The Perfect Economic Storm

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Back in September of 2003, I wrote an article entitled, 2004 Election Issues (The Economy) in which I warned of the coming economic "perfect storm" in America's future. Confidence in the Bush administration on domestic policy at the time ran contrary to the thrust of this article. Today, however, more economists are seeing the gathering storms coalesce on our economic horizon and are issuing the same stern warnings I did a year and a half ago.

Forbes sponsored an article on MSN, 4 Economic Prophets of Doom, in which highly regarded expert's warnings are becoming ever more dire. What will it take for the Bush Administration to begin to seriously address these warning signs? Economic collapse and severe economic depression cannot be averted upon arrival. Like the Titanic, it must be steered away from collapse long before collision is imminent, or the severe consequences will be inevitable. Below are excerpts which all thinking, politically active Americans should pay heed to.

Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, says:

"We are going to go through one of the most trying financial times in U.S. history, including the Great Depression,"

"The basic problem," Schiff states, "is that Americans don't produce enough, and don't save enough." Indeed, over the past 15 years, the savings rate has fallen from over 6% to less than 1% in recent quarters. As a result, the goods that we are consuming are being supplied to us by foreigners. Not only are they producing the goods, but they are lending us the money to buy them, and, in doing so, are driving the U.S. deeper and deeper into debt to the rest of the world, Schiff says.

Chris Dialynas, a managing director and portfolio manager at Pacific Investment Management, warns:

U.S. nonfinancial business debt has roughly doubled since 1994. Over the same period, the U.S. current account deficit soared from approximately 2% of gross domestic product to nearly 6%. The gap is still widening, and Dialynas and other observers, Warren Buffett included, expect it will grow, perhaps to 8% of GDP in a few years.

As a result, he calls for nothing less than a "new Marshall Plan." But unlike the first Marshall plan, the U.S. would be the beneficiary, not the benefactor.

Dialynas calls for not just a 40% revaluation of the Chinese yuan and other currencies but also "the renegotiation or even forgiveness of U.S. debt held by countries with large trade surpluses with America." The alternative, he says, is a "path to ruin and global conflict."

The effect of the debt is that the U.S. is in weaker political position negotiating with allies and other countries. The U.S.'s inability to garner much support for the Iraq war is just one example. Also, the emergence of China and other Asian countries has utterly changed what Dialynas calls the global economic architecture. As China and India start to beef up their economies, they will ultimately begin to assert military power as well.

"People don't build up claims without building up the ability to collect,"

Stephen Leeb, president of Leeb Capital Management and author of "The Oil Factor", warns:
The world economy has gotten fairly comfortable with oil at $45 a barrel. But how will it react to paying $100 a barrel three years from now? Or $150 in five years?

... The result, Leeb says, will be double-digit inflation -- if we're lucky. If we're not, it will be a severe depression.

"The problem we have is that there are 2.3 billion people in Chindia," Leeb says, using shorthand for a combined China and India. "Today, China and India use 5,500 barrels of oil per person per year, while rich nations use 39. No matter how rosy your thinking is as to the global supply of oil, there is no way there is going to be enough to satisfy the demands of an extra 2.3 billion people coming online."

In her book "The Truth About the Drug Companies," Dr. Marcia Angell, a senior lecturer at Harvard Medical School, predicts massive suffering and poverty for America's aging population in the following way:
"Prices for the top brand-name drugs are now rising at over three times the inflation rate," Angell says. "At the same time, the number of life-saving innovative drugs has fallen dramatically, as the industry concentrates instead on 'me-too' drugs -- trivial variations of top-selling drugs already on the market.

"Drug companies say they need to charge ever-higher prices to cover their research costs, but they spend far less on research and development than they do on marketing and administration, and afterwards they actually keep more in profits. In fact, for over 20 years, this has been the most profitable industry in the U.S. (It fell slightly last year, from first to third place.)

"This represents an immense transfer of wealth from the rest of corporate America to the pharmaceutical industry.

"This is what I predict: Drug companies will continue their ballet of mergers, which mask the dwindling pipelines of new drugs. There will be fewer companies, and they will be bigger -- much like supernovae before they collapse. They will probably outsource most research and development and instead become giant marketing machines."

I am not pleased at all that my warnings in 2003 are now being taken up and championed by highly respected experts in economics. I have a daughter who is an American with her whole adult life ahead of her. I am not pleased at all that her future is looking far dimmer in America than mine did at her age in 1964. It is incumbent upon Americans to contact their representatives and hold President Bush to his promise not to pass on our problems to the next generation.

He simply must abandon his economic ideology and move to install practical, sound, and swift measures to 1) reprioritize America's spending, tending to American needs while ending deficits and reducing the national debt while there is still a window of opportunity to do so, 2) invest smartly and heavily in alternative energy and conservation measures to eliminate our future's dependency on oil, 3) reverse the falling dollar, invest in education and American inventiveness in a huge way so the U.S. will have something to export in exchange for our dependency on imports, and 4) increase the minimum wage while America can still afford to, which will enhance savings, stimulate consumer demand, and shore up the hope of the lower earning 1/3 of Americans to withstand the hard times ahead with a life sustaining minimum wage.

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This page contains a single entry by David R. Remer published on January 18, 2005 9:49 AM.

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