Tuesday, January 31, 2006

Alan passes troubled Baton to Bernanke

I’m going to try and keep it short today, as it’s my anniversary and my wife will kill me if I stay too long.

Anyway, much change happened today. Borrowing rates were increased a 14th time as Alan passed his troubled baton to the Helicopter man. How will Ben Bernanke fare? If history sets precedent, Bernanke should be worried.

Stephen Roach has this to say about the issue:

History points to a difficult handover. The October 1987 stock-market crash came shortly after Greenspan succeeded Paul Volcker at the Fed. In 1979 Volcker faced problems of inflation and bond-market turbulence when he took over from G William Miller.
“When Greenspan leaves he will take his papers, but he will also take the confidence the markets have built in him,” said Roach. “I think Bernanke will be tested by the markets.

I’ve previously stated that I see numerous problems on the horizon. Which of these do you think, if any, will present Ben Bernanke with a crisis of his own?

(1) Enormous U.S. Trade Deficit
(2) Massive U.S. Debt
(3) Severe Oil supply issues on the horizon
(4) Housing Bubble
(5) Corporate Bankruptcies & Bond Market Problems
(6) Stock Market Bubble
(7) Derivatives Bubble
(8) Tremendous Consumer Debt, Negative savings rate and consumer pullback
(9) Hyperinflation
(10) Continuing Loss of Jobs/Outsourcing
(11) Loss of Central Bank confidence & dollar crisis
(12) Pension Crisis (look at PBGC)

Are there other issues that I missed? What are your thoughts on the matter

Sunday, January 29, 2006

U.S. Government has Exceeded its Debt Ceiling--Is it a Default?

If you look at my running debt-clock (right side of blog, beneath my profile) and then look the notes beneath it, you will quickly come to the realization that something is wrong... The United States has exceeded its maximum authorized debt limit--and the rift between the ceiling and actual expenditures is growing larger by the second.

How can our government leaders exceed the National debt ceiling without some kind of explanation? Why are there no national press reports? Where is CNN? What are the implications? When will the Debt Ceiling Be Increased?--(Certainly, we won't wait till March)

I just sit here baffled and dumbfounded... In an effort to find answers to these questions, I decided to go searching through the web for answers. What did I find?--a mere 2 links:

Financial Sense University has this link: U.S. IN TECHNICAL DEFAULT. Snippets below:

In a shocking development, the Treasury Department website is openly stating that as of January 24, 2006 our national debt stood at $8,185.3 billion and on January 26th at $8,190.5 billion. Yet the US national debt ‘ceiling’, the maximum amount of debt the US government may hold at any one time, stands at $8,184 billion – a full $5.5 billion less. Although called upon by John Snow, Congress has not yet passed an expansion of the debt ceiling and so the US government is now operating in technical default.

Hammer of Truth has anther link: Fed Debt Limit Breach: U.S. in Technical Default. Snippets:

On January 24th, the U.S. government went into technical default according to the government’s own debt watch website. Economist Dr. Chris Martenson is sounding the klaxons and wondering why it hasn’t hit the financial press yet, saying “But the silence is all the more troubling because there is an unprecedented level of government borrowing on the books for 1Q06 with next 2 weeks (Feb 1st to Feb 9th) an especially busy period of time. An ambitious ~$70-$80b in Treasury paper will hit the market.” He suggests emergency congressional action may be needed to avoid a full-fledged default.

Hopefully, our elected leaders will let us know their plan VERY SOON.

Oil’s affect on the world economy

Recent evidence suggests that the high cost of oil, post Katrina, helped to slow the U.S. economy in the 4th quarter of 2005. The increased cost of fuel took money out of the already strapped American consumer’s wallet, which hurt Big-3 SUV/auto sales, slowed discretionary spending, impacted housing and acted as a drag on the U.S. Economy. See this NY Times article: U.S. Economy Slowed Sharply at End of 2005: Snippets below:

Consumer spending slowed abruptly as purchases of motor vehicles collapsed after automakers phased out the generous incentive programs that had lifted sales through the summer. As consumers cut back on spending, business investment also slowed as companies curtailed spending on cars and trucks.

The abrupt slowdown fed into a bubbling debate over the nation's economic prospects as the housing market weakens and removes a core pillar supporting consumers' hearty spending.

Many economic analysts have been warning for months that the housing bubble will burst and lead to retrenchment as rising interest rates and the stalling of home sales put a dent in consumer spending.

Moreover, the surge in the price of oil led to a big jump in the nation's energy bill, contributing to a sharp rise in imports that put a drag on domestic output.

With the above information digested, what does the future hold for oil and how will it impact our lives, our housing market and our economy?

I’ve previously discussed several oil sector problems (in Time To Worry?), and I don’t think the outlook is very promising. With that said, I’m no analyst and I’m probably not smart enough to understand all the details, but I do keep my ear to the ground and listen to what others are saying:

Word just came out that Kuwait, long regarded as home to some of the world's largest reserves of petroleum, may possess only half the amount of oil reserves that it officially has been stating for many years. Kuwait’s Reserves have been downgraded from 99 Billion Barrels to ~ 50 Billion Barrels.

See to what Sir Richard Branson, the billionaire entrepreneur has to say about the current oil situation: “… any conflict with Iran could push oil prices over $100 a barrel and trigger "the biggest recession we have ever seen".

Ryan McGreal, from Raise the Hammer feels the same way: If Iran cuts off all, or even some, of its 2.5 million barrels a day, the rest of the world will not be able to make up the shortfall and oil importing countries have already dipped heavily into their strategic reserves. Most analysts agree that oil will spike over $100 a barrel, shocking the global economy. When a recession lasts for 20 years, it's called a depression. That's what we're in for once oil production goes into decline.

The Gulf Times paints a pretty bleak picture also: Kidnappings in Nigeria, sabotage in Iraq, and Iran’s controversial nuclear program have combined with huge demand from emerging countries to spark fears of an oil supply crisis, analysts say. “World producers need to bring another one and a half million barrels per day on line every year to meet rising demand,” said Bruce Evers, an analyst with Investec in London. “So even a minor supply disruption is going to have a disproportionate impact on oil prices.” The vigor of China’s demand for oil since 2004 has coincided with rising consumption in the US and India and has shaken up the supply side of the industry. OPEC has increased production, but this has left it with little spare production in reserve, leaving it vulnerable to a supply shock in a member country.

Next, lets see what folks have to say about the possibility of an Iran Oil Bourse: The Bush administration will never allow the Iranian government to open an oil exchange (bourse) that trades petroleum in euros. If that were to happen, hundreds of billions of dollars would come flooding back to the United States crushing the greenback and destroying the economy.
Such a crash would result in soaring interest rates, hyperinflation, skyrocketing energy costs, massive unemployment and, perhaps, depression. This is the troubling scenario if an Iran bourse gets established and knocks the dollar from its lofty perch.

If you consider all of these issues together: the troublesome situation in Nigeria; the recently released news from Kuwait; the extremely narrow margins between oil supply and demand; and the current IRAN nuclear situation/IRAN Bourse; just how high do you think future oil prices will go, and how do you think it will impact our housing sector (which is cooling) and our economy (also slowing)?

Please feel free to provide your thoughts on the matter...

Friday, January 27, 2006

Conflicting media reports--Resale vs New

I’d like to provide some clarification for the many folks who seem confused over the seemingly conflicting media reports of new vs. existing home sales. Lets take the past 2 days as an example.

Yesterday, the media reported that existing home sales declined 5.7% in December—the 3rd consecutive month of declines (wow, that sure seems like bad news for the industry). Then today, we receive what seems to be a completely different story. This Bloomberg story reports that new home sales increased by 2.9% in December (wow, this sure sounds like good news for the economy). So which of these reports is accurate and what should you believe?

Technically folks, both of the reports are accurate. New home sales increased, and existing home sales decreased. What many folks don’t understand is the fact that the resale market is 6 times bigger than the new home market (~ 7 million resale homes per year vs. 1.2 million new home sales). Therefore, the number of resale home declines in December (-5.7% x 7M = 399,000/12 months= 33,250) carries 11 times the weight of the number of new home sale increases in December (+2.9% x 1.2M = 34,800/12 months = 2,900). So, the TOTAL overall decrease in the number of home sales over the previous month is: 33,250-2,900=30,350

Bottom Line: The Existing Home Resale market is the major indicator to watch. I believe the only reason new homes are still doing well is numerous builder incentives (low rates, closing deals, free upgrades, vacations, etc)

From what I’m seeing in the resale market, I think the overall market is on the downhill slide. Hopefully, we’ll be able to have a controlled decent rather than sliding off the cliff into oblivion.

Wednesday, January 25, 2006

American Wake Up Call!

If you feel that I am somewhat pessimistic about the future of our economy (in the near-to-mid term), you would be correct. I personally think the U.S. (and world) will experience some “painful” adjustments as many of the economic imbalances we see today begin to seek equilibrium sometime before the end of this decade. With that said, my longer-term outlook (20-30 years down the road) begins to start looking much better.

