little anxiety among economists, the nation has undergone a radical transformation in terms of its economic infrastructure and its economic behavior. A society that saved, produced, created wealth, and was a major exporter has become a society that stopped saving, shifted from manufacturing to nonexportable services, has run up record national and personal indebtedness, and uses borrowed money to finance excessive consumption of unproductive imported goods.

On a national level, our circumstances are similar to those of a philandering playboy who inherits a huge fortune and then proceeds to squander it. During the dissipation period, he lives the good life, and by all appearances he seems prosperous. But his prosperity is a function of the hard work of his ancestors rather than his own. Once the fortune is gone, so too will be the gracious lifestyle that it helped support. The problem is that most Americans, including most economists and investment advisers, have confused conspicuous consumption with legitimate wealth creation. Our impressive gross domestic product (GDP) growth, dominated as it is by consumption, is not a measure of how much wealth we have created but of how much we have destroyed (see Figure 1.1).

The result: a trade deficit of some $800 billion annually, a budget deficit running $300 billion to $400 billion, and a national debt of $8.5 trillion. (Of course, when unfunded liabilities, such as Social Security obligations, are included, the real national debt exceeds $50 trillion, or over six times the official estimates). Had the past two decades been characterized by genuine prosperity, we would have run trade surpluses and still be the world’s largest creditor, rather than its greatest debtor. I believe that we are fast approaching a perfect storm scenario, with a monetary collapse the most likely way it will play out.

FIGURE 1.1U.S. current account balance, 1990-2005. The U.S. current account deficit has exploded in recent years, with annual red ink now flowing at a rate close to $1 trillion. Such an abysmal economic performance is a national disaster of unparalleled proportions.

Source: Reprinted by permission from David L. Tice and Associates (www.prudentbear.com).

It’s analogous, I think, to a family—let’s call them the Smiths—whose breadwinners have lost their jobs. To keep up appearances and maintain the same lifestyle, the family resorts to borrowing and goes deeper and deeper into debt. It is a situation that cannot go on indefinitely. Unless the breadwinners get jobs that enable them to repay their debt and legitimately finance their previous lifestyle, the family faces painful and humiliating adjustment.

Contrast this to a family—let’s call them the Chins—who sacrifice, underconsume, and live below their means in order to accumulate a significant financial nest egg. During the accumulation period, they appear far less prosperous than their spendthrift neighbors, the Smiths, who live high on the hog on credit card and mortgage debt. To the casual observer, judging only by the relative consumption patterns of both families, the Smiths appear to be the more prosperous family. However, beneath the surface, the Chins’ current sacrifice allows them to build a bright future, while the Smiths’ shortsighted profligacy comes at a great sacrifice to their future lifestyle.

To consume, you have to either be productive or borrow, and you can only borrow so much and for so long. So it is with nations. But while an individual breadwinner might get lucky by finding a well-paying job or winning the lottery, an entire nation cannot, since replenishing depleted savings and rebuilding a deteriorated manufacturing base will take time and require great sacrifice.

Because Americans are not saving and producing but are borrowing and consuming, we have become precariously dependent on foreign suppliers and lenders. As a result, we are facing an imminent monetary crisis that will dramatically lower the standard of living of Americans who fail to take action to protect themselves (seeFigure 1.2).

WHY THE GLOOM? THE GOVERNMENT SAYS THE ECONOMY’S FINE

If you’re wondering why you keep reading and hearing that the economy is doing just fine, don’t think you’re hallucinating or that I am. Modern politics is premised on the high expectations of American consumers, and the government has mastered the art of making bad economic news look like good economic news, thereby keeping the public happy and the politicians in office. (The midterm elections of 2006 that changed the leadership of the House and Senate might indicate the public is waking up.) Government officials—aided by an accommodative Federal Reserve empowered to create credit—manipulate economic data routinely to simultaneously maintain the domestic consumer confidence and foreign lender confidence required to keep the party going. But with every bit of time they buy, the basic problems worsen.

FIGURE 1.2Rest of the world holdings of U.S. financial assets, 1985-2006. America’s unprecedented consumption and borrowing binge has put record amounts of liabilities in foreign hands. If not repudiated, servicing this debt will suppress national income and domestic consumption for generations to come.

Source: Reprinted by permission from David L. Tice and Associates (www.prudentbear.com).

