Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Is a Nation of Subprime Consumers - Foreign Exporters To Reduce US Exposure

Economics / UK Economy Nov 16, 2007 - 01:48 PM GMT

By: Peter_Schiff

Economics When home prices skyrocketed in the early part of this decade, everyone seemed to forget that the subprime borrowers were high risk by definition. Now that losses are snowballing, lenders are belatedly rethinking the “wisdom” of making such loans in the first place. Similar conclusions will soon be reached by foreign nations that have supplied American consumers with goods that they can not afford. In reality, America is a nation of subprime consumers.


For most of recorded history, nations have paid for their imports with exports. When a nation runs a trade deficit, and instead pays for imports with its own currency, it in effect issues an IOU to the seller to buy an exported good at a future date. After all, the currency of the nation running the deficit is only legal tender in the country of issue, and is therefore useless to other nations unless it can be exchanged for goods in the issuing country or exchanged for other currencies. However, no matter how many times the currency is passed around, at some point the final holder must spend the money on something in the issuing country.

By providing goods in exchange for IOUs, foreign nations are in essence engaged in vendor financing. This concept came to mass attention during the dot.com boom, when many telecommunications equipment companies sold their goods to give cash to poor start-ups in exchange for credit or stock positions (in effect, IOUs). When the dot coms went bust, the equipment providers were forced to restate earnings as losses.

As the world surveys the landscape of the American economy, it will notice an industrial base too hollow to produce sufficient quantities of exportable consumer goods necessary to make good on our outstanding IOU's (U.S. dollars). As those dollars continue to lose value, the losses will suddenly become increasingly apparent. Just as lenders eventually figured out that loaning money to borrowers who could not pay them back was a bad idea, nations will discover that selling products to Americans who can not afford to pay for them is just as foolish.

Think about this. Currently, foreign tour operators are organizing shopping tours, where foreign citizens fly to America for the specific purpose of buying goods cheaper here than they can buy the same goods in their own countries. Of course, most of the goods they are buying, such as clothing, electronics, jewelry, etc., were not made in America in the first place. How absurd is it for Italians to come to New York to buy Italian made shoes cheaper than they can find them in Milan ? Does it make sense for foreign producers to offer products to Americans for less than their own citizens? Of course not. In short order the free market will correct this by raising prices here in America and lowering them in the rest of the world.

Many naively believe that this scenario is unlikely as foreigners will indefinitely prop up the U.S. economy in order to preserve their “best” export market. However, the same argument could have been made regarding mortgage lenders and subprime borrowers. After all, based on the outsize fees generated by subprime lending products, risky borrowers were clearly the mortgage industry's best customers. Given their profitability, why didn't lenders simply extend subprime borrowers even more credit to preserve the market? The obvious answer is that at some point lenders discovered that the market was not worth preserving. They realized that the short-term profits came at the expense of far greater future losses.

The same revelations are about to be made around the world as other nations realize that selling consumer goods to Americans is a losing proposition, as the profits they believe they are earning today will simply evaporate tomorrow. When that happens, just as subprime borrowers are losing access to mortgage credit, America 's subprime consumers will find far fewer bargain basement imported products at their local Wal-Mart.

For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

By Peter Schiff
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in