The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.

—Ben Bernanke

For the first two decades of the twenty‐first century, money had become “easy.” On November 21, 2002, the then‐Federal Reserve Governor Ben Bernanke gave an address before the National Economists Club in Washington, DC. The speech has come to be known as “The Helicopter Theory” speech—in which Bernanke outlined an economic recipe to avert Japan‐style deflation in the United States through a series of tax cuts and low interest rates that could effectively drop cash into the hands of consumers, as if from a helicopter. The result: inflation. Problem solved. Later he would win a Nobel Prize for his work.

If you listen to Bernanke and his successors today, they are still patting themselves on the back. In their view, when consumers refinance their homes and increase their mortgage debt, that frees up money. That money is used to spend and, according to the Fed chairman, that is a good thing—even though the US consumer savings rate had dropped to 2.4% in July of 2022,¹ significantly lower than the inflation rate that month of 8.5%.²

When we say things like “people are living paycheck to paycheck,” it's because our consumer culture accommodates spending over saving. The Fed, Treasury, and Congress do not encourage savings. Career politicians don't even think about things like the national savings rate. Why would they? Their incentives are to get more for their constituents from the public treasury. The more they can bring home from Washington, the better their chances of getting re‐elected. It's perverse.

Unfortunately, the economy and its growing deficits can be forecast by looking at a parallel situation in the late 1990s in one of our Asian trading partners. Japan, even with its work ethic and competitive spirit, discovered the hard way that deficit spending doesn't grow an economy. Deficits, however, are a good way to destroy one.

BIG IN JAPAN

Indeed, we would be wise to heed the lessons of the Japanese experience.³ We can learn a great deal about what is happening to our dollar today by reviewing the details of the “yen miracle.” It was true when we first wrote those words in 2005. It's still true now.

Nearly two decades ago, in 1997, Japan went through an experience that proves the economic wisdom that weak economies have weak currencies and strong economies have strong currencies. This may seem obvious, but we see over and over that economists do not always accept this wisdom. While Greenspan, then our Fed head, said he was concerned with the possible connection between a weakened US dollar and the prospects for the overall economy, his actions weren't convincing.

What the Japan experience showed was that when a country's economy is weakened, it doesn't take much to push it over the edge. After years of growth in its gross domestic product (GDP), the numbers began slowing down. The slowdown was tied to ever‐higher budget deficits. By 1997, Japan was in trouble. That year, the government made modest cuts to its budget deficit, and the result was an economic free fall in 1998. GDP fell, inflation followed, and productivity slowed. In response, the government instituted record levels of deficit spending in a Greenspan‐esque hope that deficit spending would fix a failing economy. But that same year, the Japanese economy, by all measurements, just got worse and worse.

By 1999, according to the Organization for Economic Cooperation and Development (OECD), restructuring was being promoted as “fortification” for the Japanese economy, but its effect would be doubtful:

Firms have been making claims that they intend to … restructure their businesses. The number of restructuring announcements has surged… . But there is a legitimate concern … whether [restructuring will be] carried out … or whether [share buybacks] are being trotted out for the hoped‐for favorable effect on the share price… . Many restructuring announcements lack any target for cost cutting by which they can be judged.⁴

As a matter of fact, it's doubtful that this attempt at restructuring was really helpful to the Japanese economy. It has not grown its way out of its economic and financial imbalances. In fact, the various financial stimulus packages have been ineffective. Between 1992 and 1999, the Japanese government launched 10 such packages, but during the same period its debt grew by $1.13 trillion. The Japanese government policy was premised on the idea that it is possible to spend a country's way out of economic trouble. The numbers prove this theory wrong.

The ratio of government debt to GDP soared from about 60% in 1992 to 105% of GDP in 1999. That is troubling for any economy involved in trade, such as Japan, China, or the United States. The Japanese history lesson reveals that you can't spend your way out of trouble.⁵

Even so, the theme—the official story, if you will—was that Japan's restructuring has fixed the problem. Many of those once‐popular international mutual funds bought the story and went through a transitional period, moving investment dollars out of Europe and into Japan. We saw once again—as we have seen so many times in our own domestic stock market—an institutional herd mentality. If everyone is investing in Japan, we can't ignore it. We have to be there too.

Selling business restructuring as the fix was effective, at least in terms of raising foreign investment levels. But restructuring is not the same as investment. Moving debt around and changing its face doesn't fix the problem of deficit spending—a fact the US Fed has not yet learned. We may read all about Japan's promising plans for improving its economy, but the numbers don't support the claimed successes.

The chronic budget deficits coupled with very low interest rates held back any prospects of a real recovery. In fact, conditions in Japan during the 1990s were very similar to conditions in the United States today—and it's a mistake for US policy makers to believe that we are immune from the same outcome that Japan has experienced.

