The US market seems ridiculously leveraged, and debt is at record level in consumer and government levels. The baby boomers are getting set to retire with consumer savings at ridiculous lows. Social security and medicare are both seriously underfunded, and paying off the national deficet is taking an increasingly large chunk out of America's pocketbook.
With energy prices and debt going up, the Fed needs to rise interest rates to cool borrowing and contract the money supply. But with so much leveraged, doing so could cripple the markets. Higher energy prices are also causing stagflation (price goes up, pay doesn't).
Despite record deficets, the US $ is staying afloat: mostly because it's the oil currency (and thusly the world currency) and because asians are buying into the dollar massively. If either the middle east or asia was to get angry enough, could they not bury the dollar? The US$'s stability isn't going to seem to enviable with all this debt backing it up, especially if the fed doesn't raise interest rates more and stop the viscious money growth cycle.
Other foreign countries are in similar boats; UK's housing boom is absolutely ridiculously out of control and people are trying to manage buying two or three homes at once. A rise in interest rates (and the cost of borrowing), and a fall in housing demand, could kill them.
So, is the US economy ok from where you sit? Instead of "saving for the future" like I should, I'm considering putting my money into metals and commodities to avoid inflation and the overvalued stockmarket. I believe I heard Warren Buffet was abandoning the stock market...does anyone know what he's actually doing these days?
Your thoughts?
Supporting news artilces:
$this->bbcode_second_pass_quote('', '[')url]http://www.energybulletin.net/1327.html[/url] (a Washington Post article, but avoids registration)
Last month, the Organization for Economic Cooperation and Development released figures showing that last year for the first time, China supplanted the United States as the No. 1 destination for foreign direct investment worldwide - that is, money that goes into factories, equipment, real estate or existing companies. And in a blow to fans of ``freedom fries,'' No. 2 was France. Though other major economies also suffered a drop-off in this category, no nation fell as far in percentage terms as the United States.
...
For example, foreign purchases of Treasury bonds and other government securities are up, because the way the government finances higher budget deficits is by selling more paper. But the percentage of those foreign purchases made by private investors - people with confidence in the U.S. economy - is falling sharply. Instead, foreign governments, which bought only 47 percent of such securities in the first quarter of 2003, bought 86 percent in the first quarter in the same period this year. Almost all the government buyers were Asian, and the effect of their purchases was to prop up the value of the dollar and make U.S. exports less competitive with foreign products. Given their motivation and America's growing dependence on such investors, this is an ominous turn of events.
...
Let's start with the biggest domestic economic problems. Almost any one of them is a greater threat to the economy than virtually any imaginable form of terrorism. There is the record-breaking budget deficit that is likely to amount to $5 trillion over the next decade. Then there's the burgeoning trade deficit. And the $72 trillion in unfunded future retirement and health care obligations to our own citizens. And a record low savings rate, which suggests that we will need even more help with retirement funding. And the hemorrhaging of manufacturing jobs and the cost of fixing our dysfunctional health care and energy systems.
Every one of these is a gigantic problem on its own. Taken together, they represent a series of bombs placed at the foundations of our society, and they are capable of exploding in ways that would touch more Americans than anything even the most sophisticated terrorists could devise.
...
Consider our broken health care system. Americans pay, on average, $4,000 more a year for the same or less adequate health care than citizens of other OECD countries; at General Motors, the cost of employee health care now exceeds the costs of steel. That is the kind of labor cost that drives foreign investors (and domestic companies) overseas. So health care becomes a jobs issue; and the lost jobs are an economic security issue.
This is a cold, hard reality. And every minute we ignore the problem or fail to view it in strategic terms, we are losing ground. In this light, health care should become a top priority in a thoughtful National Economic Strategy, as should education and investment in infrastructure. Addressing these areas would mean creating jobs - and that is a much more positive, proactive approach to protecting workers than reactive, punitive trade strategies that produce tensions with our trading partners.
PeakOil is You
THE US Economy (merged)
THE US Economy (merged)
by Whitecrab » Thu 12 Aug 2004, 21:19:31
$this->bbcode_second_pass_quote('', '[')url]http://www.financialsense.com/stormwatch/oldupdates/2004/0618.html[/url]
By contrast, the U.S. has experienced a rising currency even as our budget and trade deficits worsen. This is due to currency intervention by Japan and China and other central banks. On Monday, June 13th, the day the April trade deficit numbers were released, the dollar rose against the Japanese yen. The Fed reports that foreign central bank holdings of Treasuries at the Fed have risen by $293 billion in the last twelve months. They are up only $7.4 billion in the latest week ending on June 9th.