For their part, the foreign central banks continue to use accumulated dollars to buy our Treasury and mortgage-backed securities, helping finance our growing deficits and keeping our housing market propped up (see Figure 1.3). They get the same sunny economic news we do, and they also have the naive belief, although there are signs that this belief is beginning to waver, that the U.S. economy is too big to fail. If they woke up to what’s actually happening and stopped buying our Treasury securities, our choice would be to further tax an already overburdened citizenry or default like Russia did in the later 1990s. We are in a real mess.

FIGURE 1.3Foreign holdings of U.S. Treasuries as percent of total, 1980- 2006. Due to insufficient domestic savings and profligate government spending, an increasing percentage of U.S. Treasury debt is now held abroad. We certainly do not “owe it to ourselves” anymore.

Source: Reprinted by permission from David L. Tice and Associates (www.prudentbear.com).

That brings me back to my prizefighter analogy. Remember when Iron Mike Tyson wore the heavyweight crown, was knocking out everybody in sight, and was so fearsome it seemed inconceivable he could lose? Well, as always happens eventually, he finally met his match. Buster Douglas beat him, and after that he just kept getting beaten. It was the same Mike Tyson, but Buster had broken a psychological barrier.

Any reality check that pierces the myth that the American economy is too big to fail could begin the process of unraveling.

Our days as the dominant economic power are numbered. The dollar is going to collapse, and Americans are going to experience stagflation on an unprecedented scale in the form of recession and hyperinflation. Those of you who act smartly and quickly by taking measures I outline later in this book not only will avoid loss of wealth but also will have positioned yourselves to prosper while your neighbors suffer a painful period of reconstruction and reform.

It is important to remember that in market economies living standards rise as a result of capital accumulation, which allows labor to be more productive, which in turn results in greater output per worker, allowing for increased consumption and leisure. However, capital investment can be increased only if adequate savings are available to finance it. Savings, of course, can come into existence only as a result of underconsumption and self-sacrifice (see Figure 1.4).

The fatal flaw in the modern economy is that any attempt to save and under consume, which would surely bring about a badly needed recession, is resisted by government policy, the sole purpose of which is to postpone the inevitable day of reckoning. In their selfish attempt to secure reelection, American politicians have persuaded their constituents that they should indulge their every whim and that self-sacrifice or underconsumption are somehow un-American, a character flaw uniquely Asian.

As a result, those same American politicians, with the help of the Federal Reserve, will succeed in doing what no foreign power ever could have: They will bring the U.S. economy to its knees, as sacrifice and underconsumption will ultimately define the U.S. economy for generations to come.

FIGURE 1.4U.S. savings rate, 1970-2006. The collapse of personal savings has led to the unprecedented accumulation of external liabilities and the demise of the U.S. industrial base. Rebuilding national savings and the capital investment it finances will be a hallmark of the coming economic austerity.

Source: Reprinted by permission from David L. Tice and Associates (www.prudentbear.com).

HOW WE GOT INTO THIS MESS

In a very real way, our success as a military and industrial power and the period of great affluence that followed World War II seeded the developments that have caused the fix we’re in and allowed it to fester.

Reserve currency status, a badge of America’s preeminence, has been both a blessing and a curse. Bestowed on the United States by the Bretton Woods agreement of 1944 (see Chapter 3) and still enjoyed by the United States today thanks to complacent central bankers abroad, the U.S. dollar’s status as the world’s reserve currency has shielded the United States from the consequences of persistent and growing trade imbalances.

The Bretton Woods accords made the U.S. dollar the currency used by other governments and institutions to settle their foreign exchange accounts and to transact trade in certain vital commodities, such as gold and oil. It thus behooved countries involved in international trade to accumulate dollars and build ample reserves. That the dollar was originally accepted by the world as its reserve currency was due to America’s unequaled industrial might, its status as both the world’s leading exporter of manufactured goods and its greatest creditor, and the fact that its currency was fully backed by, and redeemable in, a fixed quantity of gold. None of these attributes currently exist, and the dollar would not qualify for comparable status were a similar accord attempted today.

However, because its reserve currency function was inseparable from its own import/export activities, the United States was permitted to run trade deficits exempt from the free market forces that would otherwise have forced their adjustment. Thus we were spared the economic impact that a devaluation of the dollar would have caused.