To this day, the Japanese economy is weak and remains chronically so. The country has seen strong GDP growth, low inflation, and climbing exports. The economic fundamental indicators are positive as well: a very high savings rate, strong balance of payments, and virtually no inflation. Even so, Japan's economy refuses to jump‐start. Why?⁶

To understand what is going on in Japan—and by association, what may take place in the United States—it's helpful to compare Japan in the 1990s to the United States before the crash of 1929.

The question is debated even today: Was the collapse of the market and of the 1929 economy inevitable? We know of the economic, business, and market excesses of the 1920s, so the unregulated environment was one possible culprit. But was there more? Was the market crash (and the Great Depression that followed) the result of US monetary policies before, during, or after the crash? Could looser money policies have avoided the economic problems?

Probably not.

From a monetary perspective, Japan is the greatest paradox in the world—strong indicators, but a chronically weak economy. Compare this to the United States, where our ever‐falling economic indicators have not affected our dollar's value; in fact, we're dealing with a very strong dollar (more on that later).

Japan has the lowest interest rates of any industrialized nation, nearly zero; yet credit growth is the slowest in the world. Is this sluggish expansion a cause or effect of the economy's doldrums?

These doldrums remain troubling. In the face of chronic budget deficits, Japan has not been able to fix its economic pace. The economic policies and business practices are sound, investment and savings rates are high, and exports are surplus. Perhaps Japan's deficits simply got too large and all of the other economic positive signs simply haven't been enough to fix the budget problem. So what does this mean for the United States, where consumer credit increases every year at ever‐faster rates, trade deficits are higher than ever, and federal budget deficits are climbing too?

DENIAL IS NOT JUST A RIVER IN EGYPT

Unfortunately for the US consumer, our Fed guy, Ben Bernanke, was not confronting the root of the problem with any proposed solutions during his tenure.

He did keep rates low.

That flat line on the right existed for nearly a decade before the pandemic hit. In deflation, Ben Bernanke saw a foe he didn't like and chose inflation instead. The result threw us back to inflation rates that Paul Volcker had to deal with in the early Reagan presidency. Here we are, “the greenback boogie.” Since 1971, each Fed chairman has had to deal with the previous Fed's theory and strategy. The only real loser in the game is those who have to manage their own money or businesses in a world where they don't get a say or even understand what lies behind the value of their money.

Back when this cycle began in 2010, real productivity had been flat and rising employment numbers represented a shift out of manufacturing and into low‐paying health care and retail jobs. That trend only accelerated during the pandemic. No one can know for certain how much more of this kind of productivity the American economy could afford. After all, it worked until it broke.

Like our own Jerome Powell today, Bernanke saw controlling inflation as the centerpiece of economic balance. But he contradicted his claims by pursuing policies that hurt the dollar. That's inflation. But even if we were to have bought into the Fed's “two‐part” economic theory, it did not pan out.

Bernanke's theory of low interest rates had a cause‐and‐effect ideal that went something like this: Low inflation is an opportunity to print new money and to create ever‐growing levels of consumer debt. Consumer debt leads to more consumer spending, and more spending is the same thing as prosperity.

Et voilà, you can now spend your way to wealth.

Well, a shot of whiskey is enjoyable and makes us feel good. But if we drink enough shots in one evening, it can kill us. Or call them quantitative easing (QE) martinis. How much credit growth could we really afford? A conservative economic theory would limit credit growth so that it would never exceed savings. Putting this another way, we should never allow our liabilities to exceed our assets.

The economist Stephanie Kelton became the poster child for a theory known as modern monetary theory (MMT). My mentor, Bill Bonner, used to say on occasion “markets make opinions.” Stephanie's idea, and others who agree, is that the United States can print all the money it wants, as long as it has the authority to collect it back in tax receipts. That idea can only exist by virtue of the dollar being the reserve currency of the world. And the fact that not a lot a people question policy makers. What MMT effectively does is give politicians and lobbyists a blank check on the nation's bounty. We'll see that play out in spectacular fashion during the COVID‐19 pandemic when the Treasury starts sending checks directly to citizens. Why, we always want to ask, are we okay with these decisions? Maybe with a bout of serious inflation, when people are struggling with mortgages, tuition, car loans, gas, and everyday food, we won't be. Maybe the policy makers will start sending free money to people again. At what point does the money become worth less or completely worthless?

In the days prior to Greenspan‐Bernanke Fed policy, then Yellen by extension, it was almost universally recognized that it was a function of credit to transfer financial resources from savers to borrowers; an orderly, predictable, and controlled aspect of “leveraging” assets. But the idea that credit could run unchecked above and beyond those assets was thought to be irresponsible—and it is. With rates at zero, banks don't pay savers anything. Anyone who grew up in this era has no idea what savings can or should do. Ideally, your money should be used as a productive asset that pays you back over time. There aren't a lot of people who think that way anymore. Some entrepreneurs, maybe.