Why has the dollar risen instead of falling as would be the case if the markets weren’t altered?
Plain and simple: the value of the dollar has been held up by Asian currency policy. Asian central banks, in particular Japan and China, have been willing to endlessly buy dollars. So in effect, interest rates and the value of the greenback rest on the whims of Asian central bankers.
What will happen to interest rates here in the U.S.? What will happen to mortgage rates, to the value of real estate and to our stock market, which now rest in the hands of Japan and China more than it does the U.S. Fed? If foreign central banks stop buying or—even worse—start selling, our currency falls and interest rates rise. It is now a question of not “if” but “when” the dollar nexus unravels. No nation—not even the U.S.—can run $500-$600 billion twin budget and trade deficits into perpetuity. At some point foreigners will say “No more!”
...
The markets have become even more geared since those turbulent days. In addition the Fed had plenty of bullets to fight a crisis with the federal funds rate at much higher levels than where it stands today. At the end of 1994, the federal funds rate stood at 5.50%. It was 5.50% at the end of 1997 and 4.75% at the end of 1998. All three years were crisis years. When the Fed raised interest rates in 1994, it nearly collapsed the financial markets creating the peso crisis and a crisis in derivatives with Orange County, Gibson Greeting Cards and other derivative players. Institutions simply didn’t understand the risks they were taking. I am not sure they understand those risks today.
The point that needs to be understood is that the U.S. economy and the financial system is far more leveraged than where it was nearly a decade ago. Globally, derivatives have grown to a mammoth $272 trillion. In the U.S. the notional value of derivatives in insured commercial bank portfolios grew to $71.1 trillion. Of this amount, $61.9 trillion was interest rate related. Bank derivative portfolios have grown exponentially since 1994. We've seen derivatives grow from less than $17 trillion in 1994 to today’s $71.1 trillion. Incredibly, bank derivatives have grown at a compound rate of over 17% over the last 9 years.
Unlike previous years, today’s players are more interconnected. Most trades are placed with a handful of banks and brokerage firms. Everyone believes that they have hedged their risks. In actuality, the risk has just been passed around from bank to bank and brokerage firm to brokerage firm. Everything works out as long as no major player goes under. If that happens, the whole system implodes like dominoes stacked up one against the other. You may think that you are hedged, but your hedge is only as good as the financial solvency of your counterparty.
...
Massaging The Numbers Won't Make It Better
However, as much as rates have risen, they have much further to go. Inflation indexes indicate that the true rate of inflation is probably approaching 8-10%. The CPI and PPI numbers are statistically massaged to remove the major impact of inflationary increases. Instead of measuring the cost of housing, the CPI Index uses a rent equivalent number which is much lower than the true inflationary costs of housing. Other statistical measures, such as quality adjustments, temper or remove price increases so that inflation rates seem reasonable. Even with these adjustments, there is no hiding the fact that inflation is on the rise. May import prices for the United States were up 1.6% in May. While a good majority of this increase was due to a spike in oil prices, other commodity prices rose as well. Wage costs are rising, health care benefits are moving up at high single-digit rates and food costs have nearly doubled.
The May CPI index jumped 0.6%, which was the largest increase since January 2001. Higher food and energy costs accounted for the bulk of the increase. Year-over-year core CPI is up 1.7% and rising quickly this year. Including food and energy, which everyone needs, the CPI index is now rising at an annual rate between 7 to 8% a year. In the meantime, for the second time this year, the Bureau of Labor Statistics has delayed the release of the PPI, the second measure of inflation. The Bureau is having "technical difficulties" coming up with a number. One can only guess by the jump in raw material prices that the PPI number has risen considerably. The new improvement measures the Bureau is considering can suspiciously be seen as an attempt to suppress a sudden surge in the index. Given the fact that commodity prices are up this year, one would expect the PPI numbers to also be up. There is tremendous pressure to keep the numbers suppressed. Higher inflation numbers mean higher interest rates, higher COLA adjustments on pensions, and a major adjustment of market multiples. Higher inflation rates and higher interest rates pose a major risk not only to the financial markets, but also to the economy. It is important to maintain the illusion that inflation rates are low, especially for the bond markets, which are the traditional vigilantes of inflation. Regardless of what is said by Wall Street and Washington officials, inflation is on the rise and has worked its way down Wall Street to Main Street.
Remember When...?