Currently, we Americans are a spoiled bunch, sucking up 80% of the world’s savings to live our lavish, gluttonous, carefree lifestyle. What really concerns me is: Many Americans are completely ignorant to the fact that our lifestyles are being subsidized by the rest of the world, and some even feel (due to our superpower status) that we are “entitled” to live the way we do.

I suspect however, that people will soon start to see things differently, as the tide is beginning to turn…

Years ago, the US was a manufacturing powerhouse, but today, our country manufactures very little, because it’s so much cheaper to outsource/employ a foreign workforce. Examples: U.S. Manufacturing, Steel, Technical services, Administrative call centers, Research & Technology (Xerox, IBM) and numerous other sectors are all being outsourced. Heck, you can’t even find a pair of Levis (the American Trademark) made in the good ole USA anymore.

Why is this happening you may ask? It’s numbers my friend! A U.S. company can pay a worker overseas $1-2 bucks an hour to do the same job requiring $20-30 hour in the US... Either they outsource or they end up like the rest of our troubled U.S. home bound corporations (below).

Many of the home-bound US companies still trying to compete in the Global marketplace are reeling from high labor costs, pension plans, union benefits, health care costs and the like: Delphi, General Motors, Ford and the U. S. airline sector are only the latest in a growing trend of companies feeling the pressures. Expect to see more US corporate and worker problems in the future…

So why has the U.S. economy remained so strong if outsourcing and corporate issues are such a problem? Answer: Housing and consumer spending: Over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private-sector jobs created since 2001 have been in the housing-related sectors, such as construction, real estate and mortgage broking. What do you think will happen to our economy when the housing boom dies?

I personally foresee the entire U.S. financial lending & banking industry crashing down and taking our economy with them. Many are leveraged to the hilt and when the housing bubble pops, they will be unable to cover their losses. It’ll probably get very ugly!

So, we have established that (1) the current American standard of living requires an enormous proportion of the worlds savings (2) the US manufactures very little within its borders, (3) outsourcing is prevalent and will continue, (4) home bound US companies are hurting and (5) housing/consumer spending has been the engine that has kept our economy strong.

So, what will it take change all this? How will the U.S. ever be competitive in the world again? Answer: change will be made through a Substantial devaluation of the U.S. Dollar… It is the only way!

Both the US government and consumer are in debt up to their eyeballs, foreign central banks are becoming concerned, oil markets are shaky, the housing market is cooling and it is predicted that US growth will slow in 2006. In this light, I foresee the dollar declining in value as (1) foreign central banks seek to diversify their enormous holdings, (2) helicopter Ben turns up the presses full-blast and (3) the U.S. economy stumbles into a recession. In the end (probably 5-10 years from now), dollar hegemony will be a thing of the past.

Ultimately, this adjustment of the dollar will be painful for the world, and the average American’s standard of living will suffer significantly (much lower). Many Americans will become unemployed early on, but those who live through this era will eventually be put back to work and things will begin to get better… However, the trivial issues we concern ourselves with today (Politics, American Idol, Survivor, keeping up with the Jones’, etc) will no longer be the forefront of our daily lives, as we struggle to keep food on the table and a roof over our heads. The ACLU-type concerns of today will become irrelevant and family values/religion will become the center-stage of the new America.

Another bright side to the issue: This dollar devaluation will allow the United States to eliminate much of its foreign debt and American citizens will demand that our government leaders LEAD (rather than today’s sickening ego power plays, rampant corruption and partisan politics). Welfare will probably become a thing of the past, and people will have to work to earn an honest days pay. Companies and the Government will again start to invest in infrastructure, American expectations will begin to rise, factories will once again start to billow smoke, and ultimately, our country will be competitive in the world once again…

I personally believe it will be a long, very difficult ride ahead, but in the end, it will probably make us a better, stronger nation. We, as a people, have become way too self-centered and soft, trivial issues have become important, important issues are ignored, people are completely ignorant to the world, values are gone, family means little, government is completely out of touch and ineffective, everyone wants something for nothing, etc. This wake-up call will probably do us some good.

Tuesday, January 24, 2006

Blogger Thanks

As many of you know, I am very new to this whole Blogging thing and I’m learning as I go... When I started posting up on Dec 31st 2005, I had an general idea and message, but I didn't really know where I was going or how to get there. Fortunately for me, however, through the advice, kindness and generosity of other Blog Sites, I have received over 4,000 hits in a short 25 days. I never would have imagined…

Anyway, I just wanted to say thank you to all the Blog Sites who have linked to me. I wouldn’t be able to spread my message without you... Thanks!


Monday, January 23, 2006

Helicopter Ben and Gold @ $3000 oz

This Yahoo Finance Post makes the assertion that Ben "Helicopter" Bernanke will ramp up the money presses to devalue the dollar and reduce our national debt. It goes on to state that Gold has risen nearly 16% in the short time since Ben's nomination to take over Greenspan's job.

According to the article, as the Fed starts flooding the market with new dollars, the price of gold will continue its march upward towards (a conservative estimate) $3000 oz.

Guess we'll find out soon enough, as the Helicopter man takes charge on Jan 31, 2006.

Sunday, January 22, 2006

LaRouche--We're on the edge of the biggest financial mortgage bubble collapse in world history

Just found/read this EIR article: Transcripts from a radio interview w/ Lyndon LaRouche on Jan 18, 2006. It is a rather long interview, so I will just pick out relevant snippets:

For those of you who don't know anything about previous presidential candidate Lyndon LaRouche -- See Link

Snippets from interview below:

" ...We're up against the potentiality, which is coming out of the international financial crisis, that somebody's going to try to do what they did in the 1930s! Set up dictatorship. Because, they don't want democratic processes interfering with what dictators want to do with the economy, and with other things."

"You have this pressure on Iran, the question on Syria, so forth—more wars, more wars! And the fear we have, in Washington, is that, were Alito confirmed, that Cheney and company would push ahead, we'd get those "more wars" which are now waiting for us, in Syria, in Iran, and so forth. It's an extremely dangerous situation, particularly as today, and yesterday, you have this crisis on the Japan stock market. Which could be—that is, "could be"; these things are not so simple, you can say "yes" or "no"—but it could be the trigger that could set off a world financial collapse."

"...we have a potential collapse of the real-estate bubble in the United States, the mortgage-based securities bubble. Also in Britain, also in Spain, and other parts of the world. This is very much involved with the hedge funds, and we're looking at the Japan crisis: To what degree the hedge funds are involved in this Japan flap, where they went down about 6% on the market over the past day."

"There's always a question of this, because we're dealing with a hyperinflationary economy, where every time we go into a potential collapse, someone starts pouring a lot of aggregate into the money system, and therefore you have an inflationary postponement of a crash which is ultimately inevitable. Now, the only thing that'd stop this crash, is if the Federal government would simply say, "Well, our system is in bankruptcy."

"We're on the edge of a crash, could occur any timet. We're on the edge of the biggest financial mortgage bubble collapse in world history. We hope that it doesn't come too soon."

"...we have to reverse our direction, and go back to becoming an agro-industrial manufacturing nation, again. We should no longer be living on what other people produce for us, at low wages, while we leave our own people unemployed. That's what the problem is: We're not producing enough. We're not educating enough people, we're throwing too many of our people on the dump.

Bank Safe Deposit Boxes--Has anyone ever heard about this?

I just read an article today Collapse of U.S. Economy Imminent .

One issue that really struck me was the following:
Bank Of America and Compass Bank managers (probably all other U.S. banks too) have been instructing their employees in the last few weeks on how to respond to customer demands in the event of a collapse of the U.S. economy - specifically telling the employees that only agents from the Department Of Homeland Security will have authority to decide what belongings customers may have from their safe deposit boxes - and that precious metals and other valuables will not be released to U.S. citizens. The bank employees have been strictly prohibited from revealing the banks’ new "guidelines" to anyone. (however, employees have been talking to friends and family). The next time you visit your bank, ask them about it - then ask yourself, why is this information being kept secret from customers and the public - what’s really going on?

I later found another link discussing the same issue.

Has Anyone heard of this? Does anyone have a family member working at a bank (preferably BOA) who can confirm or deny this? If true, this is a BIG DEAL!

Thanks... Randy

Plant Closings, Job Cuts Loom at Ford

Very bad news for employees of the U.S.'s #2 Automaker. Today, Forbes is reporting that Ford may soon close plants and lay off thousands of workers.

Another reporting agency is stating that the bad news will be officially announced on Monday: 10 plants will close and 25,000 layoffs

So, the next time you hear the talking heads on TV spouting off the typical: "U.S. Job growth figures look great this month, as we've added x-thousands of jobs" You can rest assure the #'s are skewed and the jobs that have been added are low paying service sector jobs--not decent, good paying jobs like the auto industry. Do we expect Wal-mart or McDonalds to absorb these 25,000 Ford job losses?

As I've stated before: The US is quickly moving towards a service-based, consumer nation and we are living far beyond our means--from both a personal and government perspective.

Question: How can the US expect to compete in the global marketplace when foreign entities pay cents on the dollar for wages and rarely care about health care and/or worker benefits?

Answer: WE CAN’T… and the problems, bankruptcies, plant closings, layoffs, etc, will only get worse!

See next link for good articles/discussions concerning the loss of American industries.

