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Mix-Ansicht- Richebächer: The great Calamity waiting to happen - Aristoteles, 26.06.2002, 23:00
Richebächer: The great Calamity waiting to happen
THE GREAT CALAMITY WAITING TO HAPPEN
by Kurt Richebacher
Long ago, we predicted the dollar's collapse.
Despite the soaring deficit in the current account, it
went from strength to strength. Our opinion, however,
has not changed.
What has happened with the dollar since 1995 is more or
less a repeat of the experience of the first half of the
1980s. Thanks to booming financial markets and the
prevailing perception of superior economic performance,
the United States attracted capital inflows that easily
covered the soaring deficit in its current account.
Yet we took the opposite view. Noting the exploding U.S.
budget deficit, an unprecedented consumption boom and
the soaring trade deficit, we kept warning of the
dollar's inevitable plunge - in contradiction to the
bullish consensus that believed in the U.S. economy's
renaissance through supply-side Reaganomics.
The final outcome of the dollar's bull-run in the early
'80s is now well known. The reversal came when the U.S.
economy slowed down in 1984-85. Inexplicably, the dollar
even surged at first, but soon began an even sharper
decline. Yet in the summer, it seemed to start a new
rise. As all major governments, except for Japan's,
wanted a lower dollar, the fears of renewed appreciation
galvanized the celebrated Plaza Accord of Sept. 22,
1985.
Although the following joint interventions of the
central banks to weaken the dollar were on a very small
scale, the U.S. currency went - with strong intermittent
fluctuations - into a long, steep slide that ended in
May 1995.
The single most important question at this juncture is
definitely whether any decline of the dollar will be
orderly and limited in scope or whether it will be as
precipitous and prolonged as the fall between 1985-95.
It seems the latter is unimaginable for most people.
Longer-term forecasts generally project a stronger
dollar next year, reflecting the U.S. economy's
recovery.
It is our definite view that the U.S. currency is
destined to slide to new lows, that is, below those of
May 1995. Basic to this assessment is the recognition
that the imbalances that have accumulated in the U.S.
economy and its financial system in the wake of
unprecedented credit and debt excesses during the past
six or seven years vastly surpass those that accrued in
the early 1980s before the dollar's ensuing collapse.
The crucial test of a country's economic development
from a long-term perspective are the changes in two
aggregates: investment resources (savings) and
investment incentives (profits). By these two measures,
the U.S. economy's growth structure has been literally
devastated in the past few years. National saving, net
investment and profit margins are at all-time lows.
Their malignant counterparts are a record-high share of
private consumption in GDP and soaring foreign
indebtedness.
Pondering the dollar's vulnerability, comparisons with
conditions and events in the early 1980s are certainly
informative. At the time, everybody was awed by the
exploding gap in the U.S. external current account. When
the dollar's collapse started in 1985, it soared to a
record amount of $122 billion, equaling 3% of GDP.
During the last two years, the U.S. current account
deficit has run well above an annual rate of $400
billion, or about 4.5% of GDP. However, the biggest
difference between the mid-1980s and the early 2000s is,
by far, the international investment position of the
United States.
In 1985, the international investment position of the
United States went into negative territory for the first
time. Foreign-owned assets in the United States of
$1,061 billion compared with U.S.-owned assets abroad of
$949 billion, for a net of negative $111 billion.
At year-end 2000, the market value of foreign holdings
amounted to almost 10 times the amount of 1985: $9,377
billion, vs. U.S.-owned assets abroad of $7,189 billion,
resulting in net foreign indebtedness of $2,187 billion.
With another deficit in the current account of $417
billion and continuing increases in the current year,
net foreign indebtedness is rapidly approaching $3,000
billion.
We mention these figures in particular for two reasons:
first, because they are widely unknown; and second, they
provide some idea of the fantastic magnitude of the
forces that may come into operation once the dollar's
invincibility comes into question...
Considering the astronomic size of foreign dollar
holdings that have accumulated in past years, the stage
is definitely set for a bandwagon against the dollar.
And its trigger is just as obvious: growing
disillusionment about the U.S. economy and its asset
markets.
Keep a watchful eye. Disappointment about the trumpeted
U.S. economic recovery is the critical near-term event.
Regards,
Kurt Richebacher,
for The Daily Reckoning
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