During the 80’s inflation was transferred from the economy to the financial sector. Inflation accelerated during the 90’s as the money supply ballooned. Debt levels went through the roof. However, the bulk of this money and credit went into our financial markets giving us double-digit growth in the major indexes year after year. Inflation never showed up on Main Street because excess demand was made up by cheap Asian imports.
The burgeoning trade deficit, a Nasdaq at 5048, and P/E multiples of 100 to 1,000 on tech and Internet stocks was a reflection of this inflation. Consider the fact that since January 1995 M3 money supply has grown by $4.8 trillion, a growth rate of over 8 percent per annum.
What has changed in this new millennium is that money growth has accelerated as a result of the bursting of a stock market bubble, a recession, and the attacks of 9-11.
In addition to the growth of money and credit, U.S. companies and consumers now compete with Asian companies and consumers for raw materials and consumer goods. Asian economic growth now competes with U.S. economic growth. The result is that inflation has made its way over on to Main Street.
Stagflation Rears Its Ugly Head
We are now in a new environment somewhat similar to the 1970s when the money supply soared as central banks expanded money and credit to accommodate the impact of higher energy prices. The result was stagflation. Isn’t that where we are today? Rising energy prices, higher rates of inflation, anemic job growth, and stagnating wages all point to a stagflation environment.
Given the current budget and trade deficits of the U.S., inflation is likely to accelerate in the months and years ahead. The reason is simple: money and credit growth.
...
With Asian central banks pulling back on their purchases, the Fed may have no choice but to start monetizing our debt. The government deficit will be over $500 billion this year and the trade deficit is tracking at an annual rate of $575 billion. Where will all of this money come from? If the government tries to get it from taxes, there will be a tax revolt in this country the likes we have not seen since the founding of this country. Taxes are going to go up no matter who is elected president. Kerry will raise tax rates the most, which will be the final death knell on the economy. Regardless of what tax rates our leaders impose, they won’t be high enough to cover the government’s voracious appetite for spending. (Each candidate is proposing massive new spending programs.) Taxes will not be able to cover the government’s bill. Government simply spends more than it takes in. So what they don’t take in taxes will be made up by printing more money. This will further accelerate inflation.
...
the money supply hasn’t been growing as fast as the figures indicate, then where did all of this credit come from? Or consider these facts: financial sector debt more than doubled since 1997 from $5,532 billion to $11,402 billion, total indebtedness grew by $15 trillion to $35 trillion from 1997 to 2003, and it is now $37 trillion. As for that pillar of the global economy—the American consumer—he is up to his eyeballs in debt having borrowed $775.7 billion in 2002 and $879.9 billion in 2003 by way of mortgages, home equity loans and credit cards.[3] Consumer debt is now estimated at over $2 trillion dollars.
Unraveling: Then and Now
What you have today is an economy that is entirely run on credit. Even a small rise in interest rates can do irreparable harm. Think back to 1999-2000. The Fed began raising interest rates at its June 30th meeting in 1999. It raised the federal funds rate from 4.75% to 5%. Thereafter, it continued to raise rates in quarter point increments, taking the federal funds rate up to 6.5% by May 16, 2001. It raised rates gradually and in small increments. But it was able to raise interest rates by only 1.75%. The rise in interest rates gave us a 75% decline in the Nasdaq, a recession, the worst job growth and the largest pullback in business investment in nearly half a century.
Companies, consumers, the government at all levels, the financial markets, and our entire economy are far more leveraged today than we were in 1991 or even 2000. A rise in interest rates of as much as 1, 2, 3 or 4% (as many analysts and economists are indicating) would collapse our economy and financial markets. What is sustaining the U.S. economy, our financial markets, and the American consumer is ever increasing amounts of debt and the asset bubbles that underpin that debt. Homeowner equity has fallen steadily from 85% in 1945 to 55% in 2003. Even that figure is distorted by the amount of homes that are free and clear held by an older generation. Corporate debt remains high at close to 75% of GDP and the government's own debt is now over $7 trillion.
The Consequence of Rising Interest Rates
If the Fed raises interest rates as high as many in the financial community suggest, they will lead us into the next Great Depression. I doubt whether the next president—whoever that turns out to be—or an American Congress would look favorably at collapsing real estate prices, a collapsing stock market, another banking crisis, a sinking economy, and unemployment rates of over 10%. There would be a voter backlash of biblical proportions. The economy is simply too weak and dependent on easy and cheap credit. Deprive that economy of credit and the whole financial edifice collapses. Unlike 2000, the financial system—in particular the banking system—is dependent on inflated real estate prices as collateral for all of those mortgage loans made to consumers. (Mortgage assets represent almost 60% of banks' earning assets.) The financial sector appears healthy only as long as real estate prices hold up. Household balance sheets are stretched to the limit with less disposal income and debt levels at record highs.
