Is the Global Economy About to Crash?

washingtondispatch ^ | 1/26/2003 | Pat Buchanan

[TLBSHOW]

Is the Global Economy About to Crash?

Among those predicting the crash of the bubble market of the 1990s, this writer was among the first. Putting my money behind that prediction, I pulled my pension funds out of the market and placed them into bonds with a fixed rate of return.

Unfortunately, my pullout came in 1997, so we missed the last two and most bullish years of the great bull market.

However, as U.S. equity markets have tanked for three straight years -- a pullback unseen since the Depression -- and are now below where I ejected, my prediction is looking prescient.

Now, let me make a new one. The Global Economy is headed for the rocks.

The U.S. merchandise trade deficit in November shot over $500 billion a year, or 5 percent of Gross Domestic Product. We are shoveling out dollars at the rate of $1.5 billion a day to satisfy our craving for foreign goods. Foreigners are using these dollars to buy up U.S. stocks, bonds, property and businesses. Once the world's greatest creditor, we are now the world's greatest debtor nation, and going in deeper every day.

Now, the dollar has begun to fall. It has lost a fifth of its value against the euro. While a weak dollar will make U.S. exports attractive, in the short run it makes imports more expensive.

So, here is the financial situation of the world superpower: We are running a trade deficit near $500 billion a year and a budget deficit headed for $300 billion. We have a dollar that is falling against the euro, against the yen and against gold, and an economy that grew at an anemic rate in the last quarter.

While these twin deficits, and falling dollar, do not ensure a rise in interest rates, that would seem to be the way to bet. And if interests rates rise, that could collapse the housing market and put a stop to all that refinancing that has provided the cash to keep the economy going.

Nor is this all. President Bush appears about to launch a war in the middle of the world's gas station, with oil prices near $35 a barrel -- another drag on the economy and consumer's capacity to reignite it. And this time, we will have to pay for the war ourselves. Indeed, the Israelis and Turks are already holding us up for billions more in aid, just to render passive assistance to American arms.

Nor is this all. Argentina, which has defaulted on scores of billions of dollars in private loans, last week played hardball with the IMF, and won. The IMF is lending bankrupt Argentina the billions it needs to meet its overdue loan repayments -- to the IMF.

That's right. Though Argentina has the cash to meet its obligations to the IMF and Inter-American Development Bank, it chose not to. Instead, Argentina demanded the IMF cough up the money for Argentina to make the payment to the IMF. Terrified it would otherwise have to declare its Argentine loans in default, and deal with that on its books, the IMF decided to participate in the scam.

The IMF is now doing exactly what it condemns the Japanese banks for doing, keeping worthless loans on its books at face value rather than confront the reality that the banks, too, are bust.

So, what does the future hold?

Without a dramatic turnaround in the economy, we are headed for deep water. With war and big tax cuts on the way, and the U.S. economy meandering along, our fiscal deficit is going to explode. And with the dollar falling and price of foreign goods rising, our trade deficit, now near $500 billion, will continue to expand.

Alan Greenspan may be forced to raise interest rates simply to put a floor under the dollar. Otherwise, it could sink to where it threatens U.S. leadership and foreign policy. And with states raising taxes to cover red ink, is Congress going to vote billions to bail out international banks and deadbeat countries that have just seen how Agentina ripped off the IMF?

International trade has been around at least since the days of Marco Polo, and Portuguese navigators sought a more secure route to the riches of the East than the Silk Road across a hostile Islamic world.

But the Global Economy is something new. It is built on several pillars. The U.S. dollar is the world's currency. The IMF and World Bank stand ready to rescue bankrupt nations about to default, to protect Western investors. Free-trade America consumes a lion's share of the world' production to maintain global prosperity.

Now, the dollar is falling, deadbeat nations are stiffing the IMF, U.S. dependency on imports is at record levels and growing, U.S. debt is soaring, U.S. production is sinking, and U.S. willingness to see its industrial base vanish is disappearing. Yes, a crisis impends. Just don't hold me to the date.

[Dog Gone]

Pat is an economist like I am a brain surgeon.

[Monty22]

Good grief. I've been unemployed for awhile, and things are pretty crummy, but c'mon. This is 'worst economy in 50 years' talk. We have far more to fear from bio/chem/nuke attacks than this.

[arete]

Pat has it about right. We are in serious economic waters and they are getting deeper. Issuing even more debt to cover an already badly stressed credit system isn't the answer and is only going to make things worse when we finally hit the reality wall.

Richard W.

[ex-snook]

The odds are Buchanan is right. Pat's forecasting record is outstanding. He best articulates Conservatism for America first. Good, honest analysts are just like prophets, they warn us about things we don't want to hear (or what others don't want us to hear). We ignore them to our peril.

Pat was right about illegal immigration, stock market bubble, unbalanced trade destroying jobs, homosexual practices are a no-no (Catholic Church already devastated), foreign entanglements will bring war to our shores, abortion is an evil practice and the GOP is no longer pro-life.

Republicans and Democrats saw budget surplus, tax cuts and unlimited spending for as far as the eye could see. Pat did not fake the public.

[Willie Green]

"Americans are being true neither to themselves nor their heritage as the champions of freedom and decency if they engage in business-as-usual with tyrants who trample upon all that we profess to hold sacred. For Americans there must always be some things still greater in the hierarchy of values than the bottom line of a balance sheet. It is time to put country before commerce, and let America be America again."

-- Patrick J. Buchanan, "A Time for Truth About China", (April 5, 1999)

Fundamentally, we believe that the U.S. government needs to devote more resources and put in place new programs to build wider expertise about China and to protect our industrial base from eroding as a result of our economic relations with China.

-- C. Richard D’Amato, chairman
U.S.-China Security Review Commission
(How to improve U.S.-China relations )

[TheDon]

Hmm...

[AEMILIUS PAULUS]

QUESTION:"Is the Global Economy About to Crash?"

ANSWER: Impossible! Why we have diversity-which is our strength. We have Free Trade-which is better than the Second Coming. The Millenium is here. Nothing can go wrong, can go wrong, can go wrong, can go wrong.

[razorback-bert]

Our economists seem to be better politicians than economists, so maybe some of our politicians would be good economists.

[shaggy eel]

time will tell.

[Soren]

Is your point that there is a gigantic head and shoulders pattern portending a huge decline once the neckline just below 8000 is penetrated?

[SerfsUp]

Yes that's what I see. Price objective looks to be about 5000.

[SerfsUp]

And what a coincidence that a historical fair-value P/E of 14 puts the Dow at 5309. Hmmm...

[Dec31,1999]

Sure is a BIG bubble! And we all know What happens to BIG bubbles. They pop. Hold onto your hats!

[Soren]

Well, that depends on how you calculate the E in PE. IMO, the most appropriate way is trailing 12 months on a GAAP basis, as opposed to projected earnings and pro forma earnings. When you do that, the current PE is more than 40. That would put fair value around 3000. But if you consider bear market troughs usually overshoot fair value and bottom at PEs around 8, then we are talking sub-2000.

[TheDon]

Just trying to put a little perspective on the recent loses.

[TheDon]

and losses too... :)

[razorback-bert]

Members of the tin-foil crowd think it is the share price divided by the dividend.

[lodwick]

bttt - cash rules. Stay liquid folks.