Our trading partners could, under the Bretton Woods rules, force us to deal with the issue, but bureaucratic central bankers have so far been complacent and allowed our deficit to reach increasingly dangerous levels.

But that complacency could change. There is also speculation that reserve currency status might be transferred to the euro or to a combination of foreign currencies. In any event, the U.S. dollar’s status as a reserve currency immune from market pressures cannot last indefinitely. When it ends, all those surplus dollars will come home to roost, creating hyperinflation domestically.

The shift from manufacturing to services caused growing trade deficits. The erosion of our manufacturing base with its value as a producer of exportable goods and a source of high wages was the result of a number of factors. Aggressive labor unions demanding worker benefits, increased government regulation, higher taxation, aging plants and equipment, a “bigger is better” attitude that allowed too much waste and encouraged too little conservation and discipline, a smugness with respect to quality and design—these and other factors put U.S. manufacturing at a disadvantage to competitors abroad that were playing catch-up.

Abroad, in contrast, there was a spirit of rebuilding, an awareness that natural resources were scarce and must be conserved, lower taxes and wages, and generally fewer government obstacles to economic development. America’s most formidable overseas competitor was Japan, whose answer to America’s “bigger is better” was “higher quality is better.” Gas-guzzling, chrome-laden “Detroit iron” was suddenly challenged by durable, economical, electronically sophisticated competition from Toyota and others. Resources, human and natural, were to be used with more care, more skill, and more discipline not to make money but to make products of greater excellence that in turn would make money. Nor was the Japanese government averse to self-serving trade policies, which the United States was willing to tolerate in exchange for an ally in its all-consuming war in Vietnam.

David Halberstam, in his book, The Next Century (Morrow, 1991), observed:

America in the postwar years became a political society that assumed the essential health and bountiful quality of the American economy. Japan, by contrast, was an economic society, where wealth had to be renewed each day by the nation’s most talented people. . . . We were obsessed with the cold war then the hot war, but the Japanese were obsessed with commerce.

As our manufacturing base shrank, a service economy expanded in its place. Service economies do not reduce trade deficits. Consisting of businesses such as retailing and wholesaling, transportation, entertainment, personal services, and other intangible and intellectual property, the service sector not only produces fewer exportable goods but also makes us dependent on goods imported from economies that do save and produce. How would we otherwise stock our shelves?

The popular notion that in the postindustrial service economy money-valued services are an acceptable substitute for goods because both generate money ignores the distinction between money and wealth. Money is a medium of exchange. Wealth is what is received in that exchange.

I agree with those who argue that information technology can be an exportable product equal to goods, but I don’t agree that we can ever replace manufacturing with information. There is simply an insufficient quantity of such products, and the diversity of cultures abroad limits the marketability of the entertainment and educational output coming from the United States. The facts speak for themselves. We are simply not exporting enough information technology to pay for the real goods that we import. The resulting trade deficits prove that our so-called information/service economy is in reality a sham.

Another problem with an economy based primarily on services is that jobs in that sector pay less than manufacturing jobs. Making matters worse, there are high-end and low-end, skilled and unskilled jobs in the service sector, and in the United States the growth is in the low-end jobs. When we talk services, we’re talking mainly about flipping hamburgers.

Debunking a Popular Fallacy

A popular fallacy is that America’s transition from a manufacturing-based to a service-based economy is an example of progress comparable to its transition during the nineteenth century from an agrarian-based to a manufacturing-based economy. During the nineteenth century, efficiencies made possible by capital investment financed with savings enabled more food to be produced by fewer farm workers. This increased farm productivity freed up labor to make a transition into higher-paying manufacturing jobs similarly created by capital investment financed by savings. The growth in farm productivity that made the industrial revolution possible also resulted in huge exports of American agricultural products and agricultural trade surpluses.

Contrast that with the modern transition from a manufacturing-based to a service-based economy. In this case, labor was freed up because American manufacturers, increasingly burdened by high taxes, excessive regulation, and trade union demands tantamount to extortion, were driven out of business by more efficient foreign manufacturers, resulting in huge trade deficits as we imported all the stuff we could no longer produce competitively at home. The fact that those displaced factory workers were forced to accept lower-paying jobs in the service sector is indicative not of progress but of colossal failure.