Saturday, January 21, 2006

Time to Worry?

If ever there was a time to be worried about the financial health of the U.S. and world economy, this is it! Multiple issues are simultaneously coming to a head and any of them could potentially set off a chain reaction in other areas and throw the U.S. into a severe recession. (I highly urge you to read the links below)

Fed Activity
Housing Bubble

The current situation with Iran will probably continue to escalate, and with already strained oil supplies (a mere 1% difference between world oil demand and world oil production & supply capacity), we could easily top $100 barrel oil and $4 gas this year.

There couldn’t be a worse time for civil unrest in Nigeria (the world’s eighth largest oil exporter). Militants have been (and promise to continue to) stage attacks against Nigerian oil facilities. They have also kidnapped and are holding oil workers hostage. Bottom line: Expect more militant activity, and reduced oil output from Nigeria. As stated above, the margin between oil supply and demand is extremely narrow and this will begin to hurt at the gas pump quite soon.

Quite a few smart folks feel that the world is beginning to reach Peak Oil. With increased worldwide oil requirements/consumption (China, India and others using more energy than ever and competing for the same energy supplies), the latest situation with IRAN and Nigeria are merely bringing the issue to light a little earlier that it otherwise would have anyway. This could be the beginning of a long-term trend for high priced energy.

NOTE1: This issue is actually bigger than oil. Natural Gas supply/demand is also strained. Last week, the LV Review Journal stated that Sierra Pacific, the provider for Nevada Power, is seeking a 30% increase in electricity prices in 2006… This is on top of major price increases in 2004 and 2005… Southwest gas has also recently increased (substantially) their rates. Bottom line: Not only will it hurt you at the gas pump; it will also hurt your monthly budget when paying to heat and power your home. (Question: why aren’t energy prices used as a part of Government’s inflation calculation statistics? Answer: because then the people could not be snowballed into believing that inflation {and the economy} is under control.)

NOTE2: When oil prices increase, our trade deficit (running > $700B in 2005) will also increase (many suggest it could reach $850B in 2006). This increase will cause a further drag on the U.S. Dollar (a decline in value), as Central Banks become increasingly leery with our massive debt and deficits, and they seek to increase diversification of their savings (into Gold, Euros, etc.). This diversification and drag of the dollar will actually exacerbate the issue for the U.S., as OPEC will require more devalued dollars for the same quantity of their tangible asset (oil), driving the trade deficit even higher. (I hope this makes sense to you folks).

Many people are beginning to believe that the Fed is running scared. In an attempt to shield their ponzi scheme from the public, the Fed has decided that M3 will cease to be published after March 2006.

With that said, we couldn’t ask for a better monetization policy executor than “Helicopter Ben”. Bottom line: Expect inflation to start screaming as tremendous amounts of new liquidity are pumped into our economic system—a futile attempt to keep the game going indefinitely.

The party may be over for real estate. Recent evidence suggests the housing market is slowing. Existing home sales are expected to fall 4.4 percent in 2006 after years of record sales, while new construction is expected to drop 6.6 percent, according to the National Association of Realtors.

The housing forecast mentioned above is based upon continued strong economic indicators. What would happen to house prices if OIL reached $90-100 a barrel? I believe it could get nasty!

Consumers, who are already strapped, would need to make difficult choices and many would have no other choice but to reign in spending. With rising interest rates and a high number of interest only mortgages, many folks will get creamed… This could cause rampant defaults, a massive number of homes on the market (people trying to get out before they get creamed), and housing prices could plummet.

Note: Consumer spending and housing have been responsible for 90% of GDP over the last 3 years. If this is taken away, the economic outlook for the U.S. is extremely bleak.

Numerous issues are currently in play—the main one being oil. If oil supplies are reduced much further, prices will skyrocket. This will be felt by the consumer (who is already stretched thin); will increase the deficit; will impact Fed policy (printing madly); will impact the dollar (decline in value) and will ultimately impact the housing bubble (which has been the main engine of our economy over the last 3 years).

Hold on to your hats folks, this could be one hell of a ride!

Wednesday, January 18, 2006

Buffett Sounds Warning On U.S. Trade Deficit

The world's second richest man is again sounding alarm on our trade deficit. Here are a few snippets from Forbes today.

Don't count on a soft landing for the country's deficit-addicted economy, Buffett reiterated Tuesday. The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to "political turmoil".

Fixing the trade deficit--which soared to a record $665.9 billion in 2004, and is expected to top $700 billion this year--is becoming rather like turning around an ocean liner by dipping a teaspoon in the water.

The globe owns $3 trillion more of the U.S. than it owns of them. "In my view, it will create political turmoil at some point... Pretty soon, I think there will be a big adjustment," he said without elaborating.

Tuesday, January 17, 2006

Oil Prices Rising Rapidly

I recently made a prediction that Oil would top $90 a barrel in 2006 and that we'd see $3 gas again. Now that I've had time to think about it some more, maybe I was being overly optimistic.

CNN Headlines are today reporting that oil futures are at the highest levels in over 3 months, based on concerns of IRAN and civil unrest in Nigeria. If these issues continue to fester (almost a certainty), we could easily top our previous record of $70.85 (set the day after Katrina) within weeks or months.

Bloomberg is even reporting we could see $100 oil if Iran decides to reduce their production. Think about it... Iran is being threatened by the world for their Nuclear ambitions. Soon the United Nations (a spineless, do nothing debating organization) will issue a couple of dire warnings and resolutions. Iran will probably laugh off these warnings and it will then be up to the U.S. or Israel to make IRAN abide by the resolutions.

What do you think the likely outcome will be? Let me give you a hint: Israel is not about to play games with a radical leader who seeks to wipe them off the map, and even though the U.S. military is spread thin (with Iraq and Afghanistan) it still has enough Airpower to knock IRAN back to the stone age.

If this scenario happens, what do you think will happen to the price of oil? I personally believe it's wise to start seriously thinking about the loss of IRAN's contribution to the world's oil supply... and we thought $3 gas in 2005 was bad!

If you want to read more about a possible doom/gloom oil scenario, I recommend this link.

So, where will an oil crisis leave the U.S. consumer, our housing bubble, and the US economy? Extremely vulnerable my friends... I hope our economy can handle the serious shock that may be looming on the horizon.

Monday, January 16, 2006

Maslow’s Hierarchy of Needs and the U.S. Economy

This article was written as food for thought:

Today, when all is well in the economy, rarely does one need to worry about physical survival or safety, as there just isn't enough time in a day, and it's not relevant to the life we live. With a decent paying job, a roof over our heads, food in the refrigerator and gas in the car, we are content with our personal survival & safety, but we tend to worry about other things... Things that we believe will enhance our love life, our family, self-improvement or the larger society as a whole. We think of our career progression, how to improve our relationships or sexuality, improved material status symbols (a big house, Hummer in the driveway, Plasma TV, etc), morality issues (equal rights for everyone, abortion issues, gay marriage, feeding the homeless, welfare, etc), and we make an attempt to figure out and solve the world's problems (this Blog is a good example).

You are probably asking: Why is this relevant? How does this relate to Maslow's Hierarchy of Needs and the Economy? Well, that is an excellent question, and I'm glad you asked. Allow me to first try to explain Maslow's Hierarchy of Needs and then show how the two are interrelated.

Maslow's Hierarchy of Needs is a hierarchy of five levels of basic human needs (illustrated in the pyramid below). Beyond these needs, higher levels of needs exist. These include needs for understanding, esthetic appreciation and purely spiritual needs. In the levels of the five basic needs, the person does not feel the second need until the demands of the first have been satisfied, nor the third until the second has been satisfied, and so on. Maslow's basic needs are as follows:

Physiological Needs
Our biological needs: The need for oxygen, food, water, and a relatively constant body temperature. They are the strongest needs due to mans need to survive

Safety Needs
When all physiological needs are satisfied and are no longer controlling thoughts and behaviors, the needs for security can become active. Adults have little awareness of their security needs except in times of emergency or periods of disorganization in the social structure (such as widespread rioting). Children often display the signs of insecurity and the need to be safe.

Needs of Love, Affection and Belongingness
When the needs for safety and for physiological well-being are satisfied, the next class of needs for love, affection and belongingness emerge. Maslow states that people seek to overcome feelings of loneliness and alienation. This involves both giving and receiving love, affection and the sense of belonging.

Needs for Esteem
When the first three classes of needs are satisfied, the needs for esteem can become dominant. These involve needs for both self-esteem and for the esteem a person gets from others. Humans have a need for a stable, firmly based, high level of self-respect, and respect from others. When these needs are satisfied, the person feels self-confident and valuable as a person in the world. When these needs are frustrated, the person feels inferior, weak, helpless and worthless.

Needs for Self-Actualization
When all of the foregoing needs are satisfied, then and only then are the needs for self-actualization activated. Maslow describes self-actualization as a person's need to be and do that which the person was "born to do." "A musician must make music, an artist must paint, and a poet must write." These needs make themselves felt in signs of restlessness. The person feels on edge, tense, lacking something, in short, restless. If a person is hungry, unsafe, not loved or accepted, or lacking self-esteem, it is very easy to know what the person is restless about. It is not always clear what a person wants when there is a need for self-actualization

OK, you get the point. These basic human needs impact everyone and the later needs can't be achieved until the lower needs are fulfilled. So, how does the issue relate to the economy? I'll try to explain that next.

