There are those who fret that current troubles in real estate will lead to an economic slowdown, maybe a recession. Then there's Peter Schiff. "Our standard of living is going to decline," the Connecticut stockbroker confidently declares. "There's no way around it, and it has just started."
Schiff owns Euro Pacific Capital, a smallish firm that specializes in moving clients' money into nondollar assets like foreign stocks and bonds. Over the past couple of years, he has become a regular, hectoring presence on cable-TV business shows--on CNBC they call him "Dr. Doom." Now he has a book out, ominously titled Crash Proof: How to Profit from the Coming Economic Collapse.
It isn't the only such cheery tome on shelves these days. In Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, trader Michael Panzner warns of an economic meltdown that will lead to Zimbabwe-style hyperinflation and possible martial law. In Empire of Debt: The Rise of an Epic Financial Crisis, which briefly hit business best-seller lists in 2005 and will feature next year in a documentary film by the makers of acclaimed crossword-puzzle geekfest Wordplay, financial-newsletter authors William Bonner and Addison Wiggin draw parallels between the early 21st century U.S. and the decline of Rome and imperial Spain. There are more such jeremiads on sale. I just don't want to use up all my space listing them.
We have heard such pronouncements of impending doom before, of course. Howard Ruff's How to Prosper During the Coming Bad Years was a top seller in 1979. Ravi Batra's The Great Depression of 1990 hit No. 1 in 1987. Ruff's book did in fact ring in several very bad years, and there was a recession in 1990. But doom was averted, the economy came roaring back both times, and the lesson learned was that betting against the continued prosperity of the U.S. was a losing strategy.
When I bring this record up with Panzner, he has a ready retort. "History didn't begin in the postwar period," he says. "History didn't begin 20 years ago." Living memory includes the Great Depression, begun in 1929 and stopped only by global war; stocks didn't fully recover until 1954. The scary scenarios painted by Panzner and his ilk are not outside the realm of historical experience. What's more, they're all grounded in the incontrovertible truth that much of our economic growth of the past 25 years--and almost all the growth of the past five--has been funded by debt.
As of the end of 2005, the U.S. owed $2.7 trillion more to the rest of the world than the rest of the world owed to the U.S. (the 2006 numbers won't be out until summer; they'll be even worse). That's a record, and a dramatic increase since 1999, when the number was $766 billion. Consumer debt has exploded as well: in 2006, U.S. households owed $12.8 trillion in mortgage and consumer loans--135% of disposable income. At first glance, the government picture actually looks comparatively good--federal debt, expressed as a share of the economy, is down from a peak of 49.4% in 1993 to 37% today--but that's only if you don't count future commitments to Social Security and Medicare recipients worth tens of trillions of dollars.
Debt isn't necessarily a bad thing. But it does eventually have to be paid back or defaulted on. If the U.S. economy becomes more productive and consumers' incomes rise--as happened, to some extent, in the late 1990s--paying it back might not be a problem. But let's say wages stagnate--one possible consequence of globalization. The alternatives then are debt payments that will slash our standard of living or defaults that could bring a global financial crisis.
So far, so uncontroversial. Economists, business executives and government officials make worried pronouncements about this very predicament from time to time. But they usually stop short of apocalypse. "There are a lot of people who get the analysis of the situation correct, but then they say the U.S. economy is very resilient and if we just fix a few structural flaws we'll be fine," explains Empire of Debt co-author Wiggin. "My view is that generally it takes a crisis to get people to act."
If you agree with Wiggin, then former Federal Reserve Chairman Alan Greenspan's legendary ability to pilot us past market jitters and avert major economic dislocations is something not to be praised but to be condemned. Among the doom crowd, Greenspan's decision to slash interest rates as the stock market plummeted in 2001, which fueled the last leg of the real estate boom, is seen as his gravest error. Despite his raising rates since then, Greenspan's successor Ben Bernanke is if anything even more reviled. His sin was committed in 2002 when, as a member of the Federal Reserve Board but not yet its chairman, he declared that among the tools the Fed had at its disposal to fend off deflation was one that he termed equivalent to a "helicopter drop of money."
The Bernanke-Greenspan point of view is that averting Great Depression--style financial meltdowns by opening the federal monetary spigot is a good thing. The doom guys (who usually refer to Bernanke as "Helicopter Ben") argue that this is short-sighted. Without occasional, and painful, unravelings of debt and speculation, debt and speculation inevitably get out of hand. It's a stark, almost Puritan way of looking at the world, and it has been out of step with economic reality for the past quarter-century. But that doesn't mean it always will be.