Another fallacious comparison was made during an interview I had with Mark Haines, host of CNBC’s Squawk Box. Mark misinterpreted my position that the United States cannot hope to pay for imports solely through reliance on the service sector as my advocating that the country return to the equivalent of a buggy whip economy. His “buggy whip” reference is to the classic example of creative destruction, a concept of economist Joseph Schumpeter, whereby an innovation such as the automobile represents an improvement so major that it causes the destruction of a mature industry, such as whips for horse-drawn buggies.

The application of the creative destruction concept to the atrophy of manufacturing in the United States is flawed, however. When buggy whip companies went out of business, Americans did not start importing foreign-made buggy whips. American businesses stopped making buggy whips because the invention of the automobile made them obsolete. Today, the very same highly desirable, state-of-the-art consumer goods that were formerly produced in the United States are now being produced abroad.

That’s very different from the creative destruction of manufacturers of obsolete buggy whips by manufacturers of innovative automotive supplies. Today’s example is pure destruction. There is absolutely nothing creative about it.

Baby Boomers are Consumers, Not Savers

Born to a generation of people who lived though a depression and then returned from a world war to a victorious country offering the GI Bill and a future filled with possibility, the baby boomers, as the bulging population born following World War II became known, grew up knowing affluence and building it into their life expectations. Those expectations naturally became the promises of the politicians they elected. Amid a business boom driven by leverage and making credit an integral and acceptable part of modern life, financial services organizations, now deregulated and free to expand and diversify, relaxed their lending standards and aggressively foisted auto loans, credit cards, mortgages, and home equity loans on a market as vulnerable as it was demographically irresistible. With personal expectations now tantamount to a sense of entitlement, the stage was clearly set for the spending binge we have today.

Savings? Who needs savings when you own stocks that can only go up in price and a home that gains equity every year? Let the dismal scientists worry that stock values or home equity might simply be the result of inflationary bubbles created by an irresponsible Federal Reserve, or that when the bubbles burst, all that will remain are the debts they collateralized.

WHAT’S TO WORRY ABOUT? WITHOUT THE UNITED STATES THE ASIAN PRODUCERS WOULD BE ALL DRESSED UP WITH NOWHERE TO GO. NO?

You hear this argument all the time, and if you believe it I’ve got some oceanfront property in Indiana to talk to you about.

The world no more depends on U.S. consumption than medieval serfs depended on the consumption of their lords, who typically took 25 percent of what they produced. What a disaster it would have been for the serfs had their lords not exacted this tribute. Think of all the unemployment the serfs would have suffered had they not had to toil so hard for the benefit of their lords. What would they have done with all that extra free time?

The way modern economists look at things, had the lords increased their take from 25 percent to 35 percent, it would have been an economic boon for the serfs because they would have had 10 percent more work. Too bad the serfs didn’t have economic advisers or central bankers to urge such progressive policies.

Here’s my favorite analogy to illustrate why it’s idiotic to think the world benefits from Americans’ excess consumption and would suffer without it (see Figure 1.5).

Let’s suppose six castaways are stranded on a desert island, five Asians and one American. Their problem is hunger. So they sit down and divide labor as follows: One Asian will do the hunting, another will fish, the third will scrounge for vegetation, the fourth will cook dinner, and the fifth will gather firewood and tend the fire. The sixth, the American, is given the job of eating.

So five Asians work all day to feed one American, who spends his day sunning himself on the beach. The American is employed in the equivalent of the service sector, operating a tanning salon that has one customer: himself. At the end of the day, the five Asians present a painstakingly prepared feast to the American, who sits at the head of a special table built by the Asians specifically for this purpose.

FIGURE 1.5Holdings of U.S. Treasuries by selected countries, 2001-2006. The significant percentage of Treasuries purchased by Asian nations, in particular Japan and China, represents the greatest international subsidy since the Marshall Plan, the main difference being that the United States intended its aid to be charity, whereas Japan and China actually expect to be paid back.

Source: Reprinted by permission from David L. Tice and Associates (www.prudentbear.com).

Now the American is practical enough to know that if the Asians are going to continue providing banquets they must also be fed, so he allows them just enough scraps from his table to sustain them for the following day’s labor.

