U.S. Economy Still on Life Support
John Browne
Oct 17, 2008
On Monday October 13th, the Dow took the fifth biggest upward leap (in percentage terms) in its history and, most notably, since the 1930's. It appeared that Paulson and his fellow G-7 finance ministers had solved the credit crisis. Despite the fact that G-7 taxpayers will be stuck with $3.5 trillion of liabilities to support their governments' bailout plans, the stock markets nevertheless bustled with euphoria. The next day, reality dawned once again, and all markets closed down.
The truth is that these enormous bailouts enacted around the world, most notably in the United States, have done little or nothing to tackle the enormous deleveraging that is driving us into a serious recession and, if badly handled, a depression. Increasingly, politicians and commentators are talking about the need for a massive, new stimulus package, likely to cost trillions more dollars.
The extraordinary thing is that virtually no one dares even to mention the real underlying problem--that America has for the past thirty years been consuming more than it produces. During that time, the American consumer, accounting for 72 percent of Gross Domestic Product (GDP), has been financed from the retained earning of foreigners, most notably of China, Japan and more recently Russia.
Based on the willingness of these foreign producers to provide the funds, Americans have engaged in an orgy of easy credit and excessive consumption. In short, America is no longer paying its way, and is living off the earnings of its economic neighbors.
It is a rake's progress and can not last much longer, especially as the creditor nations, such as China, will soon need their own money back in order to finance their own leap to 'developed' economy status.
Millions of words have been spoken over the last month alone about how America must solve its economic and financial problems. But the stark realities that will result from massive deleveraging in the face of a massive recession have been barely considered. Apparently, no one dares to mention it.
We feel our readers should maintain an acute awareness of these underlying problems, particularly as the Presidential candidates, financial regulators and Wall Street cheerleaders appear bent on concealing the underlying truth.
The $3.5 trillion thus far committed to lubricate the credit markets have yet to produce any meaningful result. Even that vast total is unlikely to be sufficient to meet the tidal wave of bad loans yet to hit the banking system.
As the massive Bush-Greenspan credit orgy deleverages, corporate profitability is likely to fall dramatically, driving stock prices still lower, further eroding personal retirement accounts. Once confronted with unemployment and bleak prospects, even those who have been model financial citizens will be forced to default on credit card debts, auto and personal loans and, of course, home mortgages.
The tsunami of defaults crashing into our banking sector will ultimately overwhelm all government attempts to contain the damage.
As the mighty American economy shrinks, other countries, such as China, will see their export earnings fall. They may have to sell parts of their vast holdings of U.S. Treasury bonds, driving still higher the cost of dramatically increased U.S. Government borrowing.
On average and adjusting for inflation, U.S. equities have under-performed badly in this century. This will continue until America restructures itself to produce more than it consumes.
Meanwhile, the short-term Treasury bonds of hard currency governments, some offering negative yields, will continue to perform well in capital appreciation against the U.S. dollar.
China is likely to experience genuine, profitable systemic growth. However, in 2008 its stock market has fallen by some fifty percent. As a result, China and the BRIC countries could present good investment opportunities as we move into 2009.
As the recession deepens, gold could fall in price, at least in the near to medium term. But, the world's financial system will remain precariously balanced for some time, which will create a floor for gold. Furthermore, the vast amounts of 'monopoly' money now being injected into the major economies will eventually show up as inflation, possibly even threatening the viability of paper currency. Prudent investors will continue to hold a major allocation in gold.
***
For a more in depth analysis
of our financial problems and the inherent dangers they pose
for the U.S. economy and U.S. dollar denominated investments,
read Peter Schiff's book "Crash Proof: How to Profit
from the Coming Economic Collapse." Click here
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Oct 16, 2008
John Browne
Senior
Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website:
www.europac.net
 John
Browne is the Senior Market Strategist for Euro Pacific Capital,
Inc. Mr. Browne is a distinguished former member of Britain's
Parliament who served on the Treasury Select Committee, as Chairman
of the Conservative Small Business Committee, and as a close associate
of then-Prime Minister Margaret Thatcher. Among his many notable
assignments, John served as a principal advisor to Mrs. Thatcher's
government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Browne's advocacy,
Thatcher famously pronounced that Gorbachev was a man the West
"could do business with." A graduate of the Royal Military
Academy Sandhurst, Britain's version of West Point and retired
British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.
In addition to careers in British politics and the military, John
has a significant background, spanning some 37 years, in finance
and business. After graduating from the Harvard Business School,
John joined the New York firm of Morgan Stanley & Co as an
investment banker. He has also worked with such firms as Barclays
Bank and Citigroup. During his career he has served on the boards
of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's
Kudlow & Co. and the former editor of NewsMax Media's Financial
Intelligence Report and Moneynews.com. He holds FINRA series 7
& 63 licenses.
321gold Ltd
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