The idea of runaway credit is a corollary to another piece of perceived fiscal wisdom: control over interest rates can speed up or slow down the economy. Why were interest rates kept artificially low? There is a good reason. It was not based on purchasing coming from savings, nor from limitations on circulation of currency. It was an attempt to mitigate deflation of the economy during a downturn that was never allowed to happen.

Clearly, the Fed was unwilling to recognize that there is only one real source of growth: a healthy and competitive environment involving the exchange of goods and services coupled with control over deficit spending at the government level. The flaw we identified in the Japanese economy in the 1990s was a failure to eliminate deficit spending that ultimately held down the Japanese economy even when other economic attributes were strong.

TOO MUCH INFORMATION (TMI)

If you listen to explanations from the Fed around that time, you will conclude that the source of strength in the US economy comes from three sources: First, we lead the world in information technology (IT, or what we call “Big Tech” nowadays); second, our free market entrepreneurial culture and the profit motive are unparalleled; third, the US labor market has great flexibility. These might all be true.

The trouble is, the effects of these three features, or what we may collectively call our can‐do attitude and Yankee know‐how, are exaggerated by the Fed. And the US arrogance shows through. When we look at actual performance by sector, we do not find a profit miracle, nor do we find expanding, competitive manufacturing. We see production jobs going overseas, the expansion of low‐paying jobs, and the overall replacement of productive GDP growth with a different kind of GDP, that produced from consumer spending rather than from profitability. That's only a problem when interest rates rise. Companies that count on consumer spending for revenue start feeling the pinch.

The United States has been giving away the capability to manufacture goods based on innovative technology for years and failing to compete in markets that are aggressively (and successfully) going after market share. That tide may be changing. But it's difficult for individual investors to understand and act proactively. Currently, macro‐political trends are in place too. The Russia‐Ukraine war is causing all the energy markets in the world to get flummoxed. Chip makers in Taiwan are getting a rash, too, from the People's Party in mainland China. Both markets—energy and microchips—fuel and function the world. No hyperbole needed.

We can look at a promising short‐term trend in Big Tech and call it an indicator of sorts. In fact it was only a bubble. And another bubble. Then another one. We talk more extensively about bubbles in our next revised book, Financial Reckoning Day. What we can say here of bubbles is that they are often propelled by a new technology. They capture the imagination of the public and cause fits and seizures in the marketplace. Some people make money. Most don't.

American businesses have not kept their lead, and like other manufacturing sectors of our economy, they're losing to China and India—and other places around the world—almost as quickly as credit card debt is increasing. The onetime encouragement to “buy American” isn't possible any longer because so many of the products we purchase (like shoes, electronics, computers, and denim jeans, for example) are being manufactured in China, India, and other Asian and Central American countries. So no one can “buy American” any longer. Today, your only choice is to “spend American.” Or fly American.

FICTITIOUS CAPITALISM

This drastic change in how the US economy works may be accurately described as the replacement of real capitalism with show‐business fictitious capitalism. We already know from looking at the numbers that the applauded twentieth century “Information Age” didn't really create an American economic miracle. The overall effect was not a big splash, and it represented too small a share of GDP to count as a major trend. It was more like a short‐term indicator that was contradicted by the larger economic trend—leading us toward spending. Between 2002 and 2007, for example, spending on information technology and hardware hovered around 2% of GDP, but no more: It is now less than 1% of GDP.

The most significant indicator in our economy was not productivity, but expansion of credit. Under Greenspan's term, US credit and debt added up to $8.505 trillion. That means it took $4.80 of new debt to create one dollar of GDP. And then, with the burden of US credit and debt up to $9.149 trillion under his successor, Ben Bernanke, it took more than $5 to create one dollar of GDP. Every additional dollar in credit adds a dollar to someone's debt—yours, mine, the government's, or, realistically, the debt of future generations of American taxpayers and consumers.

How did all this so‐called “disposable income” develop? The housing bubble. Homeowners were able to take out their equity and increase their debt at ever‐lower interest rates. This lopsided switch away from production and toward debt is at the heart of the demise of the dollar. Americans no longer have gobs of equity to spend. But we're used to spending, so then what happens?

In the less than two years with Bernanke, our credit expanded from $3 trillion to $3.3 trillion. But a funny thing happened in November 2007: Credit dropped by nearly 9%, back down to $3 trillion. Maybe the rest of the world is sick and tired of our addiction to cheap credit.

Globally, central banks dumped about $163 billion in US Treasuries. Not since Russia's 1998 default have US Treasuries been sold at such a pace. And these numbers are from September 2007—before the Fed cut the overnight rate not once, but five times by January 30, 2008.

