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.
Monday, January 09, 2006
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:
FED
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?
Consumer
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."
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:
FED
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?
Consumer
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.
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
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.
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.
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.
U.S. Economy Faces Large Imbalances in 2006
This recent Center For Economic Policy Research article provides several reasons why 2006 will probably not fare as well as 2005. The author feels that the Housing Bubble, Trade Deficit, Dollar problems, Inflation and the US Consumer's negative savings rate will make 2006 a difficult year, and if turns out as well as 2005, we need to consider ourselves lucky.
But economists are notorious for not forecasting downturns in the economy. And there are a number of imbalances in the U.S. economy today that, when they provoke the inevitable adjustment, could send the economy spiraling downward.
The most important of these is the housing bubble. House prices have increased by about 55 percent, after adjusting for inflation, over the last 8 years. This is an unprecedented departure from their long-term trend - from the early 1950s to 1996, house prices increased at the same rate as overall inflation. The reason for this vast run-up in house prices is a speculative bubble - the same kind of frenzy that drove the stock market bubble in the late 1990s.
When the stock market bubble began to break in 2000, it caused the recession of 2001. The housing bubble has driven the economic recovery from that recession, and has been responsible for most of the job creation since 2001. The housing market is already cooling, and when the bubble bursts it is very likely to cause a recession.
Our record trade deficit is another unsustainable trend. We are now borrowing about 7 percent of our GDP from abroad. At some point this will have to adjust, and the way this happens - unless we have a serious recession - is for the dollar to fall. Normally this would not be such a bad thing, because it makes our exports cheaper and our imports more expensive, thus reducing the trade deficit. But a fall in the dollar could set off a spike in long-term interest rates here, and therefore mortgage rates. This could burst the housing bubble.
A fall in the dollar could also cause the Federal Reserve to raise short-term interest rates more than it should, since rising import prices add to inflation. This would also slow the economy.
The economic recovery has also been driven by consumption, financed by enormous levels of borrowing. Last quarter the household savings rate was negative for the first time ever. This rate of borrowing and consumption is also unsustainable. It is possible that business investment could pick up as consumer spending inevitably slows. But business investment as a share of the economy is still far below its level of 2000.
Unfortunately most Americans even in 2005 did not fare as well as the overall economy. Wages have lagged behind inflation, which means that most people actually lost ground. And this does not include increases in the costs of health insurance and co-payments.
That's why most Americans are not as pleased with the economy as Wall Street has been lately. And our 5 percent unemployment rate, which looks relatively good at first glance, is misleading. If we look at the employment rate instead - as the new Fed Chairman Ben Bernanke has pointed out -- we find that it is about 1.7 percentage points lower than it was in 2000. This corresponds to about 3.4 million fewer jobs, because people have quit the labor force. If these missing jobs were counted in the unemployment rate, it would be more than 7 percent.
So a 2006 economy that repeats 2005 wouldn't be all that great. Unfortunately, given the economy's current imbalances, we will be lucky to get that.
By Mark Weisbrot
Will the U.S. economy do as well in 2006 as it did in 2005? That may well depend on whether we can make it through another year without any of the current economy's big imbalances and unsustainable trends coming back to bite us.
The median forecast for GDP (Gross Domestic Product) growth in 2006, according to Bloomberg News' latest survey of 71 economists, is 3.4 percent. This is a little less than estimates for 2005, although a significant slowing from last quarter's 4.1 percent annualized rate.But economists are notorious for not forecasting downturns in the economy. And there are a number of imbalances in the U.S. economy today that, when they provoke the inevitable adjustment, could send the economy spiraling downward.
The most important of these is the housing bubble. House prices have increased by about 55 percent, after adjusting for inflation, over the last 8 years. This is an unprecedented departure from their long-term trend - from the early 1950s to 1996, house prices increased at the same rate as overall inflation. The reason for this vast run-up in house prices is a speculative bubble - the same kind of frenzy that drove the stock market bubble in the late 1990s.
When the stock market bubble began to break in 2000, it caused the recession of 2001. The housing bubble has driven the economic recovery from that recession, and has been responsible for most of the job creation since 2001. The housing market is already cooling, and when the bubble bursts it is very likely to cause a recession.
Our record trade deficit is another unsustainable trend. We are now borrowing about 7 percent of our GDP from abroad. At some point this will have to adjust, and the way this happens - unless we have a serious recession - is for the dollar to fall. Normally this would not be such a bad thing, because it makes our exports cheaper and our imports more expensive, thus reducing the trade deficit. But a fall in the dollar could set off a spike in long-term interest rates here, and therefore mortgage rates. This could burst the housing bubble.
A fall in the dollar could also cause the Federal Reserve to raise short-term interest rates more than it should, since rising import prices add to inflation. This would also slow the economy.
The economic recovery has also been driven by consumption, financed by enormous levels of borrowing. Last quarter the household savings rate was negative for the first time ever. This rate of borrowing and consumption is also unsustainable. It is possible that business investment could pick up as consumer spending inevitably slows. But business investment as a share of the economy is still far below its level of 2000.
Unfortunately most Americans even in 2005 did not fare as well as the overall economy. Wages have lagged behind inflation, which means that most people actually lost ground. And this does not include increases in the costs of health insurance and co-payments.
