Should we continue to invest in China and India? Where is the US economy headed in 2008? What is the U.S. dollar forecast for 2008? New York Times best selling author and founder of the Markets and Money, Bill Bonner, remarks on the demise of the dollar, its impact on other world economies, and reveals who is in line to overtake the US prime position.
The following transcript was taken from Markets and Money founder Bill Bonner’s appearance on TFN Smart Investing with Krista Das filmed on December 17, 2007. You can also see a video of this interview with Bill Bonner over at Today’s Financial News.
Krista Das: Over the past five years, the value of the U.S. dollar has declined dramatically against currencies like the euro, the British pound and the Canadian dollar. Analysts and commentators have blamed the U.S. twin deficits for the decline, as well as record levels of public and private debt in the United States.
While some like to look at current conversion rates in the context of decennial economic cycles, an increasing number of experts consider this development an indication of the impending end of fiat currency in general and of the demise of the U.S. dollar as a mainstay of global financial transactions in particular.
My guest today is William Bonner, founder of Agora, Inc., author of such financial bestsellers as The Financial Reckoning Day and celebrity contributor to Markets and Money. Welcome to Market Insights, Bill.
Bill Bonner: Thank you.
Krista Das: So tell us, you have been predicting the demise of the dollar for years now. Do you have a U.S. dollar forecast for 2008?
Bill Bonner: Well, it’s hard to know. In fact, I’m not really a currency analyst at all. I’m more of a fundamental analyst. In looking at the dollar from a long-term standpoint, it’s almost sure that the dollar is going to decline, and someday, go where all paper currency goes, which is to money heaven. That is to say it’s going to die.
But the U.S. dollar forecast for 2008 is very, very hard to predict. It depends on what you think is going to happen in the world at large. What I think is that there is going to be a continuation of the credit crunch. I think that we’ve reached the top, and in fact, that we are past the top of the credit expansion that began more than 25 years ago.
So we’re looking at a major, major top and a major, major turning point in which, now, you could expect asset prices to start down. And if that’s true, you’re going to see a lot of people who are going to need dollars. They’re going to need currency to pay their bills. The credit expansion pushed up the level of debt all throughout the system, not just in the U.S. but worldwide.
A lot of those debts, most of those debts, are calibrated in dollars so that when people go to pay off the debts, they have to come up with real money. And so I think what we’re going to see in 2008 is the first stage of a credit decline, and that’s going to mean that people are going to need dollars. They’re going to want dollars, and the price of the dollar is probably not going to go down too much. But again, I’m purely speculating on this.
Krista Das: Well, let’s talk about the dollar versus the euro for a moment. Economists, like the German Peter Bofinger, are critical of U.S. monetary policy, and yet they like to look at the global financial system as more dynamic and more interdependent. How do you think the Europeans will react to an exchange rate of $1.60 or worse to the euro?
Bill Bonner: Well, about three years ago I forecasted that the U.S. dollar would go to about $1.50 to a euro. So far it’s gotten to $1.48, and then it backed off. So it’s hard to know exactly. You can’t tell what’s going to happen between one currency and another. My guess is the euro is going to rise. It’ll probably rise above $1.50 and probably will get to $1.60.
How will the Europeans react? Well, in a very predictable fashion. They’ll try to protect their own sales, which means they’ll start the same sort of loose monetary policy that we’ve seen in the U.S.
Typically, the Europeans have been led by the Germans, and the German central bankers have been very, very conservative. Their mission is a little bit different. They see themselves as the guardians of the value of the euro, and so they’re typically much more conservative, much more careful. But they’re not going to stand by. They’re not going to sit on their hands while the dollar goes down, down, down. It makes their exports much more hard to sell.
So you can expect that they’ll get into line too. And you’ll see worldwide, not too different from what we’ve seen so far. But you’ll see worldwide an effort to devalue all paper currencies.
Krista Das: Okay. Now, recent GDP numbers indicate an upswing in U.S. exports and a slim reduction in imports that could be attributed to the weak U.S. dollar. What do you make of these indicators?
Bill Bonner: Well, I think they are just what you’d expect. The U.S. dollar has gone down, and it’s now easier to sell U.S. products. The trouble is there are fewer U.S. products that are sales worthy. Over the past two decades, as the economists say, we’ve hollowed out our manufacturing base so we have less to sell, in a way. And a lot of what American companies sell is not made in the U.S. It’s made overseas anyway.
So I think this process that you’re seeing is a process that you should expect. That is to say as the U.S. dollar goes down, you’ll see American exports doing better, but it’ll be a long, hard process. We have an $800 billion trade deficit, and that is not going to go away overnight.
Krista Das: What do you think China’s next move is going to be in reference to the dollar’s demise? This emerging market made a controversial move by tying the yuan to the weakening dollar and has profited immensely from it. Will Beijing give up this competitive advantage any time soon by lifting the dollar peg?
