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.


Anonymous said...

Thankyou for the great blog.

I also look forward to the coming collapse and subsequent rebuilding on a genuine foundation.

Americans have been too disconnected from reality for too long. Time to get reconnected. Think it will be good for everybody in the long run.

Now a little econ. question:

When the dollar gets devalued and Bernake manufactures a bunch of bills, what does that do to interest rates?

Out at the peak said...

anon: Very good implied question. The Federal Reserve can set the short term target rates to what ever they want. However, I think you are asking what will happen to yields on bonds (affecting mortgage rates) when Bernanke does his song and dance in the high chair. We can already see that the short term rate increases hasn't done its job to influence long term rates. It could be just a laggy effect or current market conditions have changed.

I read through conflicting reports on this. (Randy, someone needs to host a bond yield debate to cover the issue. I think I'll ask Ben Jones to have one on his Money & Metals blog.)

Historical presidence shows when we enter a recession, yields go down. Demand for stable returns become high and that pushes yields down. However, there are other factors to consider. Foreign banks might try to diversify away from the USD, so the demand should decrease. 30-yr bond is being reissued which takes capital away from 10-yr bond. Both rates should go up from that action.

One of my unwise investment decisions was to purchase RRPIX as a suggestion from a financial advisor. I ought to dump the position and get more metals because the bond direction is uncertain to me.

41cadillac said...

Interest rates will be pushed up.

Ben will increase interest rates to keep investors buying treasure notes. He will have no choice whatsoever.

This housing bubble will explode.

One trillion of mortgage debt monthly payments will be adjusted upward.

The end of pulling monies out of the equity in homes is near. (House ATM).

Banks are fighting the tightening of lending rules.

US banks seek more mortgage proposal comment time
Wed Jan 25, 2006 04:25 PM ET
WASHINGTON, Jan 25 (Reuters) -

Lenders this week asked U.S. regulators to extend a comment period on a proposal that urged tighter underwriting on new mortgage products that may pose greater risks for banks and borrowers as interest rates rise.

41cadillac said...

Wednesday, January 25, 2006

WASHINGTON — Sales of existing U.S. homes dropped 5.7 percent in December to a 6.6 million unit rate, marking the third consecutive decline and hitting the lowest level since March 2004, according to trade group data Wednesday that pointed to further slowing in housing

Anonymous said...

Great Blog!

Looks like the San Diego real estate market has done a 180 turn and is now on the verge of a multi-year decline!

For a great article on the true direction of the real estate market as
authored by a top San Diego real estate broker, visit:

Randy said...

Sorry for the delay... Long day--Just returned from work and first opportunity to check in

Appreciate everyone's comments.

Peak, 41Cadillac: thanks for trying to answer anon's question.

Peak, you are much more analytical than me, and you answer has much merit, but I'd personally have to agree with Cadillac. Both long and short-term rates will be much higher. Short term, in an effort to influence investment into the dollar, long term due to the lack of takers.

Food for thought: A possible explanation for our current “low” long-term rate conundrum.

OK, I’m not the sharpest knife in the drawer and I'm just speculating here, but has anyone ever thought it possible, that the fed themselves are trying to keep the long-term rates low (to prevent a housing and bond market collapse) and they themselves are directly pumping massive amounts of money into the coffers to hold the rates low?

Out at the peak said...

Randy, so do you think that the gov't is pumping their own money to keep long term rates low? I've had the same suspicion as well! They could be laundering money from offshore accounts. This theory would easily tie into PetroDollar defense.

If they are doing this to help home owners now, won't they continue to do so?

I guess I'll hold onto RRPIX now and see if I can exit at a break even point.

41cadillac said...

Well chosen USA oil and gas companies are a good investment. No matter the economy the world runs on oil. Look at just today with the Hamas news. Year after year the "desert kings" will be causing upheaval in that desert.

Out at the peak said...

I'm still more upbeat about Canadian energy trusts because of their dividends. However, US energy companies are probably posed for a great run for years to come. Does anyone know who are the biggest players in Alaskian exploration?

Anonymous said...

I just look at Bernanke as a serious inflation fighter. That means, for me, that rates for short term notes will continue to rise, and that this will keep long term notes at lower rates. Now, how long this will continue is anyone's guess. I just think that there are deflationary pressures that will result in deflation prior to Bernanke's inflationary efforts. In other words, inflation may yet come, (we have fiat currency) but not before the fed attempts to protect the value of the dollar. How else can we explain the absence of any great inflation in spite of such easy money in the last three years?

Randy said...


Thank you for posting up!

I agree that short-term rates will continue to rise, which will keep demand up for the dollar, and in-turn, help to hold long-term rates low (for a while). Eventually, however, Helicopter Ben will realize the housing market needs his help, and he will lower rates again. This action will hurt the dollar and drive long-term rates higher.

The reason we are not seeing inflation (deflation as you see it), is (1) years of cheap Asian imports, (2) the government’s exclusion of energy, housing and food prices when calculating core CPI figures and (3) The Gvt’s use of Hedonic adjustments and substitution in their CPI calculation methods.

See these MSN Money articles by Bill Fleckenstein. He discusses more on the issues.

In a nutshell: I agree the government will try to protect the dollar, but do not see any deflation in our future. If anything, Ben “Helicopter” Bernanke will probably push us into a hyperinflation state (once he stops raising rates).

Anonymous said...

So, then Randy, inflation preceeds deflation. but eventually he has to put the volker move on if inflation gets too aggressive. Then it could get interesting.

Randy said...


You are right. Inflation preceeds deflation. In the near term (18 months or so), I think we'll see big inflation numbers, as the Fed will fail to react strong enough--in a futile attempt to save housing & our economy.

This inflation will be followed by deflation & a possible economic Depression... after Bernanke overreacts and tries to save the dollar and tame inflation.

Anonymous said...

Paper, (fiat) money is dishonest money. Inflation is a devaluation in purchasing power which is a theft of your labor. This didn’t just happen - this is all planned. Banksters lend you paper money which they create out of thin air – you pay back the principle plus interest – you pay interest on money created from nothing. The interest needed on a loan is never created which means… we are all in a proverbial game of musical chairs. During a credit contraction – the music stops(new money is not created), but all those loans still need to be paid plus the interest. Lots of people will be left without a chair. This doesn’t just happen it is all planned. The so called business cycle is just your masters sheering some of the sheeple.


Everyone needs a wake up call.