Author James Howard Kunstler has been doomsaying for a long time about the coming oil crisis, say, in the next few years, after we start to feel effects of passing the all-time “Hubbert Peak” in world oil production. (He’s got a book on that coming out next year, called The Long Emergency.) But in his latest “Clusterfuck Nation” screed, he’s warning about an even more imminent financial crisis – http://www.kunstler.com/mags_diary12.html:
Perhaps some Dopers more sophisticated than I am about macroeconomics can tell me if there’s anything to this – and why, if it’s so obvious to a non-economist like Kunstler, it’s not similarly obvious to Wall Street Journal and so on.
Well, whenever inflation occurs, the price of stocks tend to rise with it, so I suppose this is true. One thing that John Mauldin points out is that people looking for real returns have to subtract inflation from their mutual fund/whatever to find out what their performance really is.
Absolutely true. One cannot have a growing economy with a negative balance of trade.
I don’t know if this is strictly true or not, but I have read that the most significant profits (i.e. what keeps them in the black) is their financing. IIRC GE relies of factoring agreements to keep capital flowing which should also tell you something.
True, foreign countries are the largest buyers of T-Notes. There’re are a whole host of conspiracy-like reasons for this. The standard saw goes: China needs to prop up the US economy to ensure that it can remain solvent enough to keep buying goods. I haven’t seen very convincing reasoning why Japan keeps spending billions on Treasury instruments, but whatever.
While his theory is correct, he doesn’t make a compelling reason for them to stop buying.
There are more conspiracy theories re: oil and euros, but implying that the entire US economy is geared for Christmas shopping? That’s a bit difficult to believe.
He’ll have to come up with some definitions before we can argue anything in this last part.
As it appears to me: he’s got the facts right but he’s leaping to conclusions that don’t necessarily follow. First, he thinks this will all come to a head much more quickly than I believe it would in reality (although I suppose that’s what they said about the Depression). Second, he’s got no numbers. Economics is nothing without numbers.
I think the run-up in real estate prices is a de facto result of the devaluation of the dollar. There is NO way that the trade deficit with China can be sustained. Personally, we would be a LOT better off if we made our stuff at home, instead of importing crap from China.
Second: we are reaching the limits of our military strength. The ill-advised war in Iraq is stretching the Army to the breaking point, and we have no support from most of the world. I fully expect us to withdraw in 3-4 months.
Finally, the high energy use lifestyle we are used to is going to end soon, but people are being deceived by the government-the automakers are still pushing out the 5 mpg SUVs as fast as they can make them.
Yeah, a great scenario…and nobdy in Washington gives a damn.
It seems this week’s Economist (which has not made it past the censors yet) has a story quoting (somebody, Alan Greenspan?) as saying he thinks there is a 75% chance of a currency crisis in the US in 2005.
I have no idea what he means, but it is said in relation to the out of control deficit.
Not true, as the US economy is growing right now. In theory as well, a trade deficit means simply that other country’s are investing in one’s own. That doesn’t prevent the economy from growing.
It’s not a tinfoil conspiracy, it’s common knowledge what’s going on: China and Japan buy Treasuries to prop up the dollar and depress their own currencies. If they were to quit doing so you’d see the both currencies skyrocket. The yen hit dipped below 80 to the dollar in the early 1990s, and that was without the dire circumstances we have today. I don’t see any reason why the yen couldn’t hit the 50s (which would be heaven for me, as I’m getting paid in yen).
Lots of Japanese would instantly be bankrupt, as they are export-dependent. The flow of cheap crap from China would instantly be stanched, sending shockwaves through that economy.
In short, you’d have chaos. Imagine if governments and institutions started dumping the dollar for yen, Euros, and Swiss Francs. A perfect storm.
You might then have China trying to devalue the renminbi, etc. It would make the '97 Asia crisis look like a cakewalk.
No, it’s not tinfoil. It could very well happen. Add in skyrocketing oil prices and–
If there was such a massive run on the dollar? As others have said, China and japan would shut down if they could not export to the USA. Similarly, Europe (Germany) would,lose their export market for cars, should the Euro go to $2.00.
