With the U.S. Dollar Index breaking decisively below its long-term support level, the sun is finally setting on the golden age of American consumption. As America’s economic dominance fades, so too will the faith in the central thesis that has explained its apparent success and has shaped the majority of recent economic theory.
At issue is the belief that a nation can grow and prosper by borrowing from abroad in order to consume imported goods. To consume at the pace that it has, America exchanges income producing assets, such as companies or property, or interest bearing IOUs, such as Treasury notes or mortgage-backed bonds, for foreign made clothes, toys and electronics. Economists call these transactions "growth". But rather than discovering a new path to prosperity, America has simply stumbled on a short cut to financial ruin.
For years America has convinced the emerging market countries that their prosperity is a function of our consumption. It is argued that their export oriented economies would falter if not for the insatiable American willingness to consume (a "virtue" that is assumed to be uniquely American). As the dollar falls into the abyss, this myth will be shattered.
My forecast is that over the next two to three years the U.S. Dollar index will fall to 40; half of its current value. As this happens, much of America’s economic power will be transferred abroad. The chart below approximates current per capita U.S. dollar GDP for thirty nations, including the United States, listed in descending order.
Luxembourg
91,926.63
Norway
76,447.78
Ireland
57,163.07
Switzerland
54,466.77
Iceland
53,532.47
United States
46,085.15
Sweden
44,454.36
Netherlands
42,762.96
United Kingdom
41,959.85
Canada
41,347.87
Australia
37,981.52
France
37,416.55
Germany
36,779.14
United Arab Emirates
36,180.87
Japan
36,021.22
Singapore
32,082.02
Spain
31,726.55
New Zealand
24,511.95
Greece
24,030.41
Israel
20,510.55
Portugal
19,287.51
Saudi Arabia
16,612.16
Poland
9,214.27
Chile
8,335.70
Russia
8,183.02
Mexico
7,755.69
Argentina
6,548.80
Venezuela
6,393.99
Brazil
5,518.21
Peru
3,328.55
A 50% decline in the value of the dollar will simultaneously increase interest rates, consumer prices and unemployment in the United States, while causing stock and real estate prices to fall. Consumption, which accounts for better than 70% of U.S. GDP, should collapse as a result, producing a significant recession. My forecast is that U.S. GDP will contract by at least 20%. (The Fed may seek to mitigate the nominal decline with expansive monetary policy, but such moves will only result in an even greater contraction in real GDP.)
Assuming a 50% decline in the value of the dollar and a 20% fall in U.S. GDP, the above chart would look something like this:
Luxembourg
183,853.25
Norway
152,895.56
Ireland
114,326.14
Switzerland
108,933.54
Iceland
107,064.94
Sweden
88,908.73
Netherlands
85,525.93
United Kingdom
83,919.70
Canada
82,695.74
Australia
75,963.04
France
74,833.10
Germany
73,558.27
United Arab Emirates
72,361.73
Japan
72,042.44
Singapore
64,164.05
Spain
63,453.11
New Zealand
49,023.91
Greece
48,060.83
Israel
41,021.10
Portugal
38,575.02
United States
36,868.12
Saudi Arabia
33,224.32
Chile
16,671.40
Russia
16,366.03
Mexico
15,511.38
Argentina
13,097.61
Venezuela
12,787.97
Brazil
11,036.41
Peru
6,657.09
Obviously, these projections are very rough. Not all foreign currencies will rise in step and not all foreign GDPs will remain constant at today’s levels in local currencies. However it is the concept that is important. Notice how America falls from 6th place to 21st.
America’s per capita GDP falls from 58% of Luxemburg’s, the top nation on the list, to a mere 20%. America’s per capita GDP falls from 14 times that of Peru, the lowest nation on the list, to only 5.6 times.
China is conspicuously absent from the list. Its current per capita GDP is only about $2,200. However, were China to allow its currency to float freely, my belief is that the yuan would rise far more significantly than other currencies. I have no idea how much more significantly that rise will be, but let us assume that its rise against the dollar would be double the rate of the typical currency in the Dollar Index. That would result in China’s per capita GDP rising to $8,800, just above Peru’s but still below Brazil’s.
Factoring in China’s enormous population means that such a significant rise in its per capita GDP would have a profound impact on global consumption. Consider the following table, in billions of U.S. dollars, of the GDPs of the G-7 nations plus China:
United States
13,928.462
Japan
4,599.358
Germany
3,036.853
China
2,871.019
United Kingdom
2,552.655
France
2,370.843
Italy
1,949.878
Canada
1,357.073
Now consider the table with my assumptions regarding exchange rates and a 20% decline in U.S. GDP.