Today, all seems to be well in the U.S. economy and we have money in our pockets, so we rarely have to worry about the lower level needs (food, water, shelter, survival, etc). But what will happen to us if we experience a drastic change in our lifestyle and we lose our job, lose our car and house, and we don't have enough food to feed our children? No longer will we care about material things, looking pretty or "equal rights for all of humanity". Our whole train of thought will change and we will concentrate on the instinctive need to survive! We will do anything and everything possible, including risking life and limb, to support that survival instinct.

What then, happens to a society when millions of people simultaneously lose their jobs and homes due to an economic crisis, and the little savings they have left is made worthless through rampant inflation and massive monetization? It will be real ugly my friends! The Social fabric of society will break down, survival instincts will kick in and it will be a dog-eat-dog world.

Remember Katrina and Louisiana? The Government had several decades to plan for this worst-case scenario... Did they do anything? Was there an effective plan?

If you think the government has a "Master-Plan" for fixing the problems with our economy, we really need to talk because some of my prime swampland in Florida is currently for sale--CHEAP!

I personally hope it never comes to this, but our economy is in such serious trouble, an economic crisis is not an impossibility several years down the road.

Worst-case scenarios are not pleasant to think about, but they are worth thinking about. Everyone needs to plan for their future as best they can, with what they know and understand. These future plans are usually developed by forecasting what is likely (or possible), and then adapting the plan to that condition.

How would you and your family react to something like an economic breakdown and the ensuing chaos? Are you ready today? Are you preparing towards that end, or do you feel this could never happen and even if it does, the government will take care of you and your family?

Personally, I do not believe the government will look out for my family's welfare and in the event of economic chaos, we will be on our own...

Remember, everything that we think is important today is really trivial with respect to our need to survive. When man has lost all hope and becomes desperate to feed his family, nothing remains sacred... Ethics, Values, Morals and the fabric of society is thrown out the window... SURVIVAL is the dominant need... everything else is secondary.

Saturday, January 14, 2006

Predictions for 2006

At some time in the future, when historians look back at 2006, I believe they will see an inflection point, as 2006 will be the year of change for the US economy. Far too many economic imbalances exist and although we probably wont see a dramatic crash, we will experience major adjustments in 2006. These adjustments will set the stage for an uncertain economic future and the outcome, several years down the road, could be extremely painful for the consumer, America and the world.

Here is what I predict for 2006:

-Fed Rates will be increased at least twice more

-Long-term rates will increase due to foreign Central Bank diversification and dollar pullout after the Fed's last increase of the year

-The US Dollar will begin a long-term decline against Euro,Yen/others

-Housing will continue to slow in overheated markets (Not crash--yet)

-Oil will flirt with, if not exceed $90 a barrel come summer; $3 gas

-Gold will break through $650 an ounce

-Silver will touch, if not exceed $11 oz

-Stock market will stagnate and go no where

-Consumer confidence will decline

-Ben "Helicopter" Bernanke will experience a crisis of some sort

-Helicopter Ben will print massive amounts of money--after M3 publication
is ceased

-Inflation will rise substantially

-Consumers will begin spending pullback later in the year

-Early 2007 Recession

Friday, January 13, 2006

Bankruptcy Stampede

CONSUMER BANKRUPTCY FILINGS hit a new record in 2005--up 32% from 2004--See stats below.

2001: 1,452,030
2002: 1,539,111
2003: 1,625,208
2004: 1,552,967
2005: 2,043,535


Surely, the tougher new bankruptcy law enacted in November of last, helped many to make their decision early, but think of the vast number of people who held out anyway, scraping by to make ends meet every month... What will happen to them? What will happen to all the new home owners who chose Interest only 80/20 loans when their loans need to be reset? What will happen to millions of hard working folks when the housing bubble leaks out 30-40% of its excess?

Today, the American consumer is absolutely strapped (see negative savings rate) and when housing values fall, the housing ATM will be unable to produce any more cash, and bankruptcy will be their only option. When this happens, the numbers shown above will pale in comparison to the new numbers and if graphed, these new numbers will be off the Charts!

This will only be the beginning however, as financial institutions will go under, millions of jobs directly and indirectly related to housing will be lost (realty, home furnishings, construction, finance, remodeling, pool companies, landscaping, etc), the economy will contract, the dollar will fall, Asia and the world will suffer and the downward spiral of the worlds greatest economy will have begun.

Unless of course, the "Helicopter man" upon swift realization of what's happening, decides to intervene and quickly/substantially lower rates--to save the housing bubble and the imbalances for another day...

Danger time for America

I just read an excellent article from The Economist, dated 12 Jan 2006. The author makes the assertion that our Alan Greenspan Economy is in a much less healthy state than popularly assumed.

Now in his final days as Fed Chairman and eager to pass the batton to the “
Helicopter man”, Mr. Greenspan is currently receiving incessant praise for masterfully guiding our economy through the last 18 years—even during difficult times. The article then points out that these tributes are probably premature, as our past economic stability has come at a great cost… Alan's policies helped to create bubbles that he was unwilling to target, and he would feed them until they popped. He would then try to minimize the pain of the fallout by creating new bubbles that required the same fuel (low rates and liquidity). With that said, Mr. Greenspan has now created multiple coexisting bubbles and the largest economic imbalances in American history...

Here are a few snippets from the article:

“Mr Greenspan's departure could well mark a high point for America's economy, with a period of sluggish growth ahead. This is not so much because he is leaving, but because of what he is leaving behind: the biggest economic imbalances in American history.”

… “the Fed's policies of the past decade look like having painful long-term costs.”

“ But the main reason why America's growth has remained strong in recent years has been a massive monetary stimulus. The Fed held real interest rates negative for several years, and even today real rates remain low. Thanks to globalisation, new technology and that vaunted flexibility, which have all helped to reduce the prices of many goods, cheap money has not spilled into traditional inflation, but into rising asset prices instead—first equities and now housing. The Economist has long criticised Mr Greenspan for not trying to restrain the stockmarket bubble in the late 1990s, and then, after it burst, for inflating a housing bubble by holding interest rates low for so long (see article). The problem is not the rising asset prices themselves but rather their effect on the economy. By borrowing against capital gains on their homes, households have been able to consume more than they earn. Robust consumer spending has boosted GDP growth, but at the cost of a negative personal saving rate, a growing burden of household debt and a huge current-account deficit.”

“Part of America's current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future. The words of Ludwig von Mises, an Austrian economist of the early 20th century, nicely sum up the illusion: “It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.”

… “there is a limit to their willingness to keep accumulating dollar reserves. Chinese officials last week offered hints that they are looking eventually to diversify China's foreign-exchange reserves. Over the next couple of years the dollar is likely to fall and bond yields rise as investors demand higher compensation for risk.”

“When house-price rises flatten off, and therefore the room for further equity withdrawal dries up, consumer spending will stumble. Given that consumer spending and residential construction have accounted for 90% of GDP growth in recent years, it is hard to see how this can occur without a sharp slowdown in the economy.”

Tuesday, January 10, 2006

The 'survivability of mankind' is at stake: are you ready?

Every day, I make an attempt to help people I know (friends, acquaintances, coworkers, family, etc) try to understand some of the major issues/imbalances effecting our economy, and the fact that we will probably experience some very difficult corrections in the near future... A futile attempt I guess, as many of them look at me with a dumbfounded look, and think that I’m completely off my rocker. But how can I blame them… Why should they listen to me anyway? I’m not an economist, nor do I hold a Ph.D… I’m just an average Joe—an insignificant organizational manager talking about rotten economic policies, deficits, debt, housing bubble, foreign Central Banks, the dollar, etc--topics very few of them understand or much less even care about anyway. I’m sure they are wondering how in the world I can think that I could possibly know more than the talking head analysts on TV, or the author of that glowing economic article they read in this morning’s paper.

How can I be so confident as to go against the trend (the “deceived perception” as I see it)? Tomorrow will be just fine they say… never in the history of the US… our debt is lower than it was during WWII… the dollar will never collapse, we’ll just nuke em… on and on… they continue to state reasons why my scenario is so out of whack with reality.

Oh well, I’m quickly coming to the realization that there is no way possible to convince someone who doesn’t want to see logic staring them in the face. Regardless, at least I know that I'll be ready when the economic $hit hits the fan... Stocking up on the Gold/Silver and liquid assets that I know will serve me well in the future.

Hope you enjoy the Marketwatch article below--it discusses numerous economic problems, the survival of mankind, and is followed by a poll:

By Paul B. Farrell, MarketWatch Last Update: 7:46 PM ET Jan. 9, 2006
ARROYO GRANDE, Calif. (MarketWatch) -- "This is the first scenario I've seen where I question the survivability of mankind," said RichardRainwater in a recent Fortune interview. He's No. 112 on the Forbes400 list of America's richest, worth $2.3 billion made in oil and realestate: "Most people invest and then sit around worrying what the nextblowup will be. I do the opposite. I wait for the blowup, then invest.