Question: what are Bush’s economic advisors saying? Are interest rates about to soar? Or have they engineered a “soft” landing for the dollar.
Very worrisome!
Currency trading (Forex). Buy Euros now, while they are low, sell them back when they are high. But if the EU pulls a Reagan and makes a devaluation to make their products competetive, you’re stuck holding the bag. I kinda doubt that’s going to happen.
BrainGlutton, get out of my head! Yesterday, I was researching bubble factors and comparing GDP over time. After that research my major concern is that the housing bubble will burst. The Fed really needs to raise interest rates to cool the market off ASAP.
I don’t think the housing price run-up would cause devaluation but I think the defaulting of Freddie Mac and/or Fannie Mae will kick off some big badness. Also, economist Paul Krugman has said that our economy is disturbingly similar to Japan’s pre-crash economy. So either we’re going to face devaluation, delfation, and a recession. I don’t discount the Peak Oil theory either.
Investing in T-Notes rather than infrastructure? It appears to me that there’s not much actual wealth being created except for pumping out more greenbacks. Perhaps you can fill me in on something else. Of course, I’m one of those guys that thinks you actually need something to sell in order to have a strong economy, but as I understand consumer spending (primarily on goods from China or other foreign producers) and the housing market (Americans buying from Americans) are driving the US economy, not manufacturing real goods. Perhaps I’m missing something.
Prop up [the dollar] to devalue their own? I don’t think I’m parsing that correctly. I understand that Yen are traded on the Forex and are floating, but that the renminbi is locked in value to the dollar.
Japan props up the dollar so that US consumers continue to buy Japanese goods. What’s the mystery? If they let the yen float to a more natural level vs the dollar, their export industries would be crushed.
Thing is, sooner or later it’s going to happen anyways, and when it does, the Japanese will be in far worse shape than if they’d let it happen at a more natural pace. Penny-wise, pound-foolish and all that. Personally, I’m glad the Cdn government isn’t trying to fight the rise of the Loonie (not that we really have the clout to do anything about it) for precisely that reason.
A sure way to financial ruin. Euros now cost about $1.30, the highest in their short history. If you think they’re going higher, by all means buy them now and sell them back for $1.60 or whatever. If you think they’re going lower, you’d have to short them - sell euros you don’t have and buy them back later for $1.10 (contact your Forex broker).
We certainly don’t disagree in this case. I don’t think the US economy is really growing either. I was just saying that a trade deficit is does not require a priori an economy that is not growing. To give one example, a country could have a trade deficit one year because they were importing massive quantities of raw materials that they convert to finished goods and sell for a massive profit the next year. It’s just like a business: debt can be an essential means to pursue growth.
But, as you correctly point out, the US is a different matter right now. We are importing massive amounts of finished goods and handing treasury notes to foreign governments. We are even getting farm deficits in certain months, and there is a prediction we will be a net importer of food as early as possibly 2005 (cite is recent WSJ on paper article). This is big and unpleasantly important! The US was always a net exporter of agricultural products.
The US is still an agricultural and industrial Titan. But currencies around the world are so out of balance, and foreign governments so eager to keep the dollar low, that the US has gone on a spending spree, buying Chinese cheapo goods and Japanese high-tech manufactures (chemicals, machinery, semiconductors–big, big, big amounts! that would collapse if the dollar crashed. I just finished working for a Japanese semiconductor manufacturing equipment company. Some of the pain would be offset by cheaper raw materials, but they would face the double punch of their own goods’ prices hitting the toposphere while American competitors’ goods are priced at rock bottom).
This spending spree is further supported by insane consumer debt. We are talking ridiculous levels, historical highs. Consumer debt per household is now $18,700! (cite from Feb.). When you add everything up, foreign governments are essentially snapping up U.S. debt so that consumers can spend like drunken sailors.
Gorsnak has it right. This is not even controversial. Take a look at this cite from www.prudentbear.com. And this. And this.
And if you don’t like this site, a book called Japan’s Policy Trap came out about a year ago that details how Japan seeks to keep the dollar high.
