We were being interviewed yesterday by a French financial publication and had been asked to explain why we were so 'negative' on the U.S economy.
"Debt levels are too high. The last time it was so cheap to borrow money - back in the Eisenhower era - total debt in the U.S. was less than 150% of GDP. In fact, it was almost always under 150% of GDP...except during bubble periods. Now, it's higher than it's ever been, at more than 300% of GDP. The New York Times tells us that the average family's debt went up by 50% over the last 13 years...from $54,000 to $79,000. And over the last 18 months, the Feds have been adding to the national debt at the rate of $2 billion per day.
"Of course, many economists - including Alan 'Bubbles' Greenspan himself - pretend to see no problem. They seem to argue that you can continue to borrow forever. But we all know it's not true. At some point, lenders refuse to lend more...and/or the debtor himself can no longer afford to keep up with his interest payments.
"Just think about it...if you really could increase your debt indefinitely, who wouldn't? Borrowing is now a whole lot easier than working for a living. Inside work. Clean. No heavy lifting. Try to imagine a man who uses mortgages and credit cards...increasing his debt year after year...Or a family that, generation after generation, merely lived on a expanding line of credit...Or a nation to which the rest of the world lent more and more of its savings...
"No happy examples come to mind. Because they don't exist. People try to live off of credit, but they usually end up disgraced...or blow their brains out."
"But here in France we are great admirers of the U.S. economy," replied the reporter. "The U.S. GDP is growing faster than in Europe. And surely you have some of the best people in the world working at the Fed. They must see the problems. They must have a way of managing them..."
"Ah," came our ready response. "All over the world, people think that the world economy is a machine and that economics itself is the science of how to make the machine run properly. They conclude that the good scientists at the Fed - such as Professor Bernanke from Princeton - will make the proper adjustments. The trouble is, the world economy is not a machine and economics - if it is a science at all - is a human science, not a hard science. If you heat up water to 212 degrees Fahrenheit, depending on pressure and so forth, it boils. Every time. But human responses are impossible to predict. They depend on whatever fool idea humans happen to have at the time.
"Imagine that you do your maths (as they say in England) and that you come to the realization that - as a scientific observation - stocks produce greater profits than bonds. If this were accepted as scientifically valid...it would be irrational for investors to put their money into anything other than stocks. Stocks would, then, rise dramatically - convincing even diehard skeptics, who would then buy stocks, too. Stocks would be hot...while bonds would cool down and ice over. Pretty soon, bonds would yield 10% or more (in 1978 you could get 15% from a U.S. government bond!)...and stocks would produce no yield at all...and no hope of capital gains, for all the world's money would be already invested in them.
"But the observation that stocks outperform bonds is based on investors' attitudes and reactions from a period when investors did not believe that stocks were better investments. Stock prices from the period - much lower - reflected the belief that stocks were, on the contrary, risky...and that investors needed a greater return to make up for the risk.
"And so it doesn't take long for the sharp, cynical investor to see that the 'stocks are always better than bonds' idea is flawed. The smart money pulls out of the boiling stock market...just as Buffett, Soros, Rogers, Templeton, and Grantham have largely done already. Later, the mob of lumpeninvestors catches on...and may, in a moment of sudden panic, realize that its goose has been cooked. Stocks crash. In effect, this generation of investors rediscovers the risk that their fathers and grandfathers always knew was there - the kind of risk that 'science' can't measure...the kind of risk the Feds can't protect you against."
Alan Greenspan sees no problem. But Americans are not so sure. Consumer confidence dropped in the latest period.
The economy is in full 'recovery,' say the experts. But mortgage foreclosures, personal bankruptcies, and late payments are at record levels. White-collar workers are having a hard time finding new jobs. Blue-collar workers' real earnings per hour have been going down for the last 30 years.
The U.S. stock market, we believe, may be approaching Phase II of the Great Bear Market.
