Imagine the future as these experts do: a world where the dollar is scorned, America needs foreign aid, oil is $150 a barrel and big drug companies no longer save lives.
By Dan Ackman, Forbes
The stock market is up and economic growth has been steady, if unspectacular. But, an increasing number of economists are seeing serious storms build on the horizon. They point to ever-growing federal budget deficits, a record trade deficit, increased consumer debt, a real estate market that looks like a bubble ready to burst, a surge in personal bankruptcies and the prospect of inflation.
Meanwhile, interest rates are on the rise, and if they increase much more, many of these problems could get dramatically worse.
Doomsayers tend to be ignored -- until it's too late. Now we're giving four prophets of doom their say.
Doom for the dollar
Could the falling dollar mean we're in for a major financial disaster? Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, thinks so.Banks and insurers
check your credit.
So should you.
He has been warning about the currency's fall for a while now and believes it will decline even further. But, the dollar's fall is more a symptom than a cause. The real problem is that the United States is producing too little and spending too much.
"We are going to go through one of the most trying financial times in U.S. history, including the Great Depression," Schiff says.
"The basic problem," Schiff states, "is that Americans don't produce enough, and don't save enough." Indeed, over the past 15 years, the savings rate has fallen from over 6% to less than 1% in recent quarters. As a result, the goods that we are consuming are being supplied to us by foreigners. Not only are they producing the goods, but they are lending us the money to buy them, and, in doing so, are driving the U.S. deeper and deeper into debt to the rest of the world, Schiff says.
"We are using dollars that we print to exchange for goods that we don't produce. We have to borrow from abroad as there are no domestic sources of savings, so the value of those dollars will continue to fall."
How bad will it get? "Very bad," Schiff says. The dollar will fall a lot lower than it already has -- dropping by perhaps 50% against the Japanese and Chinese currencies. How will the government respond? Could efforts to forestall the currency decline have a perverse -- and ultimately negative -- effect? No matter what the outcome, Americans will have to consume a lot less and save a lot more. Spending on cars, clothing and electronics will all drop dramatically -- perhaps right out of the economy.
"The further into the future this starts, the worse it will be for Americans," Schiff says.
It's payback time
Almost everyone knows that the U.S. has a growing trade gap and that it has gotten bigger than ever before. But few view the $600 billion gap with the same level of worry as Chris Dialynas, a managing director and portfolio manager at Pacific Investment Management, the giant bond-fund company.
He sees "potential for a dangerous financial crisis" in the situation, one that could even result in a military conflict.
In "Trouble Ahead --Trouble Behind," Dialynas points out that U.S. nonfinancial business debt has roughly doubled since 1994. Over the same period, the U.S. current account deficit soared from approximately 2% of gross domestic product to nearly 6%. The gap is still widening, and Dialynas and other observers, Warren Buffett included, expect it will grow, perhaps to 8% of GDP in a few years.
As a result, he calls for nothing less than a "new Marshall Plan." But unlike the first Marshall plan, the U.S. would be the beneficiary, not the benefactor.
Dialynas calls for not just a 40% revaluation of the Chinese yuan and other currencies but also "the renegotiation or even forgiveness of U.S. debt held by countries with large trade surpluses with America." The alternative, he says, is a "path to ruin and global conflict."
The effect of the debt is that the U.S. is in weaker political position negotiating with allies and other countries. The U.S.'s inability to garner much support for the Iraq war is just one example. Also, the emergence of China and other Asian countries has utterly changed what Dialynas calls the global economic architecture. As China and India start to beef up their economies, they will ultimately begin to assert military power as well.
"People don't build up claims without building up the ability to collect," Dialynas says.
The coming oil crisis
The world economy has gotten fairly comfortable with oil at $45 a barrel. But how will it react to paying $100 a barrel three years from now? Or $150 in five years?
That's what the future holds according to Stephen Leeb, president of Leeb Capital Management and author of "The Oil Factor." The result, Leeb says, will be double-digit inflation -- if we're lucky. If we're not, it will be a severe depression.
"The problem we have is that there are 2.3 billion people in Chindia," Leeb says, using shorthand for a combined China and India. "Today, China and India use 5.5 barrels of oil per person per year, while rich nations use 39. No matter how rosy your thinking is as to the global supply of oil, there is no way there is going to be enough to satisfy the demands of an extra 2.3 billion people coming online."
At the end of 1999, oil was trading for around $10 a barrel. Since then, it has risen by about 29% per year. Simply extending the trend line means that oil will be at $100 a barrel in about three years and at $160 in five years, Leeb says. If prices rise the way they have in the last year, the resulting levels will be even higher, and that's without any major geopolitical crisis in the Persian Gulf or anywhere else. "It's not a heroic position," Leeb says. "But I don't know how you avoid it."
America's other drug problem
Health care is one of the few areas of the American economy where costs are raging out of control. Pharmaceuticals, miracle and otherwise, held the promise of lower costs and better medicine, but the costs of drugs have spiraled ever higher, too. Lately, many drugs have appeared to be unsafe to boot.
In her book "The Truth About the Drug Companies," Dr. Marcia Angell, a senior lecturer at Harvard Medical School, highlights the problem and puts the blame on the big drug companies.
"Prices for the top brand-name drugs are now rising at over three times the inflation rate," Angell says. "At the same time, the number of life-saving innovative drugs has fallen dramatically, as the industry concentrates instead on 'me-too' drugs -- trivial variations of top-selling drugs already on the market.
"Drug companies say they need to charge ever-higher prices to cover their research costs, but they spend far less on research and development than they do on marketing and administration, and afterwards they actually keep more in profits. In fact, for over 20 years, this has been the most profitable industry in the U.S. (It fell slightly last year, from first to third place.)
"This represents an immense transfer of wealth from the rest of corporate America to the pharmaceutical industry.
"This is what I predict: Drug companies will continue their ballet of mergers, which mask the dwindling pipelines of new drugs. There will be fewer companies, and they will be bigger -- much like supernovae before they collapse. They will probably outsource most research and development and instead become giant marketing machines."