...
Alarm Bells Are Ringing
If alarm bells are starting to go off in emerging markets, they are also starting to ring here in the U.S. Higher oil prices and an insatiable appetite for foreign goods is driving U.S. trade deficit higher. With the U.S. importing more expensive oil, our trade deficit will be heading higher in the months ahead. A 30% drop in the dollar since 2001 has failed to put a dent in our trade imbalance. This means the U.S. will need to attract a prodigious amount of foreign capital to help fund its twin deficits. Without that foreign capital, the dollar heads lower. The only way to attract more capital is to raise interest rates. However the higher interest rate rise, Greenspan and Co. risk bursting America’s multiple bubbles in mortgages, real estate, bonds, and equities.
The whole country is involved in a borrowing and speculative orgy the likes of which have not been seen since the 17th century. Banks, brokers, hedge funds, and homeowners are all taking advantage of low short-term rates and the steep yield curve to speculate in everything from junk bonds, emerging debt, to residential housing. The bond and stock markets are highly levered as shown left. The bond market charts shown earlier are just a sampling of things to come when the carry trade is completely unwound.
$this->bbcode_second_pass_quote('', '[')url]http://moneycentral.msn.com/content/SavingandDebt/P90509.asp?GT1=4576[/url]
Return to the ‘70s
While many people still fear the return of 1970s inflation rates, the brute fact is that today's savers are in much the same situation, particularly retirees. I could go on about pathetically low rates on CDs. But you already know that.
Let's take another direction.
Let's ask a simple question: What interest rates would make it reasonable for people to save?
The quick answer: higher.
...
Money is free. While a saver has to commit to five years to get a 3.63% return on the average bank CD, home equity lines of credit are advertised as low as 3%, tax-deductible. So while savers earn a net 2.72% and lose purchasing power, borrowers pay a net 2.25% and gain through inflation.
...
The last time the markets were this kind to borrowers -- and this cruel to savers -- was the 1970s. The period was followed by the annihilation of the thrift industry and a real estate bust that took more than a decade to clean up.
...now, if you throw an imminent peak or natural gas crisis into the mix, it's obviously hell. But imagining the peak is later...would the world still be in deadly serious financial trouble? Can any decent arguement be made that the US economy is solid and well positioned?
"Our forces are now closer to the center of Baghdad than most American commuters are to their downtown office."
--Defense Secretary Donald Rumsfeld, April 2003
--Defense Secretary Donald Rumsfeld, April 2003
- Whitecrab
- Lignite
- Posts: 299
- Joined: Wed 26 May 2004, 03:00:00
- Location: Ontario, Canada
by trespam » Thu 12 Aug 2004, 23:12:55
Good questions. Not many answers. I suggest visiting
http://www.prudentbear.com/homepage.asp
for some perspective on the downside that we face. All the issues you bring up are good ones--well, actually bad ones for the economy.
The Japanese economy suffered a stock market crash and then a property market crash. We could suffer the same here in the US.
I am betting that commodities and energy will do well in the coming five years. I think real-estate in the key US markets is overpriced and my hunch is that rising energy costs and rising interest rates will lead to stagnation or an unwinding of that debt. The dollar will fall with respect to other currencies, causing increased prices since we important so many products, including oil of course.
I personally don't see a lot of growth coming from the economy here on out--some perhaps, but I think energy costs will be a drag going forward. With decreasing economic activity, commodities may be in less demand by I'm betting that rising energy costs will propagate through the commodity market.
Oil companies have depleting supplies but the price increases associated with depletion and the inability to adequately invest in new projects that are cost effect at almost any price will lead them to send the earnings back to the shareholders.
http://www.prudentbear.com/homepage.asp
for some perspective on the downside that we face. All the issues you bring up are good ones--well, actually bad ones for the economy.
The Japanese economy suffered a stock market crash and then a property market crash. We could suffer the same here in the US.
I am betting that commodities and energy will do well in the coming five years. I think real-estate in the key US markets is overpriced and my hunch is that rising energy costs and rising interest rates will lead to stagnation or an unwinding of that debt. The dollar will fall with respect to other currencies, causing increased prices since we important so many products, including oil of course.