"The "survivability of mankind?" No wonder his wife Darla, a formerbankruptcy financier, calls him "Dr. Doom." He's a combination Noah building the Arc and Darth Vader building the Death Star, with a half-billion war-chest ready to pounce, bargain hunt, bottom-fish, buy distressed properties, prey on crises, again.

He reads books like "The Long Emergency: Surviving the End of the Oil Age, Climate Change and Other Converging Catastrophes of the 21st Century." He regularly checks blogs like LifeAfterTheOilCrash.net, a clearinghouse for commentaries by "the best paid, most widely respected geologists, physicists, and investment bankers in the world." Unfortunately, most people are blind and deaf to their warnings.

Oil is the biggest economic weapon of mass destruction on his radar. And when it reaches critical mass and the flash point, its impact will ripple across the planet and bring about "the end of life as we know it." That's the "Rainwater Doomsday Scenario." And compared to that,I'm a cockeyed optimist.

OK, so the collapse is coming, that's a given in his scenario. But still, two crucial uncertainties remain: When will it start? And what will trigger it?

My prediction: There's an 86% probability that America will collapse into a major economic recession and a sustained bear market in 2006, far worse than the dark days of 2000-2002 with its $8 trillion loss of market cap. And as the FEMA/Katrina disaster proved, Congress, the White House and Homeland Security are in denial, lost in their self-serving narcissistic egotistic happy-talk, incapable of seeing, let alone anticipating, the perfect storm on the horizon.

Ergo, their response will likely add fuel to the spreading contagion rather than solve it. So if Rainwater's right and oil is at the centerof the economic WMD, it looks like just about anything could trigger aworldwide meltdown. And today the world is full of triggers.

So, what event(s) will trigger the conflagration? You tell me! Seriously. Last summer we conducted a "Mega-Bubble Meltdown Poll" and were overwhelmed by the responses. We received over three times more than any other single column in nine years. And we summarized the results in a follow-up piece on strategies.

So give us your honest opinion. We believe you know better than the clueless spinmeisters on Wall Street and in Washington: Tell us which of the following triggers are likely to push us over the edge, into another recession and bear market. Pick more than one if you like. But help us by focusing on your best picks. And feel free to pass this onto a friend, ask them to vote in the poll:

20 triggers for the coming collapse

1. Oil & energy as the trigger. Warnings: Crude at new records. Gas-guzzlers still feeding big egos. GM, Ford troubles. New politicaldangers: Venezuela, Bolivia, Russia's natural gas threats to Ukraine.

2. Foreign trade deficit as a trigger. Warnings: Recent monthly deficits top $65 billion. This year's deficit will beat 2004's $617 billion. Foreigners now own $2.5 trillion of America.

3. Federal budget deficits. Warnings: Federal debt now $7.8 trillion. Add another $400 federal deficit this year. By 2010, interest on debt will equal our defense budget.

4. Corporate pension defaults. Warnings: Congress lets pensions use absurd estimates of future returns, adding problems on top of problems. Airlines, auto, others heavily burdened, default to taxpayers.

5. Government pensions deficits. Warning: A near $400 billion mess draining local taxpayer resources.

6. Weak U.S. dollar as trigger. Warnings: Foreign nations may replace dollar reserves. Even Warren Buffett is now making foreign currency hedging bets of $20 billion.

7. Social Security deficit. Warnings: We have no choice, cut benefits or raise taxes; but politicians hate both in an election year, so it'll just get worse.

8. Health-care insurance costs. Warnings: Employees' costs increasing. Costs feed inflation. 43 million uninsured.

9. Medicare as a trigger. Warnings: Going broke faster than Social Security. Prescription drug benefit adding an unfunded $8 trillion. Long-term estimates of $36.6 trillion.

10. War and military defense deficit. Warnings: Iraq and Afghanistan wars cost over $200 billion a year. And lately we hear of new plans to invade Iran next.

11. Homeland Insecurity triggers. Warnings: Minimal legislation to protect ports and chemical plants. Federal budget cut border patrol 90%. Vigilantes patrolling. FEMA an under-funded disaster.

12. Class gap widening. Warnings: CEOs and the rich get increasing share of wealth, ownership and tax cuts, while labor's income is reduced and latest budget cuts mainly hurt lower economic classes.

13. Congressional pork-barrel. Warnings: Pork, tax cuts and out-of-control spending. And with no veto threats, Congress runs amuck like teenage addict with stolen credit cards.

14. International credibility. Warnings: Image problems: Wiretapping, Abu Ghraib, Gitmo, secret prisons, and more.

15. Real estate as a trigger. Warnings: Speculation. Cheap money. Home-equity loans used to fund current expenses.

16. Personal-savings shortfall. Warnings: National savings rate now below zero, down from 8% in early 80s. We're now obsessed consumers,blind to saving for tomorrow.

17. Consumer-debt bubble. Warnings: Americans are living beyond their means. Consumer debt is $2 trillion, an all-time high. Personal bankruptcies rising.

18. Political scandals and trials. Warnings: Libby, DeLay, Rove, Scanlon, Abramoff, Frist, Ney; the list is growing.

19. Hedge fund risks. Warning: Doubled since 2000 to over $1 trillion as pension funds, discouraged with the stock market, are taking bigger risks, further endangering retirement funds.

20. Excessive P/E ratios. Warnings: Not just Google at 50 times; the stock market is about 30% overvalued. In last summer's poll 86% of our readers said there was a better than 50-50 chance of America's economic bubble exploding. With multipletrigger points, we have the makings of a perfect storm. In this new poll we want you to tell us when you think it will happenand which of these trigger points will push us into a recession and another bear market. Send us your thoughts about these two crucialissues. Later we'll summarize the results and offer strategies. http://www.marketwatch.com/

Monday, January 09, 2006

China’s Stranglehold on the Dollar

This information on China's diversification plan is HUGE! Impacts to the US Dollar, Inflation rates, Housing Bubble, Gold prices, etc, could be Massive—the article below is an ABSOLUTE MUST READ!

Note: As I post this article, gold is up >$8 for the day and has already flirted with $550 oz.

January 9, 2006 “It's the death blow to the US dollar,” said Peter Grandich, editor of the Grandich Letter.

On Thursday, The People’s Republic of China fired off the first volley in what could turn out to be economic Armageddon. China announced that it would begin to diversify its foreign-exchange reserves away from US dollar.


The only thing keeping the dollar atop its fragile perch is the fact that other countries have been willing to lap up the $600 billion of American red ink every year via the trade deficit. That amounts to roughly $2 billion per day or nearly 7% GDP.

Currently, China is holding $769 billion, the vast majority of its foreign exchange reserves. This is a humongous sum by any measurement and represents approximately 30% of China’s gross domestic product. Regrettably, the Bush administration’s wasteful spending makes the dollar look like a bad long term investment, so China will either have to change its strategy or face a huge loss on its reserves. It’s a thorny predicament and one that China needs to handle delicately. If they move too aggressively it could trigger a sell-off and send the dollar plummeting.

It is unlikely that China will act recklessly, but just the mere suggestion of change has put the markets on edge.

Gold futures already jumped 4% in one week as large institutional buyers are voting with their feet that the dollar is headed for the dumpster. In fact, since Bush took office, gold has gone from the $200 range to $540 on Friday; a sure sign that investors have lost confidence in Washington’s ability to curb spending.

Even if China does not begin to cash in its greenbacks, we can expect to see considerable market volatility on Monday.

The Federal Reserve had anticipated China’s action for some time. That’s why the Board of Governors of the Federal Reserve announced earlier this year that they would cease to publish the M3 monetary aggregate (including the following components: large-denomination time deposits, repurchase agreements, and Eurodollars.) That way the Fed can print enough money to absorb the shock waves of a massive sell-off without the nosy public knowing what’s going on. It’s a clever ruse, and an effective way of bilking the American people out of their hard-earned savings while the dollar continues to burrow into its earthen grave.

Greenspan knew this day was coming, that’s probably why he chose to take an early retirement; splashing around in the Barbados while the dog-dung hits the fan. Here’s what he said in April before the Senate Budget Committee:

“The federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years. Unless that trend is reversed, at some point these deficits would cause the economy to stagnate or worse.

”“Unsustainable path”?!?

It was Greenspan and Bush who engineered that “unsustainable path”. He enthusiastically supported the president’s $450 billion per year tax cuts that redistributed America’s wealth to the 1% of the people that he represents. The tax cuts alone set the country on the road to catastrophe. The national debt has increased an unbelievable $3 trillion under the Bush-Greenspan cabal. He also endorsed the shaky lending practices (ARMs; adjustable rate mortgages, interest-only loans; $0 down payments) that inflated the housing bubble and caused an unprecedented wave of speculative buying. As the Fed continues to raise rates and tighten loan-requirements, the bubble is slowly limping towards the abyss carrying America’s economic future with it.

Greenspan anesthetized the country with low-interest rates while Bush and Co. maxed out the national credit card and loaded the boats with everything in the public till. Meanwhile, the economy kept sputtering along while Greenspan concealed the long-range effects of massive deficits behind a mountain of cheap money. Now, the well is running dry, and Americans will be facing rising interest rates, a stagnant economy, and a falling dollar.

