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Published: November 10, 2008
When inexplicable events perplexed
our early forbears, village wise men concocted elaborate and
colorful explanations to soothe the populace. Earthquakes,
hailstorms, and solar eclipses were all ascribed to root causes
that made sense to the villagers and increased the esteem of the
story tellers. The recent, unexpected surge of the U.S. dollar
has led many Wall Street witch doctors to conjure a series of
logic-defying tales to give reason to what is surely the random
scramble of a confused herd. Wall Street spun similar yarns
during the dot.com and real estate bubbles as investors groped
for reasons to justify sky high prices.
The recent surge, which has pushed the dollar up more than 30%
against some currencies in recent months, is purely a short-term
technical phenomenon. The move is caused by global investment
deleveraging, in which major financial players are reversing
(unwinding) risky trades and piling into what is erroneously
perceived as the safest haven they can find. Increasingly,
foreign assets, many of which had appreciated more than American
assets, have been sold, and the proceeds stashed into U.S.
Treasury bonds, which these investors believe to be the Fort
Knox of finance. The cascade has caused momentum trades, margin
calls, redemptions, and other factors having nothing to do with
the underlying fundamentals of the dollar or the U.S. economy.
In fact, all that has happened to the U.S. economy, and all that
the government has done, and is likely to do, in their misguided
attempts to contain the damage, is extremely bearish for the
U.S. dollar.
Mesmerized by technical moves and oblivious as always to the
fundamentals, the Wall Street brain trust has offered flimsy
explanations. One popular rationale is that as bad as things are
in the United States, they are even worse every place else.
Still another is that since the U.S. was the first country into
the crisis that we will be the first nation to come out. Still
another is that since our government is acting more boldly than
most to tackle the problems, our economy will not suffer as
badly as others where governments have been slower to react and
more timid in their responses. In addition, many still perceive
the United States as the citadel of stability in a world of
second-rate economies.
However, if we look beyond these "explanations," the
fundamentals loom simple and irrefutable: American borrowers of
all stripes cannot afford to repay the trillions of dollars we
owe. Over the past decade, the vast majority of lending has come
from abroad, and as Americans don't pay, the losses show up on
foreign balance sheets. Since we blew most of the money we
borrowed on consumption, we simply lack the industrial capacity
to repay our debts without resorting to a printing press.
In bankruptcy, both the debtor and creditors are affected.
However, while creditors take a financial hit, ramifications for
debtors are typically more severe. Creditors are generally
better prepared to absorb their losses. However, for bankrupt
debtors usually much more substantial changes ensue.
Since America is the world's biggest debtor, with our IOUs
broadly held by every creditor nation, the effects of our
bankruptcy are being felt worldwide. However, while our
creditors are suffering now, their pain will be temporary and
relatively mild compared to what awaits Americans.
So while it may appear to some that things are worse abroad,
that is only because the full extent of our problems has yet to
be reckoned with. The main lesson our creditors will learn from
this crisis is not to lend American consumers any more money.
Once the lending stops, our "cart before the horse" borrow to
spend economy will crumble. While the rest of the world absorbs
their losses and moves on, we will be digging our way out of the
rubble for years to come.
Earthquakes are caused by the fundamental shifts of tectonic
plates beneath the Earth's surface. A similar move is underway
in the global economy. Describing either event without a basic
understanding of either geology or economics will simply result
in a tale being told by an idiot.
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 my new book "Crash Proof: How to
Profit from the Coming Economic Collapse." You are also invited
to read Euro Pacific's
free research report, "The Collapsing Dollar: The Powerful
Case for Investing in Foreign Equities."
Peter Schiff,
President and Chief Global Strategist
Euro Pacific Capital
About Peter Schiff
Peter Schiff is President and Chief Global Strategist for Euro Pacific
Capital, a brokerage firm specializing in foreign markets and securities,
headquartered in Darien, Connecticut. He has been quoted in many of the nation's
largest newspapers, and has appeared as a frequent guest on CNBC, CNN, Fox News,
Fox Business Network, and Bloomberg. Schiff is the author of the best-selling
book, Crash-Proof: How to Profit from the Coming Economic Collapse.
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The Next 433 Banks That Could Fail
There are 7,932 banks in the United
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If you have cash in any of
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