NET WORTHLESS

“History shows,” wrote Jim Rogers in the foreword to our first book, Financial Reckoning Day (John Wiley & Sons, 2003), “that people who save and invest grow and prosper, and the others deteriorate and collapse.” Business investment creates economic recoveries. Without that investment, we have no right to expect a recovery. Except we've seen over the past decade and a half that free money has been available and the corporate community and Wall Street have interpreted the influx of capital as success.

The Fed and other monetary gurus claim that the low level of business investment is to be blamed on excess inventories and low demand overseas, or some such blame on the supply chain issues caused by the pandemic lockdowns. Realistically, corporate America has gone through a trend in the past two decades in which dwindling profits have led to increased levels of mergers and acquisitions, but little change in the lagging profit picture. The belief, or the hope, that merging and internal cost cutting would solve profitability problems has been dashed. It hasn't worked. The pandemic only muddied the picture more.

Corporate America is coming to the point of having to face its own set of realities. Merging does not improve profits if the market itself is weak. Buy backs don't necessarily work either. This is the point of the term “fictitious capitalism.” You can buy and sell paper all day, but if you're not producing anything, you're not producing anything. No one seems to really care about that. Lacking real investment in plant and equipment, long‐term growth is less likely today than before the merger mania, buy backs, or the growing trade deficit. We have been writing about this for years. Coupled with an expanding obligation for pension liabilities among large corporations, the problem of deceptive reporting isn't limited to the government. Corporations do the same thing. We're not complaining; the situation is just real.

Consider the following: Many corporations notoriously inflate their earnings report. Quite legitimately, and with the blessings of the accounting industry, companies exclude many big expense items from their operating statements and may include revenues that should be left out. Exclusions like employee stock option expenses can be huge. At the same time, including estimated earnings from future investments of pension plan assets is only an estimate and cannot be called reliable. Standard & Poor's (the revered S&P) has devised a method for making adjustments to arrive at a company's core earnings. Those are the earnings from the primary business of the company, and anything reported should be recurring.

The adjustments aren't small. For example only, and as a historical example, when we were covering the story in 2002, E.I. du Pont de Nemours (DuPont) reported earnings of more than $5 billion based on an audited statement and in compliance with all of the rules. But when adjustments were made to arrive at core earnings, the $5 billion profit was reduced to a $347 million loss; core earnings adjustments that year of nearly $5.5 billion had to be made. That is a big change. Other big negative adjustments had to be made that year for IBM ($5.7 billion reported profits versus $287 million in core earnings) and General Motors ($1.8 billion reported profits versus a $2.4 billion core loss). That year, the two largest core earnings adjustments were made by Citicorp ($13.7 billion in adjustments) and General Electric ($11.2 billion in adjustments).⁷

Here's where the question of realistic net worth comes into play: In accounting, any adjustment made in earnings has to have an offset somewhere. So when Citicorp over‐reports its earnings by $13.7 billion, that means it has also understated its liabilities by the same amount—a fact that should be very troubling to stockholders. One of the largest of the core earnings adjustments is unfunded pension plan liabilities. United Airlines, for example, announced in 2004 that it was going to stop funding pension contributions. After filing Chapter 11 bankruptcy in 2002, the United Airlines unfunded liability is an estimated $6.4 billion.⁸

When we hear that a corporation has not recorded employee stock option expenses of $1 billion, that also means the company's net worth is exaggerated by the same amount—and the book value of the company is exaggerated. So all of the numbers investors depend on are simply wrong. The escalating pension woes have been building up for years. It's a similar challenge the government faces when it keeps adding deficits to the mounting debt; they're effectively kicking the can down the road.

A booming stock market adds to corporate profits. But once the market retreated, those profits disappear. In this situation, stock prices fall while ongoing pension liabilities rise. As employees retire, obligatory payments have to be made out of operating profits and—while few corporate types want to talk about this—those very pension obligations and depressed returns on invested assets may be a leading factor in a high number of corporate bankruptcies. Add on a challenging retail sales environment during rising interest rates or wholesale price issues caused by supply chain disruptions—both a result of pandemic lockdowns—filing for bankruptcy often becomes the only way out when the corporations cannot afford to meet their pension obligations.

A PENNY BORROWED IS A PENNY EARNED

The US economy is based on the belief that in practice, borrowing is a type of wealth generation. The trouble is … it's not. Economic policy and growth are going to reflect how consumers spend what they have, individually and as a nation. The critical question to ask is: How much of our overall current production is devoted to consumption and how much to capital investment? In defining economic health and strength, generations of economists have focused on two economic indicators: savings and investment. It used to be a truism among economists of all schools of thought that the growth of an economy's tangible capital stock was the key determinant of increased productivity and subsequently of good, high‐paying jobs. And it also used to be a truism that tangible capital investment in factories, production equipment, and commercial and residential building represents the one and only form of genuine wealth creation.