That's why most Americans are not as pleased with the economy as Wall Street has been lately. And our 5 percent unemployment rate, which looks relatively good at first glance, is misleading. If we look at the employment rate instead - as the new Fed Chairman Ben Bernanke has pointed out -- we find that it is about 1.7 percentage points lower than it was in 2000. This corresponds to about 3.4 million fewer jobs, because people have quit the labor force. If these missing jobs were counted in the unemployment rate, it would be more than 7 percent.
So a 2006 economy that repeats 2005 wouldn't be all that great. Unfortunately, given the economy's current imbalances, we will be lucky to get that.
Tuesday, January 03, 2006
Gold: Alternative Currency
This Bloomberg Story says quite a bit more about the dollar and fiat currencies than most people realize. The US dollar is currently the worlds reserve currency, but with (1) so many fiat dollars circulating the planet, (2) US debt/deficit levels skyrocketing, (3) a predicted slowdown in the US economy (can you say housing bubble) and (4) interest rate hikes coming to an end soon, people are beginning to realize that the dollar will soon start losing its purchasing power/value (Note: it could turn into a "dollar crisis" under the right circumstances). People are now looking for a better investment/return and Gold will probably be the peg of the next world reserve currency (when the dollar tanks).
Bottom line: The writing could be on the wall--for an end to the dollar's tenure as the world reserve currency.
Gold Gains Most Since 2003 on Demand for Alternative Currency
Jan. 3 (Bloomberg) -- Gold in New York gained the most since May 2003 on speculation that investors will buy bullion as an alternative to currencies because of concern about accelerating inflation.
``Gold is this storehouse of value that people want to maintain their purchasing power,'' said Ronald Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. "When people start losing confidence in the dollar and the euro, they turn to gold.''
The 18 percent rally in gold last year was the fifth straight annual gain and occurred even as the dollar climbed 15 percent against the euro. The precious metal rose in all currencies, paced by a 36 percent value increase in yen and euros.
Gold futures for February delivery rose $10.50, or 2 percent, to $529.40 an ounce at 10:50 a.m. on the Comex division of the New York Mercantile Exchange. Prices rose as much as $13.30, or 2.6 percent, to $532.20. A close at that price would represent the biggest percentage gain since May 19, 2003. The metal reached a 24-year high of $544.50 on Dec. 12.
A futures contract is an obligation to sell or buy a commodity at a set price by a specific date. A rise in all commodity prices signals inflation, analysts said. Gains in gold over the past year have reflected a broader interest in commodities.
Commodity Rally
Commodity prices, led by energy and metals, reached a 25- year high in early September as pension funds, hedge funds and investors poured more money into raw materials. The Reuters- Jefferies CRB Index of 19 commodities climbed 18 percent last year, and the energy-weighted Goldman Sachs Commodity Index gained 39 percent.
Gold has become an alternative reserve currency to both the U.S. dollar and the euro for second and third-tier central banks, said Dennis Gartman, economist and editor of Suffolk, Virginia-based Gartman Letter.
Russia, South Africa and Argentina said last year they would hold more gold. Central banks, mainly in the U.S. and Europe, hold almost a fifth of the world's gold.
"This is a bull market predicated upon disdain for all currencies,'' Gartman said.
A majority of traders, investor and analysts said gold may rise this week on concern inflation will accelerate and the dollar will weaken as the Federal Reserve halts a series of interest-rate increases.
Weekly Outlook
Ten of 18 traders, investors and analysts surveyed from Sydney to Chicago on Dec. 29 and Dec. 30 advised buying gold. Four urged selling and four were neutral. Bloomberg's weekly gold survey has forecast the direction of prices accurately in 51 of 88 weeks, or 58 percent of the time.
The Fed, after raising its key interest rate 13 times since June 2004, on Dec. 13 stopped saying its monetary policy includes ``accommodation,'' suggesting the central bank is at or near a so-called neutral rate that neither spurs nor restrains growth.
``We still remain bullish in gold as interest rates will top out and the dollar will correct down,'' said Ravi Jalan of New Delhi-based Jalan Commodities.
The Fed lifted rates to 4.25 percent last month, and the European Central Bank in December raised its benchmark rate for the first time in five years to 2.25 percent, partly to head off inflation.
Bottom line: The writing could be on the wall--for an end to the dollar's tenure as the world reserve currency.
Gold Gains Most Since 2003 on Demand for Alternative Currency
Jan. 3 (Bloomberg) -- Gold in New York gained the most since May 2003 on speculation that investors will buy bullion as an alternative to currencies because of concern about accelerating inflation.
``Gold is this storehouse of value that people want to maintain their purchasing power,'' said Ronald Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. "When people start losing confidence in the dollar and the euro, they turn to gold.''
The 18 percent rally in gold last year was the fifth straight annual gain and occurred even as the dollar climbed 15 percent against the euro. The precious metal rose in all currencies, paced by a 36 percent value increase in yen and euros.
Gold futures for February delivery rose $10.50, or 2 percent, to $529.40 an ounce at 10:50 a.m. on the Comex division of the New York Mercantile Exchange. Prices rose as much as $13.30, or 2.6 percent, to $532.20. A close at that price would represent the biggest percentage gain since May 19, 2003. The metal reached a 24-year high of $544.50 on Dec. 12.
A futures contract is an obligation to sell or buy a commodity at a set price by a specific date. A rise in all commodity prices signals inflation, analysts said. Gains in gold over the past year have reflected a broader interest in commodities.
