Dr. Kurt Richebächer
Respected International Banker, Economist and Author

Dr. Kurt Richebächer's articles appear regularly in The Wall Street Journal, Barron's, the US edition of The Fleet Street Letter and other respected financial publications. France's Le Figaro magazine did a feature story on him as 'the man who predicted the Asian crisis.' Dr. Richebächer is currently warning readers to be cautious in the face of The Bogus Recovery.

A rude awakening is coming for investors in the U.S. market. The profit carnage will continue. Debts will pile up even higher, driving more U.S. corporations into 'Enron-style' meltdowns. The stock market will fall dramatically. And real estate values will likely fall too. But the worst news of all is that the U.S. dollar will fall in value. How can you protect yourself?  Find out in this excerpt from a recent interview with Dr. Kurt Richebächer.

What is the chance of a strong recovery in the months to come?  'Zero!'

Q: Dr. Richebächer, what makes you so sure that there will be no recovery soon? 

Dr. Kurt Richebächer: The lack of profits! Corporations must cut spending when there are no profits. I've warned my readers about that extensively in my newsletter. That is the reason that I regard the recovery forecasts as bogus.

There is another reason for my strongly opposing view.

The causes and pattern of the present U.S. economic downturn are fundamentally different from past recessions. Still the general focus is exclusively on the symptoms of the conventional inventory recessions of the past. That is a grave mistake.

Most U.S. economists simply track statistics from past recessions and make projections about this one based on those statistics. But this one is really different.

Q: Your view of the U.S. economic situation is at odds with almost everyone else, including most economists.  Why?

Dr. Richebächer:  I look exclusively at the macro economic picture. My analysis focuses on those aggregates in the economy that have started this economic downturn.

The great majority of economists focus excessively on trivial symptoms, surveys and statistics. And worse yet, many of the statistics they use are highly questionable at best. For example, fourth quarter GDP rose because capital investment in computers was figured at about 15 times the actual amount. In other words, they use 'hedonic pricing' to adjust those figures.

They count the quality of the computers -- their speed and memory -- to figure what they are really worth. Everyone knows that the prices of computers are falling, but they fudge the number to make them look better. Never mind that these are dollars that nobody spent and nobody received.

The biggest and most dubious item was the decline in the GDP price index, which allowed falling prices to be counted as a part of GDP. It is as if a meteorologist were to focus exclusively on atmospheric pressure readings without noticing that his barometer is faulty... and oblivious to the great storm forming over his shoulder.

These economists view the current recession as a garden-style inventory de-stocking recession. But they are wrong. It's something quite different.

Q: What makes it so different?

Dr. Richebächer: This recession has been caused primarily by two major problems: deteriorating profits and plunging fixed business investments.

All previous postwar recessions were of the so-called 'garden-variety' pattern, in that they mainly reflected temporary inventory liquidation. Once this had been accomplished and the Fed eased in response to lower inflation rates, the economy promptly took off in a steep trajectory. That is not happening this time.

Q: Why doesn't the U.S. stock market reflect these serious problems?

Dr. Richebächer: So far, policy makers and Wall Street have been very successful in deluding the public into the belief that the U.S. economy has no serious problems. The popular media largely determines investor outlook -- and they mostly report the familiar illusions and delusions that the economists and the analysts of the financial community produce in abundance.
But this is grossly misplaced confidence. While confidence is important, we should distinguish between reasonable and unreasonable confidence.

Policy makers should beware of creating expectations that are certain to be disappointed.

Such confidence games may buy some time, but the longer the borrowing and spending excesses last, the worse the eventual bust will be. This kind of severe disappointment has been the typical harbinger of the great economic and financial crashes in history.

Q: We've already had a major market correction. In fact, you predicted it. Are you saying that there is another major market disaster ahead?

Dr. Richebächer: It is an old adage that history repeats itself because people never change. What I now hear and read about the U.S. economy's imminent recovery reminds me vividly of what happened after the stock market crash of 1929.

Q: How is today's market similar to 1930?  

Dr. Richebächer: After the stock market crashed in late October/early November 1929, it rallied sharply until mid-April 1930.
In 1930, the consensus opinion was that the market's plunge was simply a healthy correction in a basically healthy economy. By early spring 1930, the economy seemed to be gaining strength, and the economic 'correction' was considered over.

In 1930, the crash of 1929 and the economy's slowdown that followed were thought of as simply a bump on the endless road to prosperity. There had been economic declines of greater magnitude in 1924 and 1926-27, and most observers expected more temporary declines to come in the future. Yet very few regarded the stock market crash as a serious event.
That is exactly the way that investors are looking at the market today. But the outlook is no rosier now than it was then.

Q: Are President Bush and Alan Greenspan wrong when they tout the growth in GDP as a sign of a healthy recovery? 

Dr. Richebächer: Current-dollar GDP grew by $235.4 billion from the fourth quarter of 2000 to the fourth quarter of 2001.
That growth was largely the result of a rise in consumer spending of $306.8 billion (accounting for 130% of total growth) and a $113.6 billion jump in government spending. Against these gains were three major decreases: Business fixed investment dropped $109.5 billion. net exports fell $77.1 billion and inventories sank $59.4 billion.