Not so anymore. The United States has abandoned these beliefs, even though they are obvious and, well, true. The laws of economics haven't been revoked, but the wonks in Washington behave as if they have.

To Americans, the suggestion that the dollar is losing value is unthinkable—unpatriotic even. The problem is found not only in the lack of understanding about the nature of wealth and the investments used to create and sustain it; in our money culture, policy makers and economists make no distinction between wealth created through saving and investment in the real economy versus “wealth” created in the markets through asset bubbles brought about by credit policies. Even when suggestions about the flaw in this thinking arise, the distraction of consumerism has created a type of attention deficit disorder. We're trying to tell people to lose weight while meeting with them for lunch at the soda fountain.

We not only spend at a high level; we also prefer accumulating wealth on the same fast track. Traditionally, economists recognized that it took time to build an estate. People and countries could build wealth slowly. But today

the new approach requires that a state find ways to increase the market value of its productive assets. [In such a strategy] an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.⁹

This is a perfect description of the economic thinking that rules in the United States today, not only in corporations and the financial markets, but even among policy makers, elevating wealth creation—that is, bubble creation—to the ultimate in economic wisdom. The asset bubbles in recent years—in stocks, bonds, and housing—were primary elements of economic growth. Considering, though, the lop‐sided effect on consumer spending and borrowing, is this a reasonable and sustainable policy? Should it be encouraged? It works in the short run from the demand side, but where does it lead? Just as mercantilism in eighteenth‐century Europe ultimately fell under its own weight, the modern economic trend toward house‐of‐cards wealth creation may become a twenty‐first‐century version of past lessons not fully learned or appreciated.

America's grinding credit machine makes all the difference in economic growth and wealth creation between our country and the rest of the world. Lately, China is overtaking the United States in so many ways, but, ironically, based on a more tangible economic viewpoint. It may prove to be the great irony of the twenty‐first century that the Chinese—once viewed as the most puristic of the Communist regimes, rabidly anticapitalist at the height of their fervor—may turn out to be the most successful model of worldwide capitalism. (On a recent trip to China, I had a good chuckle while touring the Forbidden Palace in Beijing. The tour was sponsored by Nestlé, and the plaques that explained where the concubines slept had American Express logos in the lower‐right corners.)

China's growth is no laughing matter. It is investment‐driven, with a capital investment rate close to 43% of GDP in 2006. GDP growth increased to 10.7% that year, and then rose by 11.1% in the first quarter of 2007. But the country's investment rate isn't the only record—in 2005, personal saving reached 52% of GDP, according to an envious US Treasury. By US standards, that is very, very high.

SERIAL BUBBLE BLOWERS

According to the consensus view, the US economy is breaking out of its anemic growth pattern. A few signs of accelerating economic improvement are gleefully cited to support this forecast: the 3.9% spurt of “real GDP growth” in the third quarter of 2007; higher investment technology spending, up 9% in 2006; surging profits; and surging early indicators, among them, in particular, indicators such as the Institute for Supply Management (ISM) survey for manufacturing.¹⁰

We hear that various indicators are at their strongest in 20 years. But do we simply accept the popular wisdom? No, because many of the reported indicators are nonrecurring. If they aren't really signs of a sustained pattern, the results are dubious at best. For example, the impressive third quarter 2003 growth spurt was the direct result of a one‐time splurge in federal tax rebates and a flurry of mortgage refinancing caused by low interest rates. In the third quarter of 2007, we had similarly impressive results, GDP growth of 3.9%. But you've got to read between the lines: Growth was fueled by personal consumption, which doubled to over 3%, and export growth in goods, the largest bump up since the fourth quarter of 1996. “Housing values fell, foreclosures accelerated, and imports grew” had become a familiar economic refrain in 2007.

As to investment spending, what is really going on? So‐called investment in housing is now distorted by the escalating foreclosures and credit crisis caused by the subprime mortgage mess. What should matter is the change in total nonresidential investment—business factories and equipment, for example—a trend that has been flat for many years. There is no real growth in business investment.

The US economy's so‐called improvement has one main reason: All the economic growth of the “recovery” years since 2001 can be traced to a seemingly endless array of asset and borrowing bubbles. Quoting analyst Stephen Roach, “The Fed, in effect, has become a serial bubble blower”—first the stock market bubble, then the bond bubble, then the housing bubble, and the mortgage refinancing bubble. As a result, consumer spending has been surging well in excess of disposable income for years. But we must understand, this is not real growth.

The idea behind the bubble economy was that sustained and rising consumer spending would eventually stimulate investment spending. This is like suggesting that overeating will eventually lead to serious dieting. As you might expect, rising consumer spending has not had the desired effect. In fact, consumer spending will slow down when consumer borrowing starts to fade. And that's just a matter of time.