Commodity Rally
Commodity prices, led by energy and metals, reached a 25- year high in early September as pension funds, hedge funds and investors poured more money into raw materials. The Reuters- Jefferies CRB Index of 19 commodities climbed 18 percent last year, and the energy-weighted Goldman Sachs Commodity Index gained 39 percent.
Gold has become an alternative reserve currency to both the U.S. dollar and the euro for second and third-tier central banks, said Dennis Gartman, economist and editor of Suffolk, Virginia-based Gartman Letter.
Russia, South Africa and Argentina said last year they would hold more gold. Central banks, mainly in the U.S. and Europe, hold almost a fifth of the world's gold.
"This is a bull market predicated upon disdain for all currencies,'' Gartman said.
A majority of traders, investor and analysts said gold may rise this week on concern inflation will accelerate and the dollar will weaken as the Federal Reserve halts a series of interest-rate increases.
Weekly Outlook
Ten of 18 traders, investors and analysts surveyed from Sydney to Chicago on Dec. 29 and Dec. 30 advised buying gold. Four urged selling and four were neutral. Bloomberg's weekly gold survey has forecast the direction of prices accurately in 51 of 88 weeks, or 58 percent of the time.
The Fed, after raising its key interest rate 13 times since June 2004, on Dec. 13 stopped saying its monetary policy includes ``accommodation,'' suggesting the central bank is at or near a so-called neutral rate that neither spurs nor restrains growth.
``We still remain bullish in gold as interest rates will top out and the dollar will correct down,'' said Ravi Jalan of New Delhi-based Jalan Commodities.
The Fed lifted rates to 4.25 percent last month, and the European Central Bank in December raised its benchmark rate for the first time in five years to 2.25 percent, partly to head off inflation.
GM and America together slide toward calamity
"What's good for GM is good for America." I regretfully feel those words are probably still accurate today. GM stock has slid nearly 60% since its heyday, and the company is saddled with high Union wages, massive pension obligations, soaring health care costs, and a huge slump in SUV sales (brought on by higher gas prices). Will they, and correspondingly the U.S., ever get out of the pickle they are in?
See this Market Watch report for today: Stocks sliding again
Michael S. Abraham also has an interesting perspective (posted below).
Abraham is a businessman who lives in Blacksburg. "For years I thought what was good for our country was good for General Motors and vice versa."
These famous words were uttered in 1953 by Charles "Engine Charlie" Wilson, president of GM and newly nominated secretary of defense.
His statement now seems a cruel and bitter joke since GM's domestic market share has plummeted from a high of 60 percent in its heyday to less than 25 percent today, and its bond rating dropped to "junk" status.
Once a paragon of American industrial might, GM is sputtering before our eyes. If GM succumbs, it will be more a suicide than a murder. Yes, GM faces intractable employee pension and benefit issues. But worse, GM has tenaciously held to paradigms that no longer exist and continued to build vehicles that don't fit changing times and consumer tastes. Recent gas price uncertainties provide the same situation GM faced during the OPEC oil embargoes 30 years ago.
At that time, imports carved increasingly larger slices of the market pie by making fuel-efficient vehicles while GM had none.
It's déjà vu all over again today, as waiting lists grow for competitors' hybrids while GM scrambles to engineer its first high-efficiency vehicle.
As complex systems, corporations and societies are similar in that their strength and vitality ebb and flow according to the vicissitudes of the era and their abilities to react and adjust. In the fascinating bestseller "Collapse," author Jared Diamond chronicles the downfall of several past civilizations. Particularly provocative is his subtitle, "How Societies Choose to Fail or Succeed." Corporations choose, too.
In contemplating GM's "choice," one would surmise that failure was never a conscious goal; there was never that fateful board meeting where directors schemed, "Let's destroy the company."
But the result of continuing bad decisions may ultimately prove to be the same. America, too, is exhibiting the inability to adjust. In many ways, our empire suffers from the attributes and behaviors that have doomed all empires before us.
Like GM, we stumble, clueless, into the future, wondering why what worked so well before works no more. We whitewash real threats, fashion artificial realities to suit our whims, distract ourselves with banal but titillating "news," and trust good ol' American ingenuity to carry us through. But the warning signs of failure are everywhere.
First, we're experiencing military overextension. With about 5 percent of the world's population, we spend more on our military than the rest of the world combined.
As our resource needs grow beyond our domestic ability to provide them, resources must be arrogated from others, often by force.
More than any other nation, we manipulate the rest of the world according to our needs, engendering deep resentment. The hostile reaction by those exploited is straining the ability of our military to maintain enduring subjugation.
Next, we're failing to protect the environment that nurtures us. While forging the most affluent society the world has ever known, nearly every measure of environmental health is negative.
Erosion and pollution of topsoils, depletion of aquifers, rivers and mineral resources, extremes of weather and accelerated species extinctions lead the terrible list of maladies.
For decades, our assault on nature has been pervasive, but the Bush administration is fanatical in its zeal to inflict lasting damage, passionately eviscerating two generations of hard-fought environmental laws and policies.
Third is our financial crisis. It has taken but one presidential administration to turn the world's greatest lender nation into the world's greatest debtor, from the largest national budget surplus to the largest deficit.
Over recent decades, our elected leaders have conspired with corporate strongmen in wanton, domineering ways to decimate local economies: retailing, manufacturing and agriculture. Our nation's increasing disparity of wealth will breed hostility when difficult times come. Finally, our inability to prepare for our coming energy crisis will prove catastrophic. Oil in particular is destined to become increasingly scarce as we approach the peak of international production.
