Jun 28, 2005
Last week, with Alan Greenspan
and John Snow testifying before Congress, irate lawmakers bombarded
them with questions as to when and how the Administration plans
to "get tough" with China for its unfair trade practices.
The scene is straight out of Alice in Wonderland. It is hard
to fathom how these Congressmen could be so clueless as to the
extent that China subsidizes the U.S. economy, and directly finances
the very budget deficits these spendthrifts so irresponsibly
vote to produce.
Exactly what is it that they want to punish China for doing?
Providing Americans with high quality, low cost consumer goods?
Artificially enhancing our standard of living? Keeping a lid
on our inflation rate? Suppressing our interest rates, and propping
up our housing prices? If they actually succeeded in convincing
China to stop selling us all these inexpensive products and lending
us back their earnings at low interest rates, what do they think
the consequences would be for Americans, to say nothing of their
own re-election prospects? In fact, short of a formal declaration
of war, the single most damaging thing that China could do to
America is exactly what our politicians are demanding. What is
even more ironic, is that giving in to these demands is also
the best thing China could do to improve the lives of its own
Of particular concern to our politicians was last week's $18.5
billion bid by Chinese oil company CNOOC for Unocal Corp. This
bid coincides with China's Haier Group's $1.3 billion bid for
Maytag, and follows Chinese computer giant Lenovo's $1.75 billion
acquisition of IBM's personal computer business. What is particularly
ironic about their apparent outrage is that while they have no
problem legislating policies which encourage American profligacy,
they complain when foreigners actually use some of their resulting
trade surpluses to buy something other than U.S. treasury bonds.
However, these three deals, totaling $21.55 billion, are just
drops in an enormous bucket. This year alone America's current
account deficit is likely to be $800 billion. To put this number
in its proper perspective, $800 billion is equal to the combined
market capitalization of the following fifteen Dow Jones companies:
Alcoa, American Express, Boeing, Caterpillar, Coca-Cola, DuPont,
General Motors, Hewlett-Packard, Home Depot, Honeywell, 3M, McDonalds,
Merck, SBC Communications, and Walt Disney.
In other words, to finance just one year's purchases of consumer
electronics, granite counter-tops, vacations, automobiles, furniture,
appliances, clothing, toys, and net interest and dividend payments,
Americans will basically give away the equivalent of half of
the companies that comprise the Dow Jones Industrial Average.
At the moment however, foreigners are content to invest the vast
majority of that $800 Billion in U.S. treasuries, or other debt
instruments. But when they finally lose confidence in the future
purchasing power of the dollar, or when Americans can no longer
afford to pay the interest on all those obligations, expect them
to rush to exchange these debt instruments for equity. When they
do, in the absence of government restrictions to limit foreign
investment, the entire Dow 30, and most of the S&P 500 for
that matter, could well pass into foreign hands. I wonder what
our politicians will have to say about that, or who they will
look to blame?
Jun 27, 2005
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and subscribing to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
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
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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
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.
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