China’s action signals that we are entering a period of economic instability, where America’s future is largely in the hands of its creditors. Economic policy in China will now determine the interest rates on mortgages in America.

Welcome to the new world order, comrade.

The Fed believes it can finesse the problem by manipulating the money supply beyond the public view.

We’ll see.

The last time Greenspan tried that trick he ended up dropping rates 12 times in a year and a half as the steam whooshed from the stock market bubble leaving the economy on life support.

Greenspan knows that low interest rates (“cheap money”) cannot always forestall disaster. If China starts a sell-off, it will be doomsday for the greenback. Japan would be forced to sell, with Germany close behind. The smaller nations would join the feeding frenzy, followed by the hedge and pension funds. It would be like a stroll through the Weimar Republic in the early 1930s.

So, what’s next?

On Monday, the Fed will “preemptively” sluice zillions into the system to increase liquidity and stave off a possible run on the dollar. That way they can maintain the appearance of normalcy while what little is left of American middle class wealth is shifted into the flannel pockets of the central bankers via inflation. This will put the American economy on a long downward trajectory to third-world penury.

America is on the road towards hyperinflation; designed to savage the middle class, undermine popular social programs, crush organized labor, privatize all areas of the federal government, and “flatten” the workplace (to use the language of globalization guru, Tom Friedman) so that Americans will be forced to compete with the poorest paid workers in the world.

The effects of massive deficits are entirely understood. Eventually, the chickens come home to roost and the poor and middle class suffer horribly. It won’t be any different this time.

Billionaire Investor George Soros Foresees Recession in 2007

Mr. Soros feels that the Fed will overshoot when raising short-term rates and this could create a “hard-landing” for housing, thus leading to a dollar decline, slower worldwide growth and eventually a recession in 2007. The Reuters report below provides more detail

SINGAPORE, Jan 9 (Reuters) - Billionaire investor George Soros said on Monday the U.S. Federal Reserve might overshoot in its bid to tighten monetary policy, deflating housing prices and tipping the economy into recession in 2007.

A collapse in U.S. housing prices could be associated with a dollar decline, scuppering the Fed's attempt to engineer a "soft-landing" for the economy.

Soros -- best known for his famous bet against the sterling as Britain was forced to pull its currency out of the European currency grid in 1992 -- said he expected the federal funds rate, now at 4.25 percent, to peak at 4.75 percent.

Nevertheless, the Fed could be late in estimating when to stop raising rates, he said, creating a "reasonably significant chance" of a "hard-landing."

"If housing continues to cool while rates are slowing then it could turn into a hard landing," Soros said. "That's why I expect a recession to happen in 2007, not 2006."

The Fed has raised its key rate at each of its policy meetings since June 2004, but has indicated the tightening cycle is close to peaking.

Although economies in Europe and Japan are recovering from slowdowns, they may not be in a position to counterbalance the impact of a U.S. recession, he said. Besides, Japan's economy could slow down if the Chinese economy slows.

"Europe is growing relatively well... but a hard landing in the U.S. will be associated with a decline in the dollar which would hurt the European economy," he said.

Soros said he believed the U.S. housing bubble, a major factor behind strong U.S. consumption, had reached its peak and was in the process of being deflated.

A way to tackle an ensuing global slowdown would be to stoke domestic demand in Asia and other developing regions, he said. He suggested an International Monetary Fund proposal for richer countries to donate their Special Drawing Rights (SDR) to poorer countries would be a way to stimulate that demand.

Sunday, January 08, 2006

Americans saving less than nothing

It's Official! American spending has outstripped income for seven consecutive months now. This issue is important in many regards, and it hasn't happened since the Great Depression. Why is it important you may ask? Well, it impacts Fed policy, our US trade deficit, the dollar, US economic expansion rates, Asian production, and is directly related to the Housing Bubble.

I previously discussed the issue in my December post--in case you didn't get a chance to review it. I also highly recommend you read this eye-opening article, which compares a US executive and his South Korean counterpart: Yin & Yang .

I'll try to summarize how negative American saving happened and why it is important here:

Fed policy, post 2001, was to try and stimulate the economy with massive liquidity and low short-term interest rates. These actions allowed American consumers to borrow money very cheaply and discouraged saving money over consumption (like most Americans needed help in this area?).

The Fed policy worked and Americans went on a borrowing/spending binge. The recession was very short, the economy churned, the stock market rose, auto sales were good, home values skyrocketed, and everything related to the housing industry (construction, finance, home furnishing, etc) picked up steam.

The American consumer and his spending binge was directly responsible for (1) keeping the factories churning in Asia (and increasing our trade deficit), (2) provided the fuel to keep the US economic expansion going and (3) provided increased housing demand which caused housing values to skyrocket.

But here we are now, four years later, overextended and exhausted in a changing Fed environment. But now, both the consumer and Fed are caught up in pickles:

The Fed needs to continue to increase short-term rates to (1) provide an incentive for foreign Central Banks to continue buying dollars (2) to stave off rising inflationary pressures and (3) try to gradually slow down the housing market. He is acting with extreme caution however, as he knows this new policy could be the catalyst for pricking the massive US housing bubble, which could spell disaster for the US economy. How should he proceed? Will he overshoot? What will happen to the housing bubble and the consumer "wealth-effect" it created?

The US consumer is like a kid who has spent the last 8 hours at a carnival borrowing money from his friends. The day of fun is not yet over, but he is broke. Does he continue to borrow money from friends to keep the excitement going, or does he pull back on spending (the fun), realizing that eventually he'll have to pay everyone back? That, my friends, is the crucial question... Eventually, the fun will be over, as the American consumer is strapped and MUST pull back soon. When this happens, the entire world will feel the the effects of this consumer slowdown and it will probably be a painful adjustment for everyone. I personally believe this will happen rather soon.

This 8 Jan 2006 article discusses the negative savings rate further:
When the Commerce Department recently tallied up consumer finances for November, it found that Americans shelled out more money than they took in. It was the seventh such month of red ink during 2005.

Kevin Lansing, an economist with the Federal Reserve Bank in San Francisco, tracks the personal savings rate -- the Commerce Department's measure of how much consumers have left after spending is subtracted from income. In November the savings rate was a negative 0.2 percent.

Given how much red ink households racked up in the first 11 months of last year, Lansing said the nation's personal savings rate could well be negative for all of 2005.

That, he added, would be "the first such occurrence since the Great Depression."

The term "savings rate" may be a misnomer. Keith Leggett, senior economist with the American Bankers Association, described the measure as a tally of all the income that isn't spent.

"Savings is the absence of consumption,'' he said.

Traditionally this unspent income has been used to accumulate capital for future investment. By contrast, the recent spell of low savings -- or high spending -- has provided a short-term stimulus, helping the nation's output of goods and services grow at an enviable 4.3 percent rate in the third quarter of 2005.

But many experts say that in the months ahead, savings-starved, debt-burdened households will slow their spending and, with it, the economy. "You're seeing a situation where the consumers are spending every penny they possibly can and borrowing on top of that,'' said Joel Naroff, a Pennsylvania economic consultant, who expects growth to cool in the near future.
And while classical economic theory says savings must accumulate for future investment, if consumers suddenly start spending less, it could cause problems. "If everybody decided to save, the economy would contract and you'd lose jobs,'' Leggett said.

The Federal Reserve's Lansing examined the savings argument more closely in a November Federal Reserve article titled "Spendthrift Nation." He noted that in the 1980s the personal savings rate in the United States averaged 9 percent. Put another way, back then Americans spent 91 cents of every after-tax dollar they earned, which left a 9 cent surplus for savings or investment.

During the 1990s, Americans spent about 95 cents per dollar earned and had a nickel left. The nation ended 2004 with an annual savings rate of 1.8 percent. The rate has continued down through 2005, attracting the notice of some prominent economic observers.

"If we can believe the numbers, personal savings in the United States have practically disappeared,'' former Federal Reserve Chairman Paul Volcker wrote in an ominously titled opinion piece, "An economy on thin ice," in April.

But other economists, including current members of the Federal Reserve, say the falling savings rate isn't so alarming. They argue that the declining savings rate has been offset by another factor -- rising home prices.

"A lot of the psychology of savings is that you're prepared for an emergency," said economist Tim Kane with the Heritage Foundation in Washington. "And if your house is worth 10 percent more, then you feel you're prepared.''

Federal Reserve Board member Susan Schmidt Bies painted a sanguine picture of American spending, savings and debt in an April speech. She conceded that household debt had grown twice as fast as after-tax income between 1999 and 2004, helping drive down the savings rate. But Bies noted that household net worth has soared, driven by rising home prices coupled with stock market gains.

"While analysts usually focus on the savings rate," Bies said, "some argue that a more relevant measure of savings adequacy is ... the change in net worth. And in this regard the picture of household savings looks more favorable."

In a sense, the American home has become the proverbial cake that consumers can have and eat as well, optimists say.

"Consumers want to borrow, tapping the equity they have in their homes," said Leggett, the American Bankers Association economist. "We have really figured out a way of banking to free up illiquid assets so they have greater liquidity."