The smallest gap between demand and supply will usher in skyrocketing prices and plunge our nation into a miserable, lasting recession and our citizens into fits of rage and despair. The impact will spare no nation, but due to our greater dependency, America will suffer like none other.
It is the unkindest irony that the personality characteristics that define Americans--superiority, entitlement, hubris, arrogance and invincibility -- and the values -- nationalism, individualism, hedonism and capitalism -- represented the greatest strengths in our empire's emergence, but are becoming our grandest weaknesses.
These values are elemental to our collective psyche and are inviolable -- we cling to them resolutely. Like GM, America must act to meet emerging challenges, yet both seem incapable. Adjusting to new realities by becoming more sustainable and equitable will become the defining challenge of our era.
We're on a one-way street toward calamity. A U-turn is urgently in order.
See this Market Watch report for today: Stocks sliding again
Michael S. Abraham also has an interesting perspective (posted below).
Abraham is a businessman who lives in Blacksburg. "For years I thought what was good for our country was good for General Motors and vice versa."
These famous words were uttered in 1953 by Charles "Engine Charlie" Wilson, president of GM and newly nominated secretary of defense.
His statement now seems a cruel and bitter joke since GM's domestic market share has plummeted from a high of 60 percent in its heyday to less than 25 percent today, and its bond rating dropped to "junk" status.
Once a paragon of American industrial might, GM is sputtering before our eyes. If GM succumbs, it will be more a suicide than a murder. Yes, GM faces intractable employee pension and benefit issues. But worse, GM has tenaciously held to paradigms that no longer exist and continued to build vehicles that don't fit changing times and consumer tastes. Recent gas price uncertainties provide the same situation GM faced during the OPEC oil embargoes 30 years ago.
At that time, imports carved increasingly larger slices of the market pie by making fuel-efficient vehicles while GM had none.
It's déjà vu all over again today, as waiting lists grow for competitors' hybrids while GM scrambles to engineer its first high-efficiency vehicle.
As complex systems, corporations and societies are similar in that their strength and vitality ebb and flow according to the vicissitudes of the era and their abilities to react and adjust. In the fascinating bestseller "Collapse," author Jared Diamond chronicles the downfall of several past civilizations. Particularly provocative is his subtitle, "How Societies Choose to Fail or Succeed." Corporations choose, too.
In contemplating GM's "choice," one would surmise that failure was never a conscious goal; there was never that fateful board meeting where directors schemed, "Let's destroy the company."
But the result of continuing bad decisions may ultimately prove to be the same. America, too, is exhibiting the inability to adjust. In many ways, our empire suffers from the attributes and behaviors that have doomed all empires before us.
Like GM, we stumble, clueless, into the future, wondering why what worked so well before works no more. We whitewash real threats, fashion artificial realities to suit our whims, distract ourselves with banal but titillating "news," and trust good ol' American ingenuity to carry us through. But the warning signs of failure are everywhere.
First, we're experiencing military overextension. With about 5 percent of the world's population, we spend more on our military than the rest of the world combined.
As our resource needs grow beyond our domestic ability to provide them, resources must be arrogated from others, often by force.
More than any other nation, we manipulate the rest of the world according to our needs, engendering deep resentment. The hostile reaction by those exploited is straining the ability of our military to maintain enduring subjugation.
Next, we're failing to protect the environment that nurtures us. While forging the most affluent society the world has ever known, nearly every measure of environmental health is negative.
Erosion and pollution of topsoils, depletion of aquifers, rivers and mineral resources, extremes of weather and accelerated species extinctions lead the terrible list of maladies.
For decades, our assault on nature has been pervasive, but the Bush administration is fanatical in its zeal to inflict lasting damage, passionately eviscerating two generations of hard-fought environmental laws and policies.
Third is our financial crisis. It has taken but one presidential administration to turn the world's greatest lender nation into the world's greatest debtor, from the largest national budget surplus to the largest deficit.
Over recent decades, our elected leaders have conspired with corporate strongmen in wanton, domineering ways to decimate local economies: retailing, manufacturing and agriculture. Our nation's increasing disparity of wealth will breed hostility when difficult times come. Finally, our inability to prepare for our coming energy crisis will prove catastrophic. Oil in particular is destined to become increasingly scarce as we approach the peak of international production.
The smallest gap between demand and supply will usher in skyrocketing prices and plunge our nation into a miserable, lasting recession and our citizens into fits of rage and despair. The impact will spare no nation, but due to our greater dependency, America will suffer like none other.
It is the unkindest irony that the personality characteristics that define Americans--superiority, entitlement, hubris, arrogance and invincibility -- and the values -- nationalism, individualism, hedonism and capitalism -- represented the greatest strengths in our empire's emergence, but are becoming our grandest weaknesses.
These values are elemental to our collective psyche and are inviolable -- we cling to them resolutely. Like GM, America must act to meet emerging challenges, yet both seem incapable. Adjusting to new realities by becoming more sustainable and equitable will become the defining challenge of our era.
We're on a one-way street toward calamity. A U-turn is urgently in order.
More Woes for the Airline Industry--Independence Air to shut down
I have previously discussed the dire situation of our United States airline sector: United Airlines, Delta Airlines, Northwest Airlines, ATA Airlines, US Airlines and most recently Independence Airlines--all are operating under bankruptcy protection .
The situation has gotten so bad for Independence Air, it now looks like they'll be shutting their doors (see the Jan 3, 2005 Washington Post report below).