I personally don't see a lot of growth coming from the economy here on out--some perhaps, but I think energy costs will be a drag going forward. With decreasing economic activity, commodities may be in less demand by I'm betting that rising energy costs will propagate through the commodity market.
Oil companies have depleting supplies but the price increases associated with depletion and the inability to adequately invest in new projects that are cost effect at almost any price will lead them to send the earnings back to the shareholders.
-
trespam - Tar Sands
- Posts: 995
- Joined: Tue 10 Aug 2004, 03:00:00
- Location: San Diego, CA, USA
by Pops » Thu 12 Aug 2004, 23:15:39
Pretty long copies, can you summarize?
Or should I?
Or should I?
The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves -- in their separate, and individual capacities.
-- Abraham Lincoln, Fragment on Government (July 1, 1854)
-- Abraham Lincoln, Fragment on Government (July 1, 1854)
-
Pops - Elite
- Posts: 19746
- Joined: Sat 03 Apr 2004, 04:00:00
- Location: QuikSac for a 6-Pac
by Whitecrab » Thu 12 Aug 2004, 23:32:27
Yeah, you're right, I tried to summarize but it's too much. Snip however much you need; the links will still be there.
"Our forces are now closer to the center of Baghdad than most American commuters are to their downtown office."
--Defense Secretary Donald Rumsfeld, April 2003
--Defense Secretary Donald Rumsfeld, April 2003
- Whitecrab
- Lignite
- Posts: 299
- Joined: Wed 26 May 2004, 03:00:00
- Location: Ontario, Canada
by Soft_Landing » Fri 13 Aug 2004, 00:04:21
One thing you need to remember, if the US dollar crumbles, it'll probably take the rest of the world with it.
It is possible that some are using the following logic. If I withdraw from the US dollar, that hurts the US dollar, and that hurts me, so therefore, I wont withdraw from the dollar.
Or another way:
If I withdraw from the dollar, the world econ. goes to crap. Bad investment.
If I stay in the US dollar, the world econ. may continue. If it does, it'll be at least an ok investment.
So I can't see China or Japan pulling out of the US dollar in any big way, or doing anything that they think might mess with the world economy. Of course, it's still possible for some other event to rattle the US dollar. What's that I hear blowing in the wind? Peercle? P. Qyall? Pee Coyle? I can't quite make it out.
It is possible that some are using the following logic. If I withdraw from the US dollar, that hurts the US dollar, and that hurts me, so therefore, I wont withdraw from the dollar.
Or another way:
If I withdraw from the dollar, the world econ. goes to crap. Bad investment.
If I stay in the US dollar, the world econ. may continue. If it does, it'll be at least an ok investment.
So I can't see China or Japan pulling out of the US dollar in any big way, or doing anything that they think might mess with the world economy. Of course, it's still possible for some other event to rattle the US dollar. What's that I hear blowing in the wind? Peercle? P. Qyall? Pee Coyle? I can't quite make it out.
-
Soft_Landing - Lignite
- Posts: 367
- Joined: Fri 28 May 2004, 03:00:00
by lowem » Fri 13 Aug 2004, 00:43:27
There's always the Euro. It's been doing this negative correlation thingy with the USD for quite some time now. And the Europeans aren't $40-$50 trillion in the hole like the Americans are.
Also, have you guys heard about the Asian Bond Fund? They're trying to set that up as a possible alternative to buying up US Treasury bonds / notes / bills / whatever the Americans call them.
Also, have you guys heard about the Asian Bond Fund? They're trying to set that up as a possible alternative to buying up US Treasury bonds / notes / bills / whatever the Americans call them.
-
lowem - Expert
- Posts: 1901
- Joined: Mon 19 Jul 2004, 03:00:00
- Location: Singapore
by The_Virginian » Fri 13 Aug 2004, 00:52:44
$this->bbcode_second_pass_quote('', 'O')f course, it's still possible for some other event to rattle the US dollar.
Like a swith to the pero-EURO?
The US has ceased to be the worlds economic engine, China has taken that slot. Europe offers a fiat currency with more stability and lower debt (for now) etc.
Should China want to pull away from the US factory owners, and switch to the Euro...all it would take is war with Taiwan.
[urlhttp://www.youtube.com/watchv=Ai4te4daLZs&feature=related[/url] "My soul longs for the candle and the spices. If only you would pour me a cup of wine for Havdalah...My heart yearning, I shall lift up my eyes to g-d, who provides for my needs day and night."
-
The_Virginian - Heavy Crude
- Posts: 1684
- Joined: Sat 19 Jun 2004, 03:00:00