But many economists say housing prices will, at best, flatten out, breaking the cycle of refinancing that has allowed consumers to borrow and spend.

"I'm afraid the home equity fountain of youth is going to dry up,'' said Scott Anderson, an economist with Wells Fargo. He said Freddie Mac, the giant mortgage reseller, projects that consumers will withdraw a record $200 billion in cash-out financings in 2005 -- a figure that is expected to fall to $110 billion in 2006 as mortgage rates rise.

Anderson said real earnings gains have remained more or less flat as inflation eats up wage growth. As the refinancing stimulus is removed, he foresees slower consumption in 2006. Still, he adds, "that doesn't necessarily spell doom and gloom."

Tom Schlesinger, executive director of the Financial Markets Center, a liberal Virginia think tank, is more alarmed. Schlesinger noted that the Federal Reserve's debt service ratio, which compares consumer debt payments to disposable income, hit records in each of the three quarters of 2005 for which data are available.

"Families continue to be heavily burdened by debt,'' he said.

Amelia Warren Tyagi, who, with her mother, Harvard law Professor Elizabeth Warren, co-authored "The Two Income Trap," said debt nowadays ensnares not just the working poor, but also middle-class families with two wage earners. Tyagi said elevated costs for mortgages, health insurance, education and day care had eroded the purchasing power of the second paycheck.

"What's happened to the family is that they have budgeted to the limit of those two incomes," she said. "If anything happens -- a job loss or an illness -- they're stuck."

Oakland homeowner Sue McCullough, 46, has experienced the pitfalls of going from two incomes down to one. In the early 1990s, she and her husband of 18 years, Don Barks, 48, both worked in St. Louis. They owned a fourplex, living in one unit and renting out the others.

When McCullough was laid off in 1991, they relocated to the Bay Area. And when she became pregnant, Barks became a stay-at-home dad.

In retrospect, McCullough, who has continued working straight through as a computer programmer, said giving up the second paycheck may have been an error. A string of bad breaks eventually caused them to lose their property in St. Louis and file for bankruptcy in 1997 in the midst of having their second child.

"I waddled into bankruptcy court seven months pregnant," said McCullough, who has since rebuilt the family's credit by getting small credit cards and then a car loan. In 2001, the family of four was able to qualify for a mortgage on a two-bedroom bungalow in Oakland's Lower Laurel neighborhood.

"I am really careful, as in obsessive,'' said McCullough, a self-described skinflint when it comes to debt and spending. "We hit bottom and then things started to get better."

Friday, January 06, 2006

China signals reserves switch away from dollar

More bad news for the US dollar. According to this Jan 5, 2006 FT.com article, it looks like China is beginning to get worried about all those dollars they have accumulated and are working on plans to diversify. In addition, I recently saw this December 2005 article, which discussed Asian Central Banks signaling their intention to increase their gold reserve holdings. The implications of these actions could be significant for the US dollar, but the outcome will depend on how quickly this diversification happens... Could potentially lead to a dollar crisis or just a slow devaluation. Regardless of how it is implemented, the long term trend will be: the dollar will lose value (and Americans their purchasing power), interest rates will rise (helping to speed up the decline of the housing bubble), inflation will take off and gold prices will increase.

Read the FT.com article below:

Updated January 6, 2006: China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds – a potential shift with significant implications for global financial and commodity markets.

Economists estimate that more that 70 per cent of their reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves – currently accumulating at about $15bn (€12.4bn) a month – it could put heavy downward pressure on the greenback.

In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to “improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets”.

It went on: “[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.

“We want to ensure that the use of foreign exchange reserves supports a national strategy, an open economy and the macro-economic adjustment."

The announcement came from the State Administration of Foreign Exchange (Safe). It gave no more details about whether this meant a big shift in the investment strategy for Chinese reserves, which according to local press reports reached nearly $800bn at the end of last year and are expected by economists to near $1,000bn this year.

The regulator also said it would end quotas on the amount of foreign currency Chinese companies can acquire to invest in overseas assets, a decision that removes a bureaucratic hurdle facing companies that plan to make international acquisitions.

The statement comes at a time of growing debate in China on how the reserves are invested. Some economists have called on Beijing to use the funds to finance infrastructure investment and clean up state-owned companies, or to invest in higher-yielding assets rather than financing US borrowing.

However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was “vague”, Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets.

“It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities,” he said.

The Group of Seven leading industrialised economies has repeatedly called for an adjustment in global trade imbalances, including a rise in the renminbi. The US has expressed frustration that China has not allowed its currency to rise significantly after last July’s 2 per cent revaluation. That saw China move from a dollar peg to managing its currency against a basket of currencies, potentially allowing the renminbi to rise against the dollar.

John Snow, US Treasury secretary, speaking earlier on Thursday, repeated his call for China to allow the renminbi to rise against the dollar. “The trade deficit is influenced by lots of things, differential growth rates, differential savings rates and investment rates and so on. But clearly, getting the [Chinese currency] more appropriately valued will be helpful to the global adjustment process,” he said.

However, some economists believe it would be a mistake for China to shift its reserves into domestic investment or other asset classes.

Cheap money, soaring oil, home prices and budget deficits

I highly recommend you pick up the new Economist magazine (The World In 2006--displayed until March 2006) and read the article "Fragile Foundations". Here is the link to the "on-line" version (it's premium content, so you'll have to pay.)

I'll try to summarize what is said: The article states that we are living in a world economy so out of balance, it is dangerously vulnerable to shocks, and that we should prepare for slower growth, rising inflation and wobbly housing markets.

It goes on to discuss the world economy, and stresses that "rarely has the global economy looked so out of kilter with historical norms." Later, it then explains that "the global housing boom is the biggest financial bubble in history."

The author feels that increasing oil prices, due to growing global demand, will probably be the catalyst that pops the global housing bubble. Quote: "The consequences will be painful."

The article also explains that today's economy has many of the same characteristics as the 1970's, with large budget deficits, cheap money and high oil/home prices. Can you say--Get ready for inflation?

Rising inflation pressures will limit the Fed's options, so he may not be able to cut interest rates if the housing prices do fall (Homeowners couldn't be bailed out by the Fed with lower interest rates).

It wasn't all doom and gloom. Towards the end of the article, another stated possibility for the world economy in 2006 was a gentle slowdown--if oil prices remained tame and additional economies could take up the slack in global consumption--when America starts their consumption/spending pull-back.

I would also recommend the article "Tipping-Point"--same magazine

How U.S. debt threatens the economy

More of what I've been saying all along... This Jan 5, 2006 MSN Money article written by Roger Ibbotson, discusses the US deficit, the potential for a falling dollar, rising inflation rates, bond prices, Asian competition for natural resources, increased oil prices, etc.

Mr. Ibbotson, who holds a Ph.D, and is a professor of finance at the Yale School of Management, is probably just a tad bit smarter than me. So, for those of you who think I'm off my rocker with all this stuff, read his article below.

In 2006, look for a falling dollar and dropping bond prices, along with rising inflation and interest rates, as growing economies in China and India assert themselves.

You don't have to invest in China or India to be affected by the dramatic growth of their economies. And you don't have to be a politician to worry about trade and budget deficits. They're all interconnected, and they will all affect your pocketbook in 2006 and beyond.

Yes, the growth of the global economy has created tremendous opportunities for trade and investment -- and helped keep our economy growing at a healthy rate. But certain long-term problems are becoming more apparent as a result of the way goods and dollars flow around the globe. A few: The U.S. dollar, long-term bonds and financial firms may be in for a rough ride.

But my forecast isn't all doom and gloom. The overall stock market looks like a value at current prices, and some sectors -- most notably energy stocks -- should benefit from Asia's continued rise.

A surplus of deficits
A trade deficit simply means that we import more than we export. The net result of this is that more money flows out of the country than flows in. Prior to 1980, the United States was a net exporter, selling more goods overseas than it imported. But over the last 25 years, the situation has reversed. The trade deficit today has grown to record levels (now almost 6% of gross domestic product), with the biggest import-export imbalances coming from China, Japan and Southeast Asian nations.

We're all familiar with a budget deficit. That's where we spend more than we earn and have to borrow to fill the gap. We rely on credit cards to get through a budget deficit; the federal government issues Treasury bonds to finance its shortfall.

The U.S. has run budget deficits over a great deal of its history. The budget deficit today isn't even the highest it's ever been -- we ran larger deficits (as a percentage of GDP) during World War II. But what has changed over the last 25 years is that foreign governments, rather than U.S. citizens, have been buying this U.S. debt (in the form of Treasurys). Now, approximately half of this country's debt is held outside the United States, primarily by China, Japan and Southeast Asian nations.

Until recently, none of this was a problem. These creditor nations, with whom the U.S. also had its largest trade imbalances, were happy to buy up our extra government debt. The system worked. Folks here bought their exports, and they bought our debt. American consumers benefited from the flow of inexpensive goods, and foreign creditors benefited both from their return on investment and the continued consumption of their goods. This global interdependency helped to kept interest rates low and the dollar relatively strong.