Who will be next?
WASHINGTON — FLYi, parent company of low-fare airline Independence Air, said Monday that it will discontinue flights after Thursday evening because it could not find a buyer for its financially troubled operation.
The demise of Independence Air, based in Dulles, Va., will leave 2,700 employees out of work and thousands of passengers scrambling to find alternate flights and secure refunds. It also will cut competition in the 37 markets Independence serves, and that may lead to higher fares.
The shutdown will come two months after FLYi filed for Chapter 11 bankruptcy protection, complaining of high fuel costs and intense competition, and almost 19 months after the carrier launched service, promising low fares and coast-to-coast flights.
"Today is a sad day for Independence Air," the airline's Web site said Monday in a message to passengers. "The financial pressures in the industry have prevailed. We have run out of time."
Independence began service June 16, 2004, and once offered 600 flights a day to 47 cities. Today, it offers fewer than 200 daily departures.
FLYi said it is seeking approval from the U.S. Bankruptcy Court in Delaware to issue refunds to customers who have booked flights scheduled to depart after 7 p.m. Thursday.
Travelers holding Independence tickets for those flights must be accommodated on a standby basis by other airlines serving the same route at a cost of $50 per passenger. That provision was in a law passed by Congress to protect consumers after the Sept. 11, 2001, terrorist attacks. FLYi said passengers must book those alternative flights within 60 days after the carrier goes out of business.
Independence's frequent-flier points will become worthless at that point, but passengers can file claims with the bankruptcy court, the airline said.
The carrier flew from Sea-Tac International Airport from May to November, ceasing the direct service to Dulles after filing for bankruptcy.
The shutdown was expected.
FLYi warned as early as last winter that it might have to file for bankruptcy protection if it could not successfully restructure its operation. All last year, though, the airline held out hope that a solution to its financial problems could be found. But the company declared in its bankruptcy filing Nov. 7 that it would shut down if it could not find a buyer by January.
On Dec. 23, FLYi sent a letter to employees warning it would cease operations Jan. 7 if it was unable to find a major investor or buyer.
At least two airline companies had expressed interest in bidding for FLYi's assets. One potential bidder was Mesa Air Group, a Phoenix-based regional carrier that tried to acquire FLYi two years ago. The other was FLYi's former partner, UAL, parent of United Airlines. From 1989 to 2004, FLYi, then known as Atlantic Coast Airlines operated as a feeder carrier for United, the nation's second-largest airline.
"While we've been clear in reminding everyone that this was a possibility, we remained optimistic that there would be a way to avoid reaching this juncture," Independence Air Chairman and Chief Executive Kerry Skeen said in a statement Monday. "To date there has not been a firm offer put forward that meets the financial criteria necessary to continue operations as is."
The carrier urged customers to visit its Web site, http://www.flyi.com/, for more information, noting that its phone lines likely will be jammed.
The situation has gotten so bad for Independence Air, it now looks like they'll be shutting their doors (see the Jan 3, 2005 Washington Post report below).
Who will be next?
WASHINGTON — FLYi, parent company of low-fare airline Independence Air, said Monday that it will discontinue flights after Thursday evening because it could not find a buyer for its financially troubled operation.
The demise of Independence Air, based in Dulles, Va., will leave 2,700 employees out of work and thousands of passengers scrambling to find alternate flights and secure refunds. It also will cut competition in the 37 markets Independence serves, and that may lead to higher fares.
The shutdown will come two months after FLYi filed for Chapter 11 bankruptcy protection, complaining of high fuel costs and intense competition, and almost 19 months after the carrier launched service, promising low fares and coast-to-coast flights.
"Today is a sad day for Independence Air," the airline's Web site said Monday in a message to passengers. "The financial pressures in the industry have prevailed. We have run out of time."
Independence began service June 16, 2004, and once offered 600 flights a day to 47 cities. Today, it offers fewer than 200 daily departures.
FLYi said it is seeking approval from the U.S. Bankruptcy Court in Delaware to issue refunds to customers who have booked flights scheduled to depart after 7 p.m. Thursday.
Travelers holding Independence tickets for those flights must be accommodated on a standby basis by other airlines serving the same route at a cost of $50 per passenger. That provision was in a law passed by Congress to protect consumers after the Sept. 11, 2001, terrorist attacks. FLYi said passengers must book those alternative flights within 60 days after the carrier goes out of business.
Independence's frequent-flier points will become worthless at that point, but passengers can file claims with the bankruptcy court, the airline said.
The carrier flew from Sea-Tac International Airport from May to November, ceasing the direct service to Dulles after filing for bankruptcy.
The shutdown was expected.
FLYi warned as early as last winter that it might have to file for bankruptcy protection if it could not successfully restructure its operation. All last year, though, the airline held out hope that a solution to its financial problems could be found. But the company declared in its bankruptcy filing Nov. 7 that it would shut down if it could not find a buyer by January.
On Dec. 23, FLYi sent a letter to employees warning it would cease operations Jan. 7 if it was unable to find a major investor or buyer.
At least two airline companies had expressed interest in bidding for FLYi's assets. One potential bidder was Mesa Air Group, a Phoenix-based regional carrier that tried to acquire FLYi two years ago. The other was FLYi's former partner, UAL, parent of United Airlines. From 1989 to 2004, FLYi, then known as Atlantic Coast Airlines operated as a feeder carrier for United, the nation's second-largest airline.
