US has a 90% Chance of Economic Doom.
There have been a lot of economic forecasts floating around the news lately; very few of them seem to have a positive outlook on the future. Morgan Stanley's (investment banking giant) chief economist, Stephen Roach is giving us a 10% chance of getting through this OK, citing our record US trade deficit being the cause.
From 1992 and 1997, the US trade deficit almost tripled. In 2002 the US trade deficit hit a record $418 billion; only to be outdone in 2003 when we hit another record deficit of $489.4 billion. Thats a 17.1% increase in just one year.
Stephen Roach argues the dollar will continue to fall as a result of the U.S trade deficit, thus creating inflation. To combat inflation, the Federal Reserve will be forced to raise interest rates, higher and sooner than we or they would like. We've already seen the Feds increase rates 4 times this year.
Unfortunately the boost to the dollar from the Fed is only a short term boost.
In-debt Americans will be hurt most by this. Since the majority of us are in debt, the effect will not only be nation-wide, but global, effecting the non-in-debt as well. The effects of this are already hurting other nations.
Americans are going deeper and deeper into debt, as a result bankruptcy is on the rise. Bankruptcy law currently protects your pensions, 401(k)s, social security and a few others. Because of this increase in bankruptcy, the Supreme Court is now deciding if they can seize these assets and how much of it to seize.
| "A long time ago, we were a nation of cash-rich, house-poor people. Then, we became house rich and cash poor. Today, we're a nation that's credit dependent and cash broke." |
Mortgage rates are now on the rise. Mortgage owners with variable interest rates will be affected greatly. Unfortunately close to half of all new mortgages have a variable interest rate. This will cause a greater increase of foreclosures.
Foreclosures have already been on the rise for some time now. In some Counties there has been a 100%+ increase in foreclosures in 2003, when compared to 2002. Foreclosures increases have also been predicted for California and Nevada through 2005.
| Lexis McGee, foreclosures.com, said her company has always seen a correlation between rising interest rates and rising levels of foreclosure activity. |
As interest rates rise, the prices of housing will fall, causing almost half of home owners (variable rates) payments to increase at the same time they'll find themselves owing more than their house is worth.
Foreclosure News: foreclosures.com
Housing hit an all time high in June for most communities. Though housing has started a decline or what is being called a "cooling" or "cool-down". This can already be seen in California and Boston as well as other areas. Meanwhile Scott Van Voorhis is predicting a Crash in the Condo market.
Condo prices over the past year rose more than 14 percent - more than 10 percent faster than single -family home prices.
"That's a sign that we ought to start looking very closely at this housing market," said Harvard University housing expert Nicholas Retsinas. "That may be a sign that the slowing may be sooner than we think."
Also related, share value of the largest US homebuilders has declined.
Global worries about the size of the US trade gap cause the US dollar to hit a record low against the euro. It doesn't help that our Federal Reserve chairman, Alan Greenspan announced the gap was unsustainable. It probably also doesn't help that the Chinese central banker has made comments stating China would be reducing dollar assets in its reserves. Though he later retracted his comment, he will probably still reduce the dollar asset. European Central Bank chief Jean-Claude Trichet reiterated concerns that the sliding dollar was "unwelcome" for the European economy.
Even though the US dollar has "bounced back" from the record low, many still have a negative outlook towards the future of the dollar and expect it to fall farther. [1] [2]
Effects from the drop in the US dollar can already be seen in a drop in the DOW. Though S&P Drops may be mostly due to Wal-Mart (thanks Wal-Mart).
With a national debt of $7.5+ trillion dollars, $25,535.54 of debt for each American citizen, (and growing fast) and our record breaking trade deficit, it's hard to see the light at the end of the tunnel.
So what is "our great leader", President Bush, doing about this? He sends in a $2.4 trillion dollar budget and HE RAISES OUR NATIONAL DEBT LIMIT. Apparently our problem is not that we owe too much, our problem is OUR LIMITS ARE NOT HIGH ENOUGH. I wonder why we have a national debt limit, if we're able to breach the limit without any problems. I guess it's more of a suggestion than a "limit".
Our budget is still bloated and contains many "pet projects" that total more than $15.8 billion. They found $250,000 for the Country Music Hall of Fame in Nashville, $1 million for the B.B. King Museum in Indianola, Miss., and $75,000 for the Paper Industry International Hall of Fame in Appleton, Wis.
Bush is also asking congress for an additional $87 billion dollars to "continue the fight on terrorism in Iraq". So far, it is estimated this "war on terrorism" will end up costing the US $191 billion dollars. This site has a javascript counter of how much the war is currently costing us. You can also find out how much it is costing your State, or even County. Check out this link, they provide a cute visualization of $191 billion dollars.
As if we have any problems getting into debt ourselves, the laziness of the Bush administration has also allowed a violation the laws of The World Trade Organization, costing us an initial $150 million. [2] This is like a $150 million dollar parking ticket, Bush being our driver, unfortunately we will all have to pay for it.
It seems that Bush wants to spend more money than he is allowed, so where will he find all the money for this? Easy! Bush will just borrow from social security! He doesn't have to run for re-election, so what does he care.
Maybe we would have been better off with John Kerry. It's a shame and very apparent that our voting system does not work.
Great Links about our National Debt: http://www.brillig.com/debt_clock
| "In plain English, deficits have to be financed by borrowing and large scale debt, with the risk of large-scale default and large-scale disruption and pain." |
I'm still having troubles finding economic reports stating "everything is OK". Even reports like this, which suggest growth is strong, leave suggestion that it will not last.
Don't skip by that "large-scale default" too quickly. By default, he means failure to pay or bankrupcy. And large-scale could potentially include the US banks or the US itself. He's saying, if trends continue, the US may have to declare bankrupcy. This most-likely will not happen, but that doesn't mean that it couldn't happen.
My suggestions: Read all the links in this article. Do your own research. Sell your house or refinance with a fixed rate. Pay off all debt. Start saving for our future recession.
Joel is a Chief Architect / Senior Developer who has been working in the industry since 1996.