Cycles master Bob Bronson thinks it will be at least another eight years before deflation has run its course. Hard to believe it could take so long to purge the U.S. economic system of bad debt -- but perhaps that’s what we’re in for. Last week’s mail brought a fresh reminder of how a domestic economy flooded to the gunwales with debt could remain afloat seemingly indefinitely -- and in stormy seas, no less. Specifically, I received from one of the banking giants a credit card offer that would allow me to carry sizable debt at no interest until March 2004(!). Surely I am not the only person in America who has received such a generous offer. But if it has gone out to millions of home and business owners, as I suspect it has, then quite a few who owe more than they can easily repay are in no imminent danger of drowning. Further delaying the day of reckoning for us all, no doubt, is the recently disgorged manna of sub-6 percent mortgages.
I’m tempted to write that the U.S. economy cannot possibly collapse so long as mortgages are trending below 6 percent and furniture stores, appliance and auto dealers are aggressively shoveling money at us at zero percent. But then reality dawns, and I return to two predictions that I’ve reiterated here many times since I started writing about the threat of deflation a decade ago. To wit: 1) at some point, with asset values falling by 2-3% annually, "cheap" mortgages on the order of four percent will mutate into a suffocating burden to millions of homeowners; and 2) the deflationary endgame cannot begin until the dollar collapses. Bottom line, household borrowing power remains sufficient to sustain the economy at sup-par levels for at least another year, but all bets are off if the dollar starts to plummet.
Dollar in Baby Bear
The dollar has been falling, to be sure -- by enough to give pause to those who have viewed it as a natural correction in a long-term bull market. The dollar index is trading around 105, about 13.2 percent below long-term highs near 121 that were achieved about 20 months ago. My prediction is for the current decline to continue to at least 93, which would represent a 23 percent fall from last year's top. If I am right, that will nearly match the 25 percent decline in the dollar between 1986-87 that many blame for the October 1987 crash. But so far, the dollar has not fallen far enough or steeply enough to panic Uncle Sam’s many foreign creditors.
Hard to imagine they could collectively be so stupid -- but there’s no getting around it. They hold 43 percent of all Treasury debt, and they are currently financing U.S. hyperconsumption to the tune of about half a trillion dollars per year. Someday it will dawn on them that the dollar may not be the best place to be. But so far, they seem…shall we say, a bit dense. Or even worse than dense, since, whatever they’ve gained from rising U.S. bond prices over the last year has been lost to a depreciating dollar. In any event, they remain manifestly oblivious to the implications of a U.S. credit expansion that is currently running at a $2 trillion annual rate. How much longer are they going to carry the American consumer? They’re going to abandon the dollar sooner or later, for sure, but we should pray that it does not happen overnight.
Suicide Is Painless
Meanwhile, stock market investors in the U.S. who buy into the current bear rally are probably as suicidally oblivious as the Europeans. "Today’s popular opinion with policy elites is that the U.S. economy’s fundamentals remain sound, " writes Jim Puplava in his most recent Storm Watch Update. "In fact, they have worsened. Growing government budget deficits, rising trade imbalances, declining business investment, zero savings, and record levels of debt on consumer and corporate balance sheets are not fundamentally sound. The current boost to the economy by the sharp drop in mortgage rates created additional bubbles in consumption and housing that will end when long-term rates begin to rise.
USA Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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