"While we've been clear in reminding everyone that this was a possibility, we remained optimistic that there would be a way to avoid reaching this juncture," Independence Air Chairman and Chief Executive Kerry Skeen said in a statement Monday. "To date there has not been a firm offer put forward that meets the financial criteria necessary to continue operations as is."
The carrier urged customers to visit its Web site, http://www.flyi.com/, for more information, noting that its phone lines likely will be jammed.
Monday, January 02, 2006
U.S. Treasury Secretary John Snow urges Congress to raise $8.184 T debt limit
Could this be the first time in history the US defaults on paying its bills? Treasury Secretary John Snow seems quite concerned. Read the REUTERS report below:
(29 Dec 05) U.S. Treasury Secretary John Snow warned lawmakers on Thursday that a legally set limit on the government's ability to borrow will be hit in mid-February and urged Congress to raise it quickly.
Failure to do so potentially risks throwing the country into its first default in history, Snow warned in what has become virtually an annual rite as U.S. borrowing needs spiral.
"The administration now projects that the statutory debt limit, currently $8.184 trillion, will be reached in mid-February 2006," Snow said in a letter to 21 members of the U.S. House of Representatives and Senate released by Treasury after financial markets had closed.
Snow said that Treasury, if the debt limit was not raised by then, would have to take "extraordinary actions" to keep paying its bills for everything from Social Security to national defense spending.
Even if Treasury took "all available prudent and legal actions to avoid breaching the statutory debt limit, we anticipate that we can finance government operations no longer than mid-March."
The debt limit was last raised in November 2004 by $800 billion to its current level. The letter to Congress does not specify an amount the Treasury wants the ceiling set at this time.
But he said quick action was needed to preserve the U.S. ability to borrow in global capital markets at the lowest rates possible.
"A failure to increase the debt limit in a timely manner would threaten this unique and important position," Snow said.
The call for an increase in the debt ceiling typically provokes a round of criticism from opposition politicians over excessive government spending and the process is drawn out until nearly the last possible moment.
Treasury officials had said in November it was bracing for hefty borrowing needs in the January-March quarter, likely around a record $171 billion, and that it likely would hit the debt limit in that period.
Among other factors, the Treasury cited increased spending for rebuilding Gulf Coast areas hit hard by hurricanes Katrina and Rita.
(29 Dec 05) U.S. Treasury Secretary John Snow warned lawmakers on Thursday that a legally set limit on the government's ability to borrow will be hit in mid-February and urged Congress to raise it quickly.
Failure to do so potentially risks throwing the country into its first default in history, Snow warned in what has become virtually an annual rite as U.S. borrowing needs spiral.
"The administration now projects that the statutory debt limit, currently $8.184 trillion, will be reached in mid-February 2006," Snow said in a letter to 21 members of the U.S. House of Representatives and Senate released by Treasury after financial markets had closed.
Snow said that Treasury, if the debt limit was not raised by then, would have to take "extraordinary actions" to keep paying its bills for everything from Social Security to national defense spending.
Even if Treasury took "all available prudent and legal actions to avoid breaching the statutory debt limit, we anticipate that we can finance government operations no longer than mid-March."
The debt limit was last raised in November 2004 by $800 billion to its current level. The letter to Congress does not specify an amount the Treasury wants the ceiling set at this time.
But he said quick action was needed to preserve the U.S. ability to borrow in global capital markets at the lowest rates possible.
"A failure to increase the debt limit in a timely manner would threaten this unique and important position," Snow said.
The call for an increase in the debt ceiling typically provokes a round of criticism from opposition politicians over excessive government spending and the process is drawn out until nearly the last possible moment.
Treasury officials had said in November it was bracing for hefty borrowing needs in the January-March quarter, likely around a record $171 billion, and that it likely would hit the debt limit in that period.
Among other factors, the Treasury cited increased spending for rebuilding Gulf Coast areas hit hard by hurricanes Katrina and Rita.
Volcker: U.S. Economic Crisis Imminent
Former Fed Chairman Paul Volcker said he doesn't see how the U.S. can keep borrowing and consuming while letting foreign countries do all the producing. It's a recipe for American economic disaster and Mr. Volcker thinks a crisis is likely. Volcker believes that investor confidence could fade "at some point," he said, with "damaging volatility in both exchange markets and interest rates."
Story Continues Below
Volcker believes a serious economic crisis is likely unavoidable as the U.S. economy is struggling with what he sees as a hopelessly unsustainable relationship with the rest of the world. "If I were a biologist I'd call this a perfect example of symbiosis," Volcker said during a 2005 speech at Stanford University.
"Contented American consumers matched against delighted foreign producers. Happy borrowers matched against willing lenders. The difficulty is, the seemingly comfortable pattern can't go on indefinitely."
Experts seem to agree that the current situation can't last. But will there be a smooth and manageable rebalancing of the global economy - created by a slow drop in the dollar combined with a spike in foreign demand – or will the U.S. currency suddenly collapse, with skyrocketing interest rates that lead us into a global recession?
Volcker believes a crisis is unavoidable, and he claims that investors will lose their confidence "at some point," creating serious dilemma for "both exchange markets and interest rates." As the United States faces the threats of a potential housing bubble, a massive trade deficit and the lowest level of American savings in history, the jury is out on the Federal Reserve's actions over the past five years.