Through the 90s, as our trade deficit grew, our budget deficits made up only a small percentage of our GDP. We were easily able to service our debt. But war, tax cuts and Hurricane Katrina changed that. And the combination of a weighty budget deficit and a record trade deficit has made these creditor nations nervous about loading up on too much U.S. debt. It's reasonable to think that China, Japan and Southeast Asia may soon choose to diversify their investments and stop buying our debt.

Competition for oil
The U.S. is by far the largest consumer of oil, buying almost a quarter of the total supply. But as China and India emerge as world economic players, they are demanding significantly more oil for autos and industry. In fact, China has become the No. 2 world consumer of oil. And with a population almost four times ours (and yet, only slightly larger than India's), there's increasingly more demand for oil and natural resources.

At the same time, the potential to increase the global oil supply may be more limited than in the past. Saudi Arabia and other oil-exporting countries are already producing close to capacity. Static supply and increased demand will inevitably cause energy prices to rise. Like budget surpluses, cheap energy and natural resources are unlikely to return anytime soon.

What does this mean to me?
If foreign countries stop buying our debt, that will cause long-term bond prices to drop, interest rates to rise and the dollar to fall. Excess demand for energy and natural resources from China and India will likely spur a rise in U.S. inflation rates. Higher interest rates and inflation coupled with a weak dollar make long-term bonds a risky investment with very little upside. Investors looking to invest new money in fixed income will be better off investing in short-term bonds.

The impact on the overall stock market is less clear -- some sectors will benefit while others will struggle. The drop in long-term bond prices may be harmful to certain types of financial firms, for example. Rising oil prices may help energy companies but hurt manufacturing, while a falling dollar may make many of our products more competitive overseas.

Overall, the market is strong and more reasonably priced today than it was a few years ago. Price-to-earnings ratios have come down from highs in the 40s in 2000 to half that today. And that ratio hasnt come down because prices dropped, but rather because corporate earnings have increased -- a much healthier reason. Todays lower stock valuations make the market much more attractive and should attract more money to stocks, which should drive their prices higher.

Wednesday, January 04, 2006

IRAN: Oil Bourse and the Euro

Although somewhat old news, this crucial issue is being completely ignored by the mainstream media. The worldwide impact of IRAN trading oil in EUROS is enormous, and although seemingly insignificant, this one issue could have profound negative consequences for the US Dollar. I've discussed this topic briefly in the past, but feel it needs much more attention... Reason: Since the 1970s, all OPEC countries have agreed to sell oil for US dollars only (hence the term Petrodollar). This OPEC agreement means that any country that requires oil must first acquire enough US dollars to pay for the oil they need. This has helped to keep the dollar strong, as everyone needs the dollar to buy their oil. If this change (selling oil in Euros) is allowed to take hold, the dollar could tank!

Please read the article -- Sidebar: Iran in the Crosshairs; Special Report (more from this section); By Ryan McGreal

Iran's danger to America is not its nuclear program but its plan to introduce a euro-based energy exchange.

Starting in 2006, Iran will start up an "oil bourse", or a stock exchange for trading energy, that will be based on the euro, not the US dollar. While this may seem innocuous, it will be a grave risk to continued American global hegemony.

Petrodollar Hegemony
Today, most oil trading takes place on the New York Mercantile Exchange (NYMEX) and the London-based International Petroleum Exchange (IPE). Since the 1970s, the OPEC countries have all agreed to sell oil for US dollars only. This means every country that wants to buy oil must first acquire enough US dollars to buy what it needs.

Year after year, America imports much more than it exports. It must pay out that difference (its current accounts deficit) in dollars. Last year, the US ran a current accounts deficit of over $600 billion USD; this year, it's expected to increase to $700 billion.

If there were no good reason for other countries to buy all those American dollars, then the dollar would decline in value until the US economy could no longer afford to import goods from abroad. This is what happens when other countries run large current accounts deficits over long periods.

However, the deal with OPEC means other countries have no choice but to buy all those excess American dollars, which props up the value of the dollar and allows the American "import economy" to go on year after year. Effectively, America's main export is US dollars, and it is absolutely imperative to preserve a captive market for those dollars among oil-consuming countries.

The continued viability of the US economy depends on it. Americans can still afford to consume because their economy is suffused with cheap imports; a falling dollar will raise the prices of imported goods. At the same time, Americans enjoy some of the lowest oil prices in the world, largely due to the petrodollar arrangement. This has skewed the American vehicle market toward gas-guzzling but profitable SUVs and light trucks.

Selling Oil for Euros
One of the major unstated reasons the United States invaded Iraq was to stop Saddam Hussein from trading oil for euros, which he had begun in 2000. Hussein actually made more money selling oil for euros, as the euro appreciated 17 percent against the dollar between 2000 and 2003. Other countries in the region, particulary Iran and Syria, began public musing about switching from dollars to euros around the same time.

All three countries were subject to a barrage of threats from the United States government, but only Iraq went through with the switch, and it was summarily invaded. One of the US government's first acts in Iraq was to switch oil sales back to dollars.

Now, Iran plans not just to sell oil for euros, but to create an exchange market for parties to trade oil for euros. The oil bourse will provide a euro-based price standard, the way West Texas Intermediate crude (WTI) and North Sea Brent crude do today. To the extent that the balance of reserve holdings starts to shift from dollars to euros, that's very bad news for America's system of dollar hegemony.

Iran is taking a calculated risk that enough countries have an interest in a petro-euro market to contain American aggression. Many central banks are already quietly shedding their dollar reserves, nervous that America's economic fundamentals ($500 billion federal deficit, $700 billion current accounts deficit, $7.94 trillion federal debt [see update], record business and personal debts, zero savings) cannot be sustained for long, and hoping to insulate themselves from what they see as an inevitable recession. The US dollar has declined by a third against the euro since 2000, despite the petrodollar arrangement.

At the same time, Europe is eager to enjoy more of the "virtuous circle" that comes from supplying a major reserve currency: a ready market for its currency and guaranteed reinvestment as euro-holders plant their money in European markets. Vladimir Putin, Russia's president, has also expressed interest in switching from dollars to euros. Russia would benefit from getting paid in a stronger currency, and it would represent a political victory over America after fifteen years of watching its clients and assets in the oil-rich Caspian region co-opted by American expansion.

Nuclear Politics
Iran may, indeed, be attempting to acquire nuclear weapons. However, it also has a "legitimate" interest in developing nuclear power, since its own oil reserves are already post-peak and it aims to continue in its role as an energy exporter. Iran is a signatory in good standing to the Nuclear Non-Proliferation Treaty (NPT) and has openly informed the International Atomic Energy Agency of its intentions as requried by the Treaty.

However, Iran's presumed attempt to acquire nuclear weapons is only the politically acceptable excuse for America's threats. The real danger is that Iran will lay down the foundation for a post-hegemonic international energy industry in which America is merely one of many players. If Iran is, in fact, developing nuclear weapons, it is doing so to acquire a deterrent against exactly this kind of American encroachment.

Indeed, recent world events have only enforced the notion that a nation's successful efforts to acquire nuclear weapons confer respect and status, not the opprobrium it deserves. India, a growing economic power that possesses a nuclear arsenal and refuses to sign either the NPT or the Comprehensive Test Ban Treaty (CTBT), has just been rewarded for its efforts by US President Bush, who has agreed to "work to achieve full civil nuclear energy cooperation with India." This is a straightforward violation of the NPT, which forbids signatories from exchanging nuclear materials or support with non-signatories.

If Iran really is trying to acquire nuclear weapons, is it any wonder why? Look at the advantages that having nuclear arsenals have given to US allies India, Pakistan, and Israel, all of which have benefitted immensely from a playing field tilted in their favour by their ability to project devastating power. As official hysteria about Iran's intentions escalates in volume and intensity, remember the real force undermining the moral authority of the NPT: the big nuclear 'have' countries that still refuse either to apply the ban consistently or to take any meaningful steps of their own toward "general and complete disarmament" - ostensibly the NPT's ultimate goal.

Ironically, America originally invaded Iraq - a poor, defenseless country - partly to send a message to other oil producing countries not to rock the petrodollar system, but the real message for small countries is that they need to present a credible deterrent threat or risk being ignored and/or invaded.

Further Reading
From Petrodollars to Petroeuros: Are the Dollar's Days as an International Reserve Currency Drawing to an End? Strategic Insights, Volume II, Issue 11 (November 2003)

Iraq, the Dollar and the Euro, Hazel Henderson, The Globalise, June 02, 2003

The Real Reasons for the Upcoming War With Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth William Clark, January 2003 (Revised March 2003, with Post-war Commentary January 2004)

US Dollar Hegemony Has to Go Henry Liu, Asian Times, April 11, 2002

Update: - the number for the US federal debt was originally stated as $4.5 billion, off by three orders of magnitude (oops). According to the Bureau of the Public Debt, the debt currently stands at $7.94 trillion. Thanks to the dilligent reader who pointed this out. Raise the Hammer regrets the error - Ed.
Ryan lives in Hamilton with his family and works as an analyst, web application developer, writer and journal editor. He is the editor of Raise the Hammer. Ryan also helps to edit Perspectives on Evil and Human Wickedness, writes occasionally for CanadianContent.Net, and maintains a personal website.