Pushing Bubble Economy to Limit on U.S. Dollar
Risk in Thinking Currency Will Never Fall in Value or Face Problems
The current government stimulus doesn’t solve the long-term problem of using mass amounts of borrowed money that puts pressure potentially on the U.S. dollar, said economic forecaster Robert Wiedemer. “When you’re running up a $2 trillion deficit, you’re making people more and more worried about the current debt,” he told a business briefing at the National Press Club in Washington June 23. “I’m less concerned about what we spend it on than where we get it.”
Wiedemer, who co-authored “America’s Bubble Economy” in 2006, thinks that by 2013 or 2014, problems with the dollar will be felt due to double digit unemployment, double digit inflation, and double digit interest rate. His next book, “Aftershock,” focusing on the dollar, will be published in late October.
If his forecast proves correct, it will be an outgrowth of the impact the housing-stock market bubble already is having on the dollar bubble.
Impact of Borrowing on U.S. Debt, Dollar
The nation is spending but primarily borrowing now, Wiedemer said. “Borrowing is much more dangerous than printing money.” While the government stimulus can stave off problems in the short term, psychology can shift on the dollar.
Trillion dollar deficits put a spotlight on a much larger problem that tends to stay in the shadows: namely, a $10 trillion debt, Wiedmer told the Press Club briefing. “We have never even really made attempts to pay off that $10 trillion debt.”
Lack of Understanding of Difference between Nation’s Debt and Deficits
Many ignore the debt, some not really understanding the difference between the debt and deficits. Debt is the accumulated deficits, not the amount of total money owed, he noted. Deficits are the amount of debt being added each year. The concept is similar to credit card balances and the purchases made most recently that add to the balance.
During the Clinton presidency, the economy was growing and the nation was paying a little of the debt and ran a surplus for the only time in the last 30 years, Wiedemer acknowledged in response to a question at the briefing. However, much of that money was coming from a bubble in technology and the Internet that later popped, he observed. This was part of the broader stock market bubble because Nasdaq went down a lot but the Dow stayed up fairly well during the tech bubble.
Administration officials continue to say the stimulus is helping. In "Obama Adviser Summers Defends Administration's Economic Recovery Policies," in the July 20, 2009 Daily Report for Executives, Aaron Lorenzo reported that National Economic Council Director Lawrence Summers said in a July 17 speech at the Peterson Institute for International Economics that the gross domestic product is likely to spur positive growth this year. "Factors supporting growth include the increasing impact of both fiscal stimulus and the measures to support the financial system, Summers said, as well as the wealth effects of stronger asset markets, inventory replenishment, and the replacement cycle for cars and other consumer durables."
But in his Press Club remarks, Wiedemer discounted the GNP factor. The United States is rapidly heading toward debt of between $12 trillion and $15 trillion, he said. While some say it’s only 5% of the GNP, that is irrelevant, Wiedemer stressed. “GNP doesn’t pay off the debt, your taxes do.” The debt is now basically five times what income is, he added.
Economic Realities May Affect Foreign Investors Financing U.S. Debt
Foreigners fund much of the debt and at some point they may become nervous about the dollar and its exposure, he stated. Though other countries are still buying U.S. bonds, Wiedemer said he looks at fundamental economic drivers and at some point the reality of the situation will intervene. Any group of those investors can start to get worried. China will keep inflating the currency as long as possible, Wiedemer said. But he doubts China will be the one to pull the plug. That is more likely to be investors in Europe and Asia.
When people have institutional money, they start to be reluctant about the amount of their dollar exposure, in his view. Over 40% of U.S. debt is less than a year and has to be rolled over continually. It doesn’t technically have an adjustable but is short term. “If we can’t roll it over we have big problems.” If China became scared or couldn’t afford to buy as many dollars, that poses another problem, Wiedemer told the briefing. If foreign money stopped flowing in as much, that would cause more concern about the dollar.
Wiedemer expects demand for gold to increase with a weakened dollar though he doesn’t think it’s a good investment. “There’s a lot of money, there’s not much gold, you can’t increase the supply very much.” But it can become a bubble in times of crisis, particularly in the Middle East and Asia, using gold as a long-term investment for at least awhile.
When the dollar starts to go down, further manipulation of it can cause a sharper fall because China may pull back, Wiedemer said. Investors therefore must be prepared in advance for the dollar’s decline. Most of the buyers of government debt are private (insurance firms, hedge funds), despite some government buyers. "The economic reality is we have bad debt and the government doesn’t have the money to pay it off," he said.
Robert Wiedemer speaking in Washington
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