The dollar is going to continue falling over the long run. It will fall as long as we continue to outspend our investment and production rates. If foreign investors were to slash their investment levels in the US dollar and Treasury securities, that would cause a hard landing. Our credit would dry up rapidly. This would not just send the dollar crashing. A sudden rupture of private capital would also hammer the US bond and stock markets.

Private foreign investment into US assets has slumped. But we are addicted to foreign investment; this is where much of our consumer credit and debt is financed. So we are vulnerable if our credit economy is supported primarily by huge holdings of dollars on the part of foreign private and institutional investors. If the dollar's fall begins to frighten foreign owners, they will sell from this immense stock of dollar assets.

How big are these foreign holdings? We rarely hear about this problem on the financial news channels, so what's the big deal? Well, let's run the numbers. By the end of 2006, foreign holdings of US dollars had a market value of $16.295 trillion. This includes corporate and government bonds held directly and by foreign governments. It's a big number. The point here is that these huge foreign dollar holdings are a looming threat to the dollar, perhaps the biggest threat of all. If these foreign investors lose confidence in the US economy and the dollar, they will sell and switch the dollar proceeds into a stronger currency.

That $16.295 trillion is a lot of debt. A lot. How is it going to get repaid? And by whom? The figure in 2022 is much smaller as governments unload their US debt to whomever will buy it. But the process is the same: the Treasury must “roll” the debt over every time a US treasuries term comes due. They do so at auction. If they don't raise enough money at auction to keep the government's lights on, they have to raise interest rates to attract buyers. Financing the government through debt is an ongoing task.

The hope in Washington is that the declining value of the dollar will reduce the US trade deficit. Past experience shows that this is unlikely. The chronic US trade deficit is caused by exceptionally high levels of consumption, undersaving, and underinvestment. Improving the trade deficit would require a major correction of these imbalances and cannot be fixed simply by watching the dollar's value continue to decline.

An economic downturn would come as a rude awakening to most Americans, a cataclysmic shock. It would directly affect the other two asset bubbles, housing and stocks, in addition to the dollar value bubble itself. Imagine the uncertainty and turmoil this will create in the financial markets. Rock solid? We think not.

The US economy is much weaker and much more vulnerable than official statistics make it seem. The Fed cushioned the impact of the bursting stock market bubble by manipulating new asset bubbles. Ultralow short‐term interest rates and the promise to keep them there for a long time have fueled a housing and mortgage borrowing boom, which also extended the consumer borrowing‐and‐spending binge. “Happy days are here again.” Indeed.

While European policy makers and economists worry endlessly about budget deficits and slow growth, their counterparts on this side of the pond continue to boast how wonderfully efficient and flexible the US economy is. Negative national savings, a growing trade deficit, never‐ending budget deficits, the subprime mortgage mess, and the credit crisis—all these and any other imbalances and dislocations are nonproblems. The official word is that the exploding credit and ballooning debt in the United States are not signs of excess, but a testament to the financial system's extraordinary efficiency.

Small prediction: A shock awaits the “nonproblem” crowd when we finally confront our economic realities. The US inflation rate is understated by at least 1.5 percentage points per year through the economic/statistical magic of grossly overstating real GDP and productivity growth. Bond king Bill Gross discovered this fact of life and commented on it in 2004.¹¹ An active proponent of inflation manipulation was former Fed chairman Alan Greenspan, apparently because—and here again we find a recurring theme—“a low inflation rate fosters low interest rates.”

The huge credit and debt bubbles in the United States have created a dislocated and imbalanced economy, so that a sustained recovery is going to be impossible without many painful changes. We suffer from a false sense of optimism, and when the implicit promise of that optimism is not met, experts will no longer be able to argue away the dollar's weakness.

Under a system of truly free currency markets, the dollar would have collapsed long ago. But the massive dollar purchases by the Asian central banks have prevented this. China's persistence in pegging its currency to the dollar traps other Asian countries into doing the same. This practice creates a credit bubble that, in turn, distorts economic growth. In contrast, the European Central Bank is firmly opposed to currency intervention. In its view, artificial tinkering in the currency markets tends to fuel credit excess. It could be right, using the US economy as an example.

Those who like currency intervention policy—artificially controlling the value of the dollar, in essence—ignore the beneficial effects of a rising currency. The benefit is twofold. First, it reduces the trade deficit and makes us more competitive with our trade partners. Second, it also adds a healthy premium to domestic purchasing power. It's important, though, to make a distinction here. Under our present system, our purchasing power is based exclusively on borrowed money. Under a system of competitive trade and a higher dollar, our purchasing power would be based on real economic forces, and not on good credit alone.

“The lengthy pegging of Asian currencies to the US dollar will eventually lead to an economic crisis in both the United States and Asia,” we wrote in 2008, “because the central banks accommodate each other's credit and spending excesses. So we have to change the system so that competitive forces can work and replace currency intervention as international policy.” The crisis has arrived in the form of inflation, hastened by the massive economic dislocations wrought by the pandemic lockdowns.