The Wall Street Journal reports that while the Fed acknowledges that its response to the 2000 Dot-Com crisis is partly to blame for current economic conditions, it claims it had no other viable course of action. The Fed slashed interest rates, and Congress provided extreme tax cuts giving American households unprecedented buying power. While the government's response did help the U.S. economy grow, it also created immense debt.
To alleviate this problem, at some point, U.S. consumers will have to curb spending and concentrate on saving – plus the economy will be forced to forego foreign investment.
Experts agree that the reaction to the economic problems after 9/11 took the country into uncharted territory. While many say the Fed's rate cuts and President Bush's tax initiatives were the right answer for recovery, no one can be sure.
"We have done what no other economy has done before, faced with an asset bubble," says Lawrence Lindsey, a one-time Fed governor and Bush adviser. "This is the first time in history the textbook economic policy ... was used, and worked. The problem is, once you finish that chapter of the economic texts, you turn the page and the page is blank - because no one has gone through the process before."
Some economists warn that the Fed has simply replaced the Dot-Com bubble with a housing bubble that is ready to burst, draining consumer spending, driving foreign investors away from U.S. markets and nurturing numerous other conditions that could lead to a serious recession.
Says Volcker: "I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase.
"At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets ..."
By contrast, Volcker's successor is perhaps a bit less circumspect. He said, "The number of forecasts of crises ... is far in excess of the number of crises that actually occur. There is something equivalent to an invisible hand which continuously is readdressing market imbalances to reach equilibrium."
Volcker, however, doesn't have as much faith in market forces, which oddly enough brings him to the conclusion that Greenspan and the Fed are doing the right thing by raising interest rates to hold down inflation.
The former Fed chairman thinks we need to make sure foreign investors hold their confidence in the U.S. because they're the ones doing all the investing. They need to know "those trillions of dollars they are piling up are going to be protected against inflation."
Story Continues Below
Volcker believes a serious economic crisis is likely unavoidable as the U.S. economy is struggling with what he sees as a hopelessly unsustainable relationship with the rest of the world. "If I were a biologist I'd call this a perfect example of symbiosis," Volcker said during a 2005 speech at Stanford University.
"Contented American consumers matched against delighted foreign producers. Happy borrowers matched against willing lenders. The difficulty is, the seemingly comfortable pattern can't go on indefinitely."
Experts seem to agree that the current situation can't last. But will there be a smooth and manageable rebalancing of the global economy - created by a slow drop in the dollar combined with a spike in foreign demand – or will the U.S. currency suddenly collapse, with skyrocketing interest rates that lead us into a global recession?
Volcker believes a crisis is unavoidable, and he claims that investors will lose their confidence "at some point," creating serious dilemma for "both exchange markets and interest rates." As the United States faces the threats of a potential housing bubble, a massive trade deficit and the lowest level of American savings in history, the jury is out on the Federal Reserve's actions over the past five years.
The Wall Street Journal reports that while the Fed acknowledges that its response to the 2000 Dot-Com crisis is partly to blame for current economic conditions, it claims it had no other viable course of action. The Fed slashed interest rates, and Congress provided extreme tax cuts giving American households unprecedented buying power. While the government's response did help the U.S. economy grow, it also created immense debt.
To alleviate this problem, at some point, U.S. consumers will have to curb spending and concentrate on saving – plus the economy will be forced to forego foreign investment.
Experts agree that the reaction to the economic problems after 9/11 took the country into uncharted territory. While many say the Fed's rate cuts and President Bush's tax initiatives were the right answer for recovery, no one can be sure.
"We have done what no other economy has done before, faced with an asset bubble," says Lawrence Lindsey, a one-time Fed governor and Bush adviser. "This is the first time in history the textbook economic policy ... was used, and worked. The problem is, once you finish that chapter of the economic texts, you turn the page and the page is blank - because no one has gone through the process before."
Some economists warn that the Fed has simply replaced the Dot-Com bubble with a housing bubble that is ready to burst, draining consumer spending, driving foreign investors away from U.S. markets and nurturing numerous other conditions that could lead to a serious recession.
Says Volcker: "I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase.
"At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets ..."
By contrast, Volcker's successor is perhaps a bit less circumspect. He said, "The number of forecasts of crises ... is far in excess of the number of crises that actually occur. There is something equivalent to an invisible hand which continuously is readdressing market imbalances to reach equilibrium."
Volcker, however, doesn't have as much faith in market forces, which oddly enough brings him to the conclusion that Greenspan and the Fed are doing the right thing by raising interest rates to hold down inflation.
The former Fed chairman thinks we need to make sure foreign investors hold their confidence in the U.S. because they're the ones doing all the investing. They need to know "those trillions of dollars they are piling up are going to be protected against inflation."
Top Forecaster Sees Recession on the Horizon
Folks much smarter than I are beginning to discuss the "R" word.
Jan. 2 (Bloomberg)-- The U.S. bond market's most accurate forecaster, who plies his trade 500 miles from Wall Street on Tobacco Road, says yields are sending ominous signs about the economy.
While economists at the biggest bond-trading firms wrongly predicted that the benchmark U.S. 10-year Treasury yield would end last year at 5 percent, a professor at the University of North Carolina came a lot closer to getting it right.
``It was luck, partly,'' said James F. Smith, 67, who teaches finance at the school's Chapel Hill branch. ``The other reason is the anticipation that inflation would be contained and that continued rate increases from the Federal Reserve would keep longer-maturity investors enthused about their returns.''
