NO WAY OUT
“I’m a faithful reader of your monthly newsletter,” your
editor began his recent half-day discussion with Dr.
Richebacher in Cannes, France. “And I accept your grim
diagnosis for the U.S. economy. But I don’t want to accept
your equally grim prognosis. I understand, for example,
that our economic imbalances are considerable. But I don’t
want to believe that they are insurmountable. Isn’t there
some way for us Americans to tip-toe away from the
precipice of disaster?”
“No,” Dr. Kurt answered bluntly. “That’s not possible. The
imbalances are simply too great.”
During the next six hours, your editor learned all the
gritty details of America’s economic predicament…
Richebacher: One has to realize that all the increase in
American consumer spending is borrowed. And it is borrowed
against rising house prices. In 2001, Greenspan replaced
the bursting stock market bubble with the housing bubble.
But soon he’ll be faced with a bursting housing bubble. The
only question is when. But it comes suddenly, yah.
Asset prices are the key to the US economy. As long as
asset prices are high, there seems to be ample liquidity in
the economy. But as asset prices fall, the liquidity
disappears. Americans think they are liquid. They aren’t
liquid. Liquid is a person who has savings. We must realize
that the appearance of great liquidity is merely the result
of highly leveraged asset prices. And those can collapse.
Fry: Well, let’s hope that asset prices merely deflate
gracefully, rather than collapse.
Richebacher: I don’t think that’s possible. Excess credit
is the only thing supporting asset prices…Greenspan
recently observed that American consumers have weathered
the energy price hikes very well. But that’s only because
they borrowed crazier and crazier. That’s not the kind of
resilience you should applaud. It’s as if he said, “We
succeeded in helping the consumer to borrow more and more.”
It would be desirable, of course, if the consumer would
retrench a bit. Not that he would continue to increase his
Fry: Well the consumer is retrenching a little, but only
because its costs $80 to fill up a Ford Expedition.
Richebacher: Yah, that’s right…The thing to realize, of
course, is that the housing bubble is many times more
dangerous than the stock market bubble, because it involves
the whole banking system. Greenspan has replaced one bubble
with an even bigger and more dangerous bubble. It’s insane.
American monetary policy is out of control. Greenspan has
created a debt Colossus. This debt Colossus needs permanent
new credit. In an economy that needs four dollars in credit
to produce one dollar of GDP, simply reducing credit could
be disastrous. Even a slight reduction of credit could
create enormous negative repercussions in the asset markets
and financial markets.
The level of credit excess in America has reached such a
level of absurdity that no return to normalcy is possible
without a disastrous effect on the economy.
Richebacher: America has become what Hyman Minsky calls a
“Ponzi unit.” In other words, there sometimes comes a point
where an economic unit has to rely upon asset sales to
satisfy its interest payments and debt repayment. That’s
[Editor’s note: As Dr. Kurt explains in the October issue
of his newsletter, “[The writings of Hyman P. Minksy,
particularly his 1986 book, ‘Stabilizing and Unstable
Economy,’…identify three distinct income-debt relations
for economic units: hedge, speculative and Ponzi finance:
1) Hedge-financing units can fulfill all of their
contractual payment obligations by their cash flow.
2) Speculative units can meet the interest bill on their
liabilities from their income, but are unable to repay the
principal out of cash flow from operations. They need to
roll over their liabilities.
3) Ponzi units are unable to fulfill repayment of
principal and to pay the interest due on outstanding debts
by their cash flow from operations. They depend on
borrowing or selling assets even to meet their interest
It is a reasonable conclusion that the U.S. economy and its
financial system on the whole have become one huge Ponzi
Richebacher: What the Americans have done is that they have
simply abolished savings. And that means that more and more
of GDP goes into consumption at the expense of investment
and at the expense of the trade balance…
What I often hear is that there’s so much liquidity in the
US economy and US financial markets. But this liquidity is
not from cash. It is credit. There is huge liquidity in the
asset markets that could turn into a savage deflation
tomorrow. This is an illusion, this liquidity argument. It
works as long as the system of inflating asset prices
functions. But when it stops, liquidity is gone. If there
is a lot of leverage in the market, it can collapse.
But people say to me, “It has notyet happened.” Yes,
that’s right it has not yet happened…But it will, as soon
as credit becomes more expensive or difficult to obtain…
The crucial support for the American financial
infrastructure is the massive purchases of U.S. Treasury
bonds by foreign central banks. The Americans think that
this is to their advantage. But this only means that they
have a longer rope with which to hang themselves. To have
too much credit is never good, not for a country and not
for an individual and not for a company.
Fry: And not for a wife, certainly.
Richebacher: This is the problem. America has too much
international credit. Not from private investors, but from
central banks. Central banks are the marginal key
influence. And therefore, when you consider the American
fundamentals, America is certainly the most backward
country in the world, among industrialized nations.
From a fundamental point of view, the American economy is
in incomparably worst condition today than in 2000. Income
growth for the individual is stagnating. It is negative.
And there is no savings. America has no reserves to
protect itself against the next recession
The fact is, you Americans are trapped. And worse, there
comes a point where you’re unable to sell any assets to
raise capital, a point where the markets become completely
illiquid…because there’s no buyer left. The buyers of
today are all leveraged buyers. They need new credit. But
when you get declining prices, there is no buyer
left…America’s super-liquidity all comes from borrowing.
Credit has played a major role in all U.S. financial
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
But the key question is whether America has finally reached
the inflection point where its disastrous economic policies
will begin to undermine its prosperity. I think she has.
Fry: It’s hard to see an easy way out.
Richebacher: There is no way out. The excesses are much too
big to be treated with conventional methods.
[Joel’s Note: It seems, even to your humble junior editor,
that the Titanic economy of America is headed for the
bottom of the ocean. A considerable lack of savings means
there are simply too few lifeboats for too many people.
Make sure you are not one of the millions left in the
And the Markets…
WTI NYMEX CRUDE