MEET THE DOCTOR - PART II

Richebacher: You Anglo-Saxons know no limits at all! And no
one complains about it. We Europeans impose fiscal limits
on ourselves and have difficulty keeping them under
control, which is understandable. But when Americans double
and treble their deficits, that is okay, because there are
not limits. The Anglo-Saxons have two different sets of
rules: One for the Europeans and one for the Anglo-Saxons.
The Anglo-Saxons can do whatever they like.

The normal economic condition for a developed industrial
country is to have an export surplus, and this surplus
becomes the basis of its capital formation…That was basic
macroeconomics, yah.

All of a sudden, the virtue of an industrial country is not
to export, but to over-consume…to save the world through
over-consumption.

Fry: That’s because consumption feels so much richer, even
if it impoverishes. Consumption is easier.

Richebacher: The European economies, for example, always
had investment and export as a key driver of growth. And
that is what you would expect from an industrialized
economy, that is invests and that it exports…But
Americans just borrow and consume.

Fry: Yes, but we are very good at borrowing and consuming.
Nobody does it better.

Richebacher: Yah, that’s right, but because your
consumption has grown so far out of proportion to
production, capitalist America relies on the generosity of
communist China. The Americans don’t even realize how
ridiculous and absurd this is. It’s so absurd I can’t
believe it. I think this is the worst sign that I could
imagine. It means that net investment is collapsing.

Consumption produces the least desirable kind of growth. 
And the simple thing to know is that it is unsustainable. 
It is unsustainable because real incomes are not growing.
In America you’re having a fiasco in employment and income
growth. The average income of the American middle-class is
declining in real terms. And they have debts and debts and
debts and zero savings. They have no reserves.

In America, it is no secret, the manufacturing sector is
shrinking. That’s THE big problem. In every economy, the
manufacturing sector has the biggest multiplier effect.

Fry: What about the financial sector in the United States?
It is a service sector, but it is also a major employer.
And one could argue that many parts of the financial sector
provide a value that is as tangible as the value of a
manufactured product. It performs a necessary function.

Richebacher: Yes, but let’s not forget that manufacturing
is a sector that uses all the intermediate goods. That’s
part of its multiplying effect. The growth of financial
services is fine, but not when the manufacturing sector is
disappearing at the same time…When you look at capital
goods production in the United States, you can see what has
collapsed is investment. And with the collapse of
investment you have a collapse of employment in the
manufacturing sector…

There are two kinds of assets; those that you produce, and
those that you simply trade. In America today, you have an
inflated service sector trading inflated assets. The assets
that you trade do not produce any widespread wealth. They
simply produce wealth for the individuals who trade them. 
The great failure in America is in investment, employment
and income growth…and that is tied to manufacturing.

Fry: Most American politicians would agree with you, but
most American economists would not.

Richebacher: Okay, but we’re living in a world where
Greenspan and his associates have told the world that all
of America’s massive imbalances do not matter. But for any
economist who has a little something in his head, the
structure of the American economy is one of the most
alarming of all time. For a developed economy it is
scandalous.

The American economists think this is perfectly acceptable.
But I find it unbelievable. Like Ben Bernanke blaming the
rest of the world for what he calls a “savings glut.” This
is crazy. Why isn’t he, instead, urging Americans to save
and to invest? Are the Fed governors really as stupid as
they appear? Or are they deliberately stupid?

Fry: You mean, are they stupid or corrupt? That’s the
question…And I would answer that question by saying that
I believe they are all very honorable men.

Richebacher: There are, of course, people in America,
including many of my readers, who are old-fashioned,
economically speaking. Paul Volcker, for example, who is an
old friend of mine. But he held these basic economic
concepts that I write about in his gut. All these things
that I write about used to be in the gut of every
economist.

The Americans I knew thirty years ago saved money. They
didn’t save as much as the Europeans, but they held the
same attitude, at least. The fundamentals were never
questioned. No economist questioned the idea that a nation
needs savings. They never questioned that investment is
crucial for prosperity. It was never questioned that a
developed country should have a surplus in its current
account. This was never questioned! It was never a topic of
discussion!

But all of a sudden, the Americans have rewritten
economics…because it suits them…Saving money used to be
instinctive in people, even without any economic theories. 
Classic economic theory is absent in America. It does not
exist.

Fry: Yes, but obviously, recent experience influences
behavior. And since recent experience has been one of
relatively continuous prosperity, the imperative to save
money seems like a quaint anachronism.

Richebacher: We are at an inflection point in
thinking…The big change begun in the 1980s. In the ’80s,
Americans continued to save, but it was the government that
began to dis-save. And at the time, there was a lively
debate among economists about the wisdom and benefits of
deficit-spending by the government. There was a very lively
debate about this topic. Today there is no debate. There is
no longer any economic discussion. American economists are
silent, deeply silent.

Do you know why they are quiet? Because academic America,
like all of America, believes that consumer spending is the
key to prosperity. The high esteem of consumer spending is
implanted in every American, including its academics.

There are many who say that deficit spending by the
government is bad. But they don’t say that deficit spending
by the consumer is equally bad, or worse. The American idea
that everything good comes from consumer spending is
preposterous. And that is the key fallacy in America today.

And so I wonder, is it possible that next year we will see
the great denouement of the American economy?

Cheers,

jOEL

And the Markets…