American Consumers Are Losing Their Crown

With the U.S. Dollar Index breaking decisively below its long-term support level, the sun is finally setting on the golden age of American consumption. As America’s economic dominance fades, so too will the faith in the central thesis that has explained its apparent success and has shaped the majority of recent economic theory.

At issue is the belief that a nation can grow and prosper by borrowing from abroad in order to consume imported goods. To consume at the pace that it has, America exchanges income producing assets, such as companies or property, or interest bearing IOUs, such as Treasury notes or mortgage-backed bonds, for foreign made clothes, toys and electronics. Economists call these transactions “growth”. But rather than discovering a new path to prosperity, America has simply stumbled on a short cut to financial ruin.

For years America has convinced the emerging market countries that their prosperity is a function of our consumption. It is argued that their export oriented economies would falter if not for the insatiable American willingness to consume (a “virtue” that is assumed to be uniquely American). As the dollar falls into the abyss, this myth will be shattered.

As gold surpasses $700 per ounce, oil tops $80 per barrel, and wheat prices exceed $9 per bushel, Americans are already getting a taste of things to come. Prices for these and other commodities are rising as a direct result of the weakness in the dollar. As this weakness intensifies in the months ahead, commodity price increases will accelerate. However, as their own currencies rise, many foreign buyers will actually experience price decreases. The result will be even greater demand for commodities from abroad just as domestic demand subsides.

Further, as the world stops exporting so much of its savings to America, there will be far more capital available to foreign entrepreneurs to invest productively. Think of the crowding out effect of so much of the world’s savings being lent to American consumers. Now imagine the foreign investment boom that would follow as foreigners reclaim access to their own savings.

The world economy will not be brought to its knees simply because Americans stop consuming. Rather it is America’s service sector economy that will collapse once the rest of the world stops propping it up.

*The above article has been excerpted from Peter Shiff’s article, “American Consumers are Losing their Crown.”