The national character was well prepared for the arrival of Phase I, four years ago. It was blasé, insouciant...congenitally relaxed. The thought occurred to us on the metro last night as we entered a loud car full of slouching American teenagers on a class trip. The woman sitting across from us had once been pretty. But she had not bothered to put on make-up. She wore what looked like an exercise outfit...ready to absorb the sweat from her pudgy body as she made her way around Paris. She must have been a teacher or an accompanying parent. But she carried herself like one of her charges - lazily, stupidly, casually. On another bench was a young man who had not bothered to tie his shoes or comb his hair.
In America, no one notices. Everyone is as relaxed as jello. The French are uptight by comparison; here, there is a residual respect for culture, class and style. The British, by contrast, tend to vulgarity, hooliganism or self-conscious anti-culture - at least, that is the impression you get from reading the newspapers, going to an art show or walking down Oxford Street. Americans used to be known for their vulgarity. But it was a naive, energetic, baroque vulgarity...innocent and almost attractive. Now, Americans are too soft and limp to be vulgar. They go along with anything...for they can't be bothered to think about it.
On the train this morning, en route to London, a fat young man in a T-shirt sat down across the aisle with a skinny woman at his side. He took off his shoes and put his smelly feet up on the seat. When he opened his mouth we discovered that he, too, was one of us...an American...a slob. We studied him at length. Did he have any idea of how repulsive he seemed, we wondered? Oh no...he began stroking and kissing the grumpy-looking French woman, who must have been his wife. Yech...And then, she reached under his T-shirt to rub his back. Uh oh...they looked deeply into each other's eyes...they must have been newlyweds, or else they were both blind...they embraced...We thought we might be getting sick.
These are our own people. We want to think well of them. Besides, what possible difference does it make what people look like, or how they dress? And yet, as Aristotle might have said had he thought of it, in the breath of our national character we smell, faintly, our decaying national fate.
Four years into the 21st century, the Great Bear Market Americans are so at ease with themselves and life in general...so deeply asleep to the rigors of life...that they have nearly lost consciousness. Back in the '70s, the national current account deficit rose to nearly 1% of GDP. Economists were alarmed. The dollar fell. Stocks fell. The nation was so strapped and the dollar so weak that the Carter Administration planned to borrow $10 billion in foreign currency to tide itself over. By the time the period was over, you could have earned 15% interest yield from a U.S. Treasury bond. A typical stock - which you could have bought at an average of 6 times earnings - would have paid dividends of more than 5%.
Today, the current account deficit is above 5% and economists see no problem. For the moment, the U.S. government still borrows in a currency it alone controls. Foreign central banks still seem so happy to lend that over the last 3 months, their holdings of U.S. government securities rose at more than 50% annual rate to more than $1 trillion.
And on the advice of Alan "Bubbles" Greenspan, the poor lumps go further and further into debt, digging a deeper and deeper grave for their money. They refinance their houses to buy what they cannot afford and do not need - and count on Alan "Bubbles" Greenspan to pull the right levers and turn the right knobs so they will never have to pay for their mistakes.
Day by day, the entire Lumpen Nation loses its jobs, its skills, its capital...and risks losing its soul...to E-Z credit. The Feds add $2 billion to the national debt every day. Five hundred billion per year is the net cost of America's trade deficit. Ben Bernanke at the central bank pledges to keep short-term lending rates as low as necessary, as long as necessary...to make sure the borrowing binge continues.
The sooner it is over, the better. So cheer up, dear reader. The end is coming...we think.
P.S. As debt weighs on the nation, so the dollar must have further to fall. Everyone thinks so - a consensus opinion that disturbed us for a while. For, it seemed to us that the dollar would fall, too. Yet, we knew that things everyone expects rarely come to pass.
But then, "it's not real bearishness on the dollar," colleague Dan Denning explained. "People are just fashionably bearish. They say the dollar is going down...but they don't really believe it."
What has been even more remarkable than the near-universal agreement that the dollar was headed down was the near-universal complacency about it. Most people even think it will be good for the U.S. economy. There, we think, is where the consensus will be wrong. The dollar will not surprise people by going down. It will surprise people by falling on their heads. Economists will rub their noggins and say they expected it. But it will crush the life out of stocks and bonds.
Editor's Note: If you haven't yet hedged your investments against a rout in the dollar, learn how today: 7 Ways to Sell the Dollar – A DR Special Reckoning Report