Modern-day economists would have you look at the situation just described and believe that the American is the lone engine of growth driving the island’s economy; that without the American and his ravenous appetite, the Asians on the island would all be unemployed.

The reality, of course, is that the American is not the engine of growth, but the caboose, and the best thing the Asians could do would be to vote the American off the island—decoupling the caboose from the gravy train. Without the American to consume most of their food, they’d have a lot more to eat themselves. Then the Asians could spend less time working on food-related tasks and devote more time to leisure or to satisfying other needs that now go unfulfilled because so many of their scarce resources are devoted to feeding the American.

Ah, you say, but that analogy is flawed because in the real world the United States does pay for its “food” and Asians do receive value in exchange for their effort.

Okay, then let’s assume the American on the island pays for his food the same way real-world Americans pay, by issuing IOUs. At the end of each meal, the Asians present the American with a bill, which he pays by issuing IOUs claiming to represent future payments of food.

The castaways all know that the IOUs can never be collected, since the American not only produces no food to back them up, but also lacks the means and the intention of ever providing any. But the Asians accept them anyway, each day adding to the accumulation of worthless IOUs. Are the Asians any better off as a result of this accumulation? Are they any less hungry? Of course not.

Suppose an Asian central banker suddenly washes up onto the island and volunteers his services. Now each day the central banker taxes the other Asians on the island by confiscating a portion of the scraps of food the American throws them each day from his table. The central banker then agrees to return these morsels to the other Asians each day, in exchange for each Asian’s daily accumulation of the American’s IOUs, less a small percentage for himself because he, the central banker, also has to eat.

Does the existence of a central banker change anything? Do the Asians have any more to eat because their own central banker gives them back a portion of the food he took from them in the first place? Do the American IOUs have any more value because they can now be exchanged in this manner? Of course not.

THE ASIANS WILL BE BETTER OFF WITHOUT US

The real-world lesson is that if it doesn’t make sense for the six make-believe Asians to support one make-believe American, it does not make sense for billions of real-world Asians to support millions of real-world Americans. The fact that they do so in exchange for worthless IOUs in no way alters this reality.

There is no question that in the short run, by allowing U.S. dollars to collapse (in effect, voting millions of Americans off the island), there will be some disruptions of Asian economies. Of course, there will be some initial losers, particularly among those Asians who currently profit from the present arrangement. However, these profits come only at the expense of greater losses borne by the entire Asian population.

In the end, the cessation of America’s excess consumption, which is not a benefit Asians enjoy but rather a burden they now disproportionately bear, will be the best thing that can happen to them. Like the serfs being liberated from their lords, their scarce resources will be freed to satisfy their own needs and desires, and their standards of living will rise accordingly. As their savings finance increased capital investment, rather than being squandered on American consumption, their future standards of living will rise that much faster as well.

CHINA’S “WARTIME” ECONOMY

As noted earlier with reference to Asia in general, the mainstream of economic thinking holds that China will continue to finance the U.S. current account deficit indefinitely because American consumption is vital to the survival of China’s export-driven economy. Quite to the contrary, China’s own capacity to consume is much greater than ours and the productive capacity needed to serve it is already in place—in China!

In many ways the modern Asian economies are reminiscent of the wartime economy of the United States during World War II, when the nation’s industrial might was concentrated on supplying the war effort. We had 10 million men under arms spread across three continents, our ships patrolled the Atlantic and Pacific Oceans, and our bombers blackened the skies. Factories that had previously produced passenger cars, sewing machines, and farm equipment had been retooled to make fighter planes, jeeps, tanks, rifles, bullets, artillery shells, destroyers, aircraft carriers, submarines, uniforms, helmets, boots, mess kits, and military radios.

At the time we were a very busy nation. Our factories were in operation 24/7, and more people than ever before were working, including legions of women previously absent from the workforce.

Given this full-throttle activity, economists of that time period might have argued that we never should have stormed the beaches at Normandy or Iwo Jima. After all, if the war ended, a disaster would befall our wartime economy. Millions of soldiers and factory workers would lose their jobs and corporate profits would collapse, as there would be no more demand for all the weapons and military equipment they were producing. Because victory abroad would surely bring recession at home, the war needed to be waged indefinitely.

As ridiculous as this argument sounds, it is exactly what most believe the Chinese should do today, as in reality their export-driven economy is basically no different from our wartime economy in 1944.