A weakened US economy shouldn't surprise anyone. It is a direct result of the questionable nature of the so‐called economic recovery. The US economy is plagued by an array of growth‐inhibiting imbalances: the trade deficit, the federal budget deficit, household indebtedness, a negative personal saving rate, and, of course, record‐high consumer spending. Any other country faced with these imbalances would have collapsed long ago. But the US dollar was spared this fate when Asian central banks began accumulating the dollars needed to avoid rises in their currencies.

Both the United States and China practice credit excess, but with a crucial difference: In the United States, the credit excesses went into higher asset prices and, more notably, into personal consumption. In Asia, credit excesses went into capital investment and production. The result is an odd disparity between the two economies: Americans borrow and consume, and the Asians produce.

This symbiosis plays out in the trade gap. Ironically, this ever‐growing problem is ignored on the national level and plays virtually no role in US economic policy or analysis. Since 1999, the trade deficit as a share of GDP has nearly tripled, from 2.1% to 5.75%. In comparison, during the 1980s, policy makers and economists worried about the harm that trade deficits were causing in US manufacturing. In a September 1985 move orchestrated by James Baker, the US Treasury secretary, the finance ministers of the G‐5 nations¹²⁷ agreed to drive the dollar sharply down in concerted action.

By the mid‐1990s US policy makers had decided that trade deficits were beneficial for the US economy and its financial markets. Cheap imports were playing an important role in preventing inflation and, as a result, higher interest rates. Had the decision been to allow interest rates to rise, it would have had the effect of slowing down consumer spending. Instead, spending is out of control and the trade gap is the consequence. Ultimately, the victim in all of this is going to be the US dollar.

The economic cycle involving inflation, higher interest rates, monetary tightening, recession, and recovery has a predictable postwar pattern in the United States and in the rest of the world. But we've taken a departure from this for the first time. A critic might argue that the United States enjoyed a prolonged period of strong economic growth with low inflation and low interest rates. What could be bad about that?

Well, what's bad about that is the fact that we are not experiencing strong economic growth. US net business investment has fallen to all‐time postwar lows, little more than 2% of GDP in recent years. At the same time, net financial investment is running at about 7.8% of GDP. In other words, the counterpart to foreign investment in the US economy has been higher private and public consumption, accompanied by lower saving and investment.

Official opinion in America says that the huge US trade gap is mainly the fault of foreigners, for two reasons. One is the eagerness of foreign investors to acquire US assets with higher returns than in the rest of the world; the other is supposed to be weaker economic growth in the rest of the world. In this view, the trade gap directly results from foreign investment because it provides the dollars that the foreign investors need.

A RISING TIDE

Corporate management may have been reined in, to some extent, by changes in federal law (don't tell my libertarian friends I said that). The Sarbanes‐Oxley Act of 2002 changed the culture in some important ways. But until the accounting industry goes through some changes of its own, the corporate problem won't disappear. Nothing has really changed since then. It appears so far that the disaster of Arthur Andersen converted to the now acceptable Accenture on August 31, 2002, it has been viewed in the accounting industry as a public relations problem rather than what it really is: a deep, cultural failure within the business to protect the stockholders. It's a PR problem!

The parallels between corporate failures and government policy are alarming, if only because the Fed is not accountable to the Securities and Exchange Commission (SEC) or to stockholders in the same way that corporate chief executive officers and chief financial officers are—and civil fines or imprisonment are out of the question. So as far as accountability is concerned, it looks like the borrowing and spending will continue—with yet more wild abandon.

The half‐hearted debate over the twin deficits in trade and budget involve some big numbers, but the Fed is not concerned. In his penchant for understatement, Ben Bernanke was a lot like his old boss, Alan Greenspan. Read what he told the Charlotte, North Carolina, Chamber of Commerce in late November 2007, explaining why the Fed's monetary policy committee, the Federal Open Market Committee (FOMC), decided to cut the short‐term interest rate in October:

Growth appeared likely to slow significantly in the fourth quarter from its rapid third‐quarter rate and to remain sluggish in early 2008.¹³

Still, like Greenspan, Bernanke was upbeat, believing that growth would thereafter gradually return to a pace approaching its long‐run trend as the drag from housing subsided and financial conditions improved.¹⁴ Although he admits that construction and home sales continued to be “weak,” and that the unemployment rate had “drifted up” to 4.7%, he pointed to “solid” gains in the labor market in October. What gains? The 130,000 new jobs added to private‐sector payrolls were mostly service and temp jobs. A rate of 4.7% is too close for comfort to 5%, the official mark when an economy is in recession. Then he turned a bit more realistic, admitting the combination of higher gas prices, the weak housing market, tighter credit conditions, and “declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.”¹⁵ Sound familiar? Headwinds! That's a nice way of saying we're headed for stormy weather.

