the visible hand

it is the theory which decides what can be observed – einstein

Peter Schiff on decoupling

Posted by ecoshift on August 26, 2008

In general I don’t particularly like Peter Schiff’s world view and I don’t necessarily support his policy recommendations. But his analysis is relatively clear-eyed. He runs an investment firm that is doing well by investing overseas. No doubt the recent runup in the dollar has caused him some pain and he stands to benefit materially from emphasizing a weaker dollar as the tough-love cure for US financial difficulties.

Nevertheless the fact that the global economy is weakening due to the current US recession lends support to the idea that the global economy is dependent on US markets — that the US effectively dominates global markets. The assumption of US economic dominance needs to be carefully evaluated. Peter’s comments below are worth noting:


The Strong Dollar Illusion

The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.

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