Among those predicting the crash of the bubble market of the 1990s, this writer was among the first. Putting my money behind that prediction, I pulled my pension funds out of the market and placed them into bonds with a fixed rate of return.
Unfortunately, my pullout came in 1997, so we missed the last two and most bullish years of the great bull market.
However, as U.S. equity markets have tanked for three straight years – a pullback unseen since the Depression – and are now below where I ejected, my prediction is looking prescient.
Now, let me make a new one. The Global Economy is headed for the rocks.
The U.S. merchandise trade deficit in November shot over $500 billion a year, or 5 percent of Gross Domestic Product. We are shoveling out dollars at the rate of $1.5 billion a day to satisfy our craving for foreign goods. Foreigners are using these dollars to buy up U.S. stocks, bonds, property and businesses. Once the world’s greatest creditor, we are now the world’s greatest debtor nation, and going in deeper every day.
Now, the dollar has begun to fall. It has lost a fifth of its value against the euro. While a weak dollar will make U.S. exports attractive, in the short run it makes imports more expensive.
So, here is the financial situation of the world superpower: We are running a trade deficit near $500 billion a year and a budget deficit headed for $300 billion. We have a dollar that is falling against the euro, against the yen and against gold, and an economy that grew at an anemic rate in the last quarter.
While these twin deficits, and falling dollar, do not ensure a rise in interest rates, that would seem to be the way to bet. And if interests rates rise, that could collapse the housing market and put a stop to all that refinancing that has provided the cash to keep the economy going.
Nor is this all. President Bush appears about to launch a war in the middle of the world’s gas station, with oil prices near $35 a barrel – another drag on the economy and consumers’ capacity to re-ignite it. And this time, we will have to pay for the war ourselves. Indeed, the Israelis and Turks are already holding us up for billions more in aid, just to render passive assistance to American arms.
Nor is this all. Argentina – which has defaulted on scores of billions of dollars in private loans – last week played hardball with the International Monetary Fund, and won. The IMF is lending bankrupt Argentina the billions it needs to meet its overdue loan repayments – to the IMF.
That’s right. Though Argentina has the cash to meet its obligations to the IMF and Inter-American Development Bank, it chose not to. Instead, Argentina demanded the IMF cough up the money for Argentina to make the payment to the IMF. Terrified it would otherwise have to declare its Argentine loans in default, and deal with that on its books, the IMF decided to participate in the scam.
The IMF is now doing exactly what it condemns the Japanese banks for doing, keeping worthless loans on its books at face value rather than confront the reality that the banks, too, are bust.
So, what does the future hold?
Without a dramatic turnaround in the economy, we are headed for deep water. With war and big tax cuts on the way, and the U.S. economy meandering along, our fiscal deficit is going to explode. And with the dollar falling and price of foreign goods rising, our trade deficit, now near $500 billion, will continue to expand.
Alan Greenspan may be forced to raise interest rates simply to put a floor under the dollar. Otherwise, it could sink to where it threatens U.S. leadership and foreign policy. And with states raising taxes to cover red ink, is Congress going to vote billions to bail out international banks and deadbeat countries that have just seen how Agentina ripped off the IMF?
International trade has been around at least since the days of Marco Polo, and Portuguese navigators sought a more secure route to the riches of the East than the Silk Road across a hostile Islamic world.
But the Global Economy is something new. It is built on several pillars. The U.S. dollar is the world’s currency. The IMF and World Bank stand ready to rescue bankrupt nations about to default, to protect Western investors. Free-trade America consumes a lion’s share of the world’s production to maintain global prosperity.
Now, the dollar is falling, deadbeat nations are stiffing the IMF, U.S. dependency on imports is at record levels and growing, U.S. debt is soaring, U.S. production is sinking, and U.S. willingness to see its industrial base vanish is disappearing. Yes, a crisis impends. Just don’t hold me to the date.