The fresh wave of investor concern has contributed in recent weeks to a decline in equity values, a widening of risk spreads for many credit products (not only those related to housing), and increased short‐term funding pressures. These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit‐sensitive sectors.¹⁶

Analyze this for reality, taken from the burning pages of the Daily Reckoning:

The credit bubble wouldn't have gotten so large were it not for the Fed. The Fed guarantees the solvency of the credit markets like Fannie Mae guarantees the solvency of the mortgage‐backed security market… . Without Fannie Mae, mortgage‐lending practices wouldn't have gotten crazy… . Without the Fed, the issuance of collateralized debt obligations (a type of asset‐backed security that is as dubious as it sounds, funding portfolio investments with credit‐risky, fixed‐income assets) wouldn't have mushroomed….

“A rising tide lifts all fortunes,” promises the saying—but not with this extreme form addiction to risky credit. Under terms of the agreement hammered out with lenders, only a fraction of an estimated 2.3 million subprime borrowers—an estimated 145,000–240,000 borrowers—will qualify for the freeze.

As borrowing increased as a percentage of GDP—up to more than 70% during the 1980s—savings rates fell and continued falling. By the end of the 1990s, borrowing had reached 90% of GDP, and reached 95% less than a decade later, in 2006. That's where the real damage was done. And in the middle of the very same trend, nonfinancial business profits fell as well. The so‐called US expansion had, in fact, been a nonexpansion. Corporate profits, which fell in the 1980s from 5.1% of GDP down to 3.7%, continued their downward spiral. By definition, a profitless expansion is not really an expansion at all. The bubble economy of the 1980s was the beginning of a worsening effect in real numbers that built throughout the 1990s and beyond.

MR. IRRATIONAL EXUBERANCE

Alan Greenspan, the longtime chairman of the Federal Reserve, set us on this runaway course. “Mr. Irrational Exuberance”¹⁷ himself set the standard for twenty‐first century American monetary policy with the mantra: “In debt? No problem. Spend more money—we'll print it for you.”

Greenspan was followed consecutively by Ben Bernanke who had made himself famous on his way up the ladder for giving a speech claiming the Fed had the tools to get money into consumers hands like “piles of cash being thrown out of a helicopter.”

In late October 2006, Bernanke voted with the rest of the FOMC—the Fed's policy‐making arm—to cut interest rates for the third month in a row. He was not, as the financial press called him early in his tenure, the “un‐Greenspan.” Rather, Bernanke was the reincarnation of Mr. Irrational Exuberance.

In his autobiography, The Age of Turbulence, published by Penguin Press in September 2007, Greenspan said he thought it wrong to increase scrutiny of subprime mortgages. Call me cynical, but increased scrutiny might have helped; 52% of these risky mortgages, made to borrowers with poor credit histories, were originated by companies and organizations with zero federal supervision. “I really didn't get it until very late in 2005 and 2006,” Greenspan told Reuters in an interview, apologizing for the insane housing bubble he helped create, which led to the subprime mortgage mess and the credit crisis.

In the third and fourth quarters of 2007, Citigroup ($11.38 billion), Merrill Lynch ($8.48 billion), Morgan Stanley ($4.68 billion), and Barclays ($2.7 billion) led the pack in write‐downs—government‐approved losses on these loans.

By October 2008, the US Commerce Department reported that housing permits fell to a 14‐year low, the lowest seasonally adjusted level since July 1993. In distressed markets such as San Francisco, home builders shaved off as much as $150,000 from prices. And foreclosures nearly doubled (94%) from October 2006 to October 2007. “We have not seen a nationwide decline in housing like this since the Great Depression,” said Wells Fargo chief executive John Stumpf, who correctly foresaw the crisis swallowing the market a year later. “I don't think we're in the ninth inning of unwinding this,” he said in 2007, “If we are, it's going to be an extra‐inning game.”

Stumpf was right, unfortunately. As were the characters portrayed in the financial tome turned box office hit, The Big Short. By the time the year wound down, sales of new homes had plummeted 26.4%, according to the US Department of Commerce—the worst slump since 1980. And housing starts fell almost as hard, by 24.8%. BusinessWeek, before it was bought out by Bloomberg, summed up the state of the nation in 2007: “The Economy on the Edge.”¹⁸

It is worth noting that Bernanke won the Nobel Prize in Economics in 2022 for his work following the global financial crisis of 2008–2009. Whether you agree with his methods or not, one thing is for sure: He made decisions during those years to change the course of monetary policy for decades to come. We are still dealing with the “better capitalized” banks he described at the podium in Norway. “They should be better prepared to meet whatever challenges they face,” he continued. Keyword should. Books will be (and have been) written about Bernanke, but that's not our objective here. We're all about the money.