Bill Bonner: It’s a funny thing – “competitive advantage.” It’s no competitive and advantage that the Americans enjoy. I mean, the two currencies are connected at the hip.
What will China do? Well, China’s in a very, very tough situation. They they took a big advantage. They gained immensely from America’s willingness to destroy the U.S. dollar. We were willing to buy anything; buy things we didn’t need, and buy it with money we didn’t have.
And now, Chinese have two things going for them which are contradictory. On the one hand, they have a very vibrant, very robust economy, but it’s an economy that depends on exporting to the United States of America. In other words, it depends on American’s ability to buy things, which of course, requires the dollar to be relatively strong against the yuan; those two have to stay together.
But the other thing it has is the biggest pile of dollars in the world. So you look at their operating account, and they do well from a strong dollar and a weak yuan. But they do poorly when they dollar goes down because of their asset base – they have something like $1 trillion sitting around in their central banks. If the dollar goes down 10 percent, they’re out $100 billion.
So they’re really caught, and one way or another, they’re going to have to unload that big stock of U.S. dollars. And when they do, I think we’re going to see some real excitement in the world’s market.
Krista Das: Looking at U.S. foreign debt, back in the 1930s there was a series of competitive dollar devaluations called the Beggar-Thy-Neighbor Policy. Given the demographic prospects, debt levels and stagnating consumer demand in other countries, even China, who will be taking the place of the United States’ economy as the global engine of growth?
Bill Bonner: Well, if you really compare this big burst of growth and this boom that we’ve enjoyed for the last 20 years, it is, in many ways, similar to the boom that the world enjoyed at the beginning of the 20th century. That boom was led by the United States of America. That boom was a boom in which we had new technology, electrical appliances. We had automobiles and railroads and everything.
It was very similar, in many ways, to the boom that we’ve had now – gloablization. In fact, we had a huge growth of globalized trade back in the 20s and the teens of that period. But the similarity is that while the United States was the growth economy of that period. Today, the United States is not the growth economy. The United States is more like England at the time. It was a mature economy that had – well, it looked like it had peaked out. It was also the economy that had the world’s reserve currency, which we have now.
The growth economy, the real go-go economy for the last 20 years, and especially for the last 5 years, has clearly been China. And China is in that position which to lead the world, in a way, but China is the 1929 economy, in my opinion. They have so many problems there. It’s a controlled economy, and it’s an economy controlled by communists.
Now, you have to expect that they’re going to make mistakes, and they are making big mistakes right now. They’re controlling the price of oil. They’re controlling various prices. This never works. And also, they’re controlling credit. The banks in China are controlled by the state. They all have huge loans that are not good.
And when things go down, we’re going to see a big, big mess in China. It’s going to be the 1929 economy, and you’re going to see the markets go down. The Shanghai market is going to collapse. There’s going to be all kinds of problems in China. So from that standpoint, we’re going to see a huge, huge problem developing in China.
India, by a coincidence, is not far away. I was just in India, and India is booming. It’s booming almost like China. It has a 9 percent growth rate, and India does not have those same problems. India has a different kind of problems, but India is a growth story. It has a huge base of domestic consumption that’s coming online.
And I wouldn’t be surprised to see that when the credit crunch plays itself out, when we have this correction worldwide in asset prices, I wouldn’t be surprised if it was India – not China – India that takes the leading role.
Krista Das: Now, I know you usually do not give specific stock recommendations, but what areas do you recommend your readers invest in at this point?
Bill Bonner: You’re right, I don’t give stock recommendations. I’m not a stock analyst. I’m more of a global observer. And my observation is that in the very, very long run, India looks like a very good place to have money. In the short run, Japan looks like a good place to have money. Japan is coming off of what is a 17-year period of a slump. It’s been in a terrible mess, and the Japanese currency has been lately going up. So I think there’s going to be money made in Japan.
But if I’m right about what’s going on, we’re heading into this period that’s going to be very, very difficult for everybody. It is essentially the downside of a growth period, and in the downside, investors, if they’re smart, don’t really worry about making money. They don’t worry about where to invest. What they should be worried about is how not to lose money because in this period, the investor that comes out best is the investor who loses least.
And who will lose least? Well, it’s impossible to know. But I’ve been urging my readers to buy gold because gold is the anecdote. It’s the insurance against this sort of thing. We’re seeing these tremendous problems developing from subprime debt and from the derivatives that are behind them.
And when China cracks, you’re going to see many, many more problems developing all over the world. I can’t tell you what’s going to happen exactly. But I know for myself and for my readers, I hope that we all have a little bit of gold in our pockets and our bank accounts and so on because that’s the one thing that you can count on. It may go up; it may go down, but it won’t go away.
To see the video, “U.S. Dollar Forecast for 2008” simply scroll to the link the top of this post.
Markets and Money