China
11,484.08
United States
11,142.77
Japan
9,198.72
Germany
6,073.71
United Kingdom
5,105.31
France
4,741.69
Italy
3,899.76
Canada
2,714.15
Under this scenario, China supplants the United States as the world’s largest economy, not in 30 or 40 years as is commonly believed, but perhaps as soon as before the end of this decade. The U.S. retains its lead over Japan for second place, yet the margin declines from over 300% to just 10%. (My prediction is that the yen will rise more significantly than most other currencies meaning that Japan’s GDP will likely surpass U.S. GDP as well.) Further, the GDP of the thirteen nations sharing the euro is currently about 12.8 trillion dollars. After the dollar’s decline it will rise to a staggering 25.6 trillion, more then twice that of the U.S. As a result, considering the EU as a single nation, the U.S. economy would then rank forth among the world’s largest, with its GDP declining from 43% of world GDP to only 21%.
Current ideology holds that a recession in the United States as severe as the one I am forecasting would be catastrophic for the global economy. But this short-sighted view overlooks the effects of such tremendous dollar gains in the GDPs of the rest of the world. Wouldn’t the increased consumption of everyone else offset the effects of the decreased consumption of Americans? It is not as if factories around the world would shut down if Americans stopped spending. All that would change would be the nationality of the buyers.
As American consumer spending declines, foreign spending will rise to take its place. With an explosion in foreign purchasing power, consumers around the world will see the dollar values of their incomes and savings soar. Globally, goods will fall in price and consumers around the world will snap up the bargains. Goods that were formerly out of reach for many foreign consumers will now be affordable. The reverse will occur in America. As production is diverted away from poorer Americans to more affluent foreigners, consumer prices in America will rise sharply. Goods that Americans used to easily "afford" will now be out of reach.
As gold surpasses $700 per ounce, oil tops $80 per barrel, and wheat prices exceed $9 per bushel, Americans are already getting a taste of things to come. Prices for these and other commodities are rising as a direct result of the weakness in the dollar. As this weakness intensifies in the months ahead, commodity price increases will accelerate. However, as their own currencies rise, many foreign buyers will actually experience price decreases. The result will be even greater demand for commodities from abroad just as domestic demand subsides.
Further, as the world stops exporting so much of its savings to America, there will be far more capital available to foreign entrepreneurs to invest productively. Think of the crowding out effect of so much of the world’s savings being lent to American consumers. Now imagine the foreign investment boom that would follow as foreigners reclaim access to their own savings.
The American propensity to consume is not a unique talent. Any nation can emulate it so long as it finds willing lenders and suppliers. Production on the other hand is an entirely different matter. It requires free markets, limited government, the rule of law, savings, capital and hard work. The world economy will not be brought to its knees simply because Americans stop consuming. Rather it is America’s service sector economy that will collapse once the rest of the world stops propping it up.
For a more in depth analysis of the tenuous position of the American economy, the housing and mortgage markets, and U.S. dollar denominated investments, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse."
Click here to order a copy today.
More importantly take action to protect your wealth and preserve your purchasing power before it’s too late. Protect your wealth and preserve your purchasing power before it’s too late. Discover the best way to buy gold at
www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
-- Posted Friday, 14 September 2007 | Digg This Article
- Peter Schiff C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06840
800-727-7922 www.europac.net
schiff@europac.net
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.
Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.
The content on this site is protected
by U.S. and international copyright laws and is the property of GoldSeek.com
and/or the providers of the content under license. By "content" we mean any
information, mode of expression, or other materials and services found on GoldSeek.com.
This includes editorials, news, our writings, graphics, and any and all other
features found on the site. Please contact
us for any further information.
Live GoldSeek Visitor Map | Disclaimer
The views contained here may not represent the views of GoldSeek.com, Gold Seek LLC, its affiliates or advertisers. GoldSeek.com, Gold Seek LLC makes no representation, warranty or guarantee as to the accuracy
or completeness of the information (including news, editorials, prices, statistics,
analyses and the like) provided through its service. Any copying, reproduction
and/or redistribution of any of the documents, data, content or materials contained
on or within this website, without the express written consent of GoldSeek.com, Gold Seek LLC,
is strictly prohibited. In no event shall GoldSeek.com, Gold Seek LLC or its affiliates be
liable to any person for any decision made or action taken in reliance upon
the information provided herein.