For the first time in history, the economy and stock market have slumped against a backdrop of rampant money and credit creation. The Fed has cut interest rates an unprecedented 11 times in row [the Fed has since cut rates for a 12th time]... and it's NOT stimulating the economy. This downturn pattern has no precedent in the whole postwar period. Investment spending is unusually weak and consumer spending unusually strong.

This pattern has at least one ominous parallel, the U.S. economy of 1926-29.

Q: What are the parallels to the Depression?

Dr. Richebächer: Towards the end of the bubble years of the 1920s, consumer spending accounted for total GDP growth. Despite soaring stock prices, the growth of business fixed investment and residential building had already come to a halt by 1926.
Apparently, only the booming stock market, with its wealth effects, boosted consumer spending then. This helped keep industrial production at high levels. But investment spending remained weak. By 1929-30 its negative effects overwhelmed the consumption boom.

Finally, it led to the single most dramatic change in 1930 that ushered in the Depression: Business profits literally collapsed.
Today, considering that fixed capital investment is not only stagnant but also plummeting, there can be no doubt that it will again defeat the bullish consumer.

Q: Conventional wisdom says that as long as consumers keep spending, everything else like profits and investment spending will take care of itself. Hasn't consumer spending been strong?

Dr. Richebächer: Most American economists emphasize the role of consumer spending in economic growth for two reasons. One is its big share of gross domestic product, lately accounting for 77% of GDP, against 12% for business fixed investment.
The other is the thought that consumption is the demand for the 'final' product. And isn't that, after all, the ultimate reason of all economic activity?

The popular view for a consumer-driven recovery overlooks two crucial aspects.

First of all, different types of expenditures have very different pushing power on the level of overall economic activity. Capital expenditures have the largest impact, with magnified effects on profits and consumer incomes via the so-called multiplier.
By contrast, consumer spending on services has the smallest overall effects, lacking any longer-run effects.

Second, the conventional GDP data are not a true reflection of economic structure. The conventional GDP captures only the spending on goods and services for final use. In this phrase, the word'final' is all-important. Since total consumer spending ranks, by definition, as final demand, it gets a weight far above its importance.

Look at the case of business outlays. The GDP accounts differentiate between two kinds of spending: on 'final goods' and on 'intermediate goods.' None of the intermediate goods are included in GDP.

Intermediate refers to the output of all industries and services that produce raw materials or semi-finished materials for the production of final consumer or capital goods.

If you take intermediate inputs into account, overall business outlays vastly exceed total consumer spending. In fact, isn't business spending the source of all incomes? Where do consumers get their money? It comes from salaries, wages and dividends. All of those are business expenses. Without business spending there is no consumer spending.

Q: So what is happening with business investment spending today?

Dr. Richebächer: Every five years the Commerce Department presents detailed statistics that reflect the activities in the whole economy, including intermediate goods. The latest data, published in February 2002, is from 1998.  

Of total expenditures (76% higher than GDP numbers), consumer consumption accounted for only 38%, far less than what the GDP figures suggest (66%). But compare that to total business outlays and it accounts for 53% of total spending. In the GDP it only counts 12.5%.

The most important thing to note is that a profits squeeze and the slump in business spending impact the economy on a far broader range than just capital investment.

Q: What do you see ahead for the United States?

Dr. Richebächer:  Consumers are running on empty. Personal savings have almost totally disappeared.
In 1990, the savings rate stood at around 8%. It used to be a truism among thinking people that saving in the sense of abstinence from consumption is the primary key requirement for capital formation. Saving releases the resources that are needed for the production of capital goods.

Investment activity often falls short of available savings. That isn't unusual. But the volume of available savings sets the limits to possible capital investment. A country without such savings is a country without the possibility of capital formation. The United States has become such a country. It is simply not possible for capital spending to increase without saving and, of course, profits. The United States has neither.

But it's even worse than that. Instead of stimulating investment, the extraordinary surge of consumer demand in the United States during the past few years has done the exact opposite -- crowding it out.  And slumping business investment spending translates into slumping employment and consumer incomes.  

So far, though, the consumer has largely offset this income squeeze by stampeding still faster into debt.
For the time being, this has certainly prevented much worse from happening. But it definitely does not have the power to jump-start a recovery.

For a real recovery there must be a strong growth in business fixed investment -- which in turn depends on sufficiently positive profit prospects. This cannot happen until serious imbalances in the economy are corrected. And the only way that can happen is with a 'real' recession. And that hasn't happened yet. It is still on the horizon and not far away at all.

A serious recession, collapse in the stock market and a fall in the dollar are inevitable. And investors must be prepared or they are going to get seriously hurt.

The Return of the 1930s?

Here's what Dr. Richebächer sees coming:

THE WORST PROFIT DISASTER IN U.S. HISTORY: Non-financial corporate profits fell 48% between the second quarter of 2000 and the fourth quarter of 2001. Manufacturing was hit even harder. During the same period, profits fell 71.2%. Retail profits edged up about 1.5%. That's the impact of consumer confidence on U.S. corporate profits.

BIGGER STOCK MARKET INSANITY THAN EVER: In the last year, profits per share in the companies in the S&P 500 have fallen from $50 to $25. At the same time, their valuation has surged from 22 to 45 times earnings. Keep in mind that the historical average valuation is about 14.

THE DEBT EXPLOSION THAT WON'T QUIT: Debt is increasing 10 times faster than income. Last year the national income grew by $178.6 billion. Debts, on the other hand, increased more than $2 trillion.