The Only Real Long-Term Threat to the U.S. Economy
Thursday, April 10th, 2008
By Michael Lombardi, MBA for Profit Confidential
The bank crisis… the banks will get over it. Remember the bad loans to the tech industry, third-world countries, and the Resolution Trust fiasco of the 1980s? The banks always recover. So does Wall Street.
The housing market crisis… it too will eventually go away. Property booms are followed by property busts. It has always worked that way.
The economic slowdown… could be more short-lived than most think. Fed Chairman Bernanke is pulling out all the stops to avoid a severe U.S. recession…. and the stock market likes what he’s done so far. Economies expand, then they contract — that’s how economic cycles work.
The real long-term threat to the United States is something most Americans are not well aware of. I’m talking about the systematic decline in the value of the U.S. dollar against other world currencies.
Tell me if this sounds familiar:
It’s the end of World War II. First, the United States defeats Japan in a war they started. Then the U.S. comes to the aid of its allies in Europe and saves Europe from Hitler. The year is 1945. America has proved itself as the new world might, as the reins of military and naval power shift from Great Britain to the United States.
Following the end of the World War II, an economic boom starts in the U.S. that will last for years. The U.S. manufactures goods and the remainder of the world wants to import them. American dollars become the most wanted currency in the world. And, for decades to come, America is a trade creditor nation (which means it exports more than it imports).
Countries around the world, in awe of the American economic machine, actually start adapting the U.S. dollar as their reserve currency. Who wants gold as a reserve currency? The real money is the U.S. dollar, so the thinking went. By the 21st century, approximately 70% of the countries in the world have somehow tied the U.S. dollar to their reserve currency systems.
Fast-forward 50 years:
In the mid-1990s, halfway around the world, another economic machine was just waking up. Thanks to a younger, most capitalistic regime, China’s manufacturing sector starts to hit full stride. Now, the world is importing cheap Chinese goods instead of American goods and even American companies are opening factories in China to make their own goods there for shipping back to America.
The huge amount of goods being imported into the U.S. takes America from a creditor nation to a debtor nation — it now imports more than it exports. Today, China sits with over a trillion U.S. dollars, which it has accumulated for all the goods it sent to the U.S., and, all of the sudden, American dollars are not in demand anymore. Problem is, there are too many greenbacks in the world money system.
Some countries have started to move away from the U.S. dollar as their reserve currency. Other oil-producing countries have started to make “noise” about wanting euros for oil as opposed to dollars. And as for the U.S. government, it spends about $1.5 billion more a day than it takes in. Hence, we need foreigners to buy our debt instruments so we can finance our deficit.
With Bernanke moving interest rates so low, and with foreigners so worried about the value of the U.S. dollar, the long-term threat I see for America is a devaluation of its currency. Should this happen, interest rates would have to rise to attract foreigners back to the bonds we so desperately need to sell to finance our deficit. And that is when the U.S. economy will really get hurt. For the short term, the stock market tells us that everything is okay. But for the long term, the declining U.S. dollar will become a real problem for America.
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