Smith turned out to be the top forecaster in Bloomberg's January survey of 66 economists. He predicted the benchmark 10- year yield would end the year at 4.49 percent. At the time, the yield was about 4.27 percent and the median estimate was for it to climb to 5.04 percent by Dec. 31. It finished 2005 at 4.39 percent. Yields move inversely to bond prices.
``Those Wall Street gurus have bigger expense accounts than I have total income,'' Smith said. Smith edged out three others who were forecasting 4.5 percent: Ken Goldstein, a Conference Board economist; Jeff Speakes, chief economist of Countrywide Financial Corp.; and Hugh Johnson, chairman of Johnson Illington Advisors, which has $642 million under management.
Ominous Signs
For 2006, Smith predicts the 10-year yield will climb to 4.53 percent. Core inflation, which excludes food and energy prices, ``remains under control,'' he said, tempering any rise in yields. Inflation erodes the purchasing power of a bond's fixed payments. The median estimate in the last Bloomberg survey is again 5 percent.
Beyond 2006, Smith said the bond market is waving a caution flag on the economy. Two-year Treasury yields last week rose above those on 10-year notes, creating a so-called inverted yield curve for the first time since December 2000. An inversion preceded the last four U.S. recessions.
``When the curve inverts, run for the exits,'' said Smith, who served as an economist for the Fed from 1975 to 1977. ``It will stay that way until the Fed realizes it caused a recession in 2007. Investors should start planning for a recession.''
Smith is a professor at the Kenan-Flagler Business School at UNC. He received his bachelor's, master's and doctorate degrees in economics from Southern Methodist University in Dallas, making him the only person to graduate from the school with all three degrees, according to Smith.
Fed Outlook
Smith expects the Fed to raise its target rate for overnight loans between banks three more times to 5 percent from 4.25 percent. The U.S. central bank has raised rates by a quarter- percentage point at every meeting since June 2004, when the target was at a 46-year low of 1 percent.
``That's three more times than we need,'' said Smith, who has also served as the chief economist for the Society of Industrial and Office Realtors since July 2002. In the January survey, Smith expected the Fed to only raise rates to 3 percent last year, compared with the median estimate of 3.50 percent.
Prices for personal consumption expenditures excluding food and energy rose 1.8 percent in November from a year earlier, down from 1.9 percent in October, the government said on Dec. 22. The Fed uses the PCE index in making its semi-annual forecasts. In July, the central bank said it expected the core rate to rise 1.75 percent to 2 percent last year.
Lower Yields
David Berson, chief economist at Fannie Mae, the biggest U.S. mortgage finance company, isn't surprised that Smith ended the year as the top forecaster.
The two, who worked together at the consulting firm Wharton Econometric Forecasting Associates in 1986 and 1987, both serve on the National Business Economic Issues Council.
``Jim has done well,'' said Berson. ``Jim's basic view on interest rates is that they will remain low as inflation remains low. Given that rates have remained low for the last five years, his forecasts have worked out well.''
Ten-year Treasury yields have dropped 29 basis points, or 0.29 percentage point, since reaching a seven-month high of 4.68 percent on Nov. 4 amid speculation inflation is in check.
None of the economists surveyed by Bloomberg expect a recession this year, or two consecutive quarters of a decline in gross domestic product. The economy will likely grow by 3.4 percent in 2006, based on the median of 71 forecasts in a survey conducted from Nov. 30 to Dec. 8. Smith's forecast from last month is for the economy to expand 3.8 percent.
Fed Chairman Alan Greenspan said on Nov. 3 that the yield curve ``used to be one of the most accurate measures we used to have to indicate when a recession was about to occur,'' though ``it's lost its capability of doing so in recent years.''
Last year was the fifth in a row that 10-year yields finished below economists' year-end forecasts from the start of the year, making Smith's prediction even more noteworthy.
To contact the reporter on this story:
Joshua Krongold in New York at jkrongold2@bloomberg.net.
Last Updated: January 2, 2006 09:07 EST
Jan. 2 (Bloomberg)-- The U.S. bond market's most accurate forecaster, who plies his trade 500 miles from Wall Street on Tobacco Road, says yields are sending ominous signs about the economy.
While economists at the biggest bond-trading firms wrongly predicted that the benchmark U.S. 10-year Treasury yield would end last year at 5 percent, a professor at the University of North Carolina came a lot closer to getting it right.
``It was luck, partly,'' said James F. Smith, 67, who teaches finance at the school's Chapel Hill branch. ``The other reason is the anticipation that inflation would be contained and that continued rate increases from the Federal Reserve would keep longer-maturity investors enthused about their returns.''
Smith turned out to be the top forecaster in Bloomberg's January survey of 66 economists. He predicted the benchmark 10- year yield would end the year at 4.49 percent. At the time, the yield was about 4.27 percent and the median estimate was for it to climb to 5.04 percent by Dec. 31. It finished 2005 at 4.39 percent. Yields move inversely to bond prices.
``Those Wall Street gurus have bigger expense accounts than I have total income,'' Smith said. Smith edged out three others who were forecasting 4.5 percent: Ken Goldstein, a Conference Board economist; Jeff Speakes, chief economist of Countrywide Financial Corp.; and Hugh Johnson, chairman of Johnson Illington Advisors, which has $642 million under management.
Ominous Signs
For 2006, Smith predicts the 10-year yield will climb to 4.53 percent. Core inflation, which excludes food and energy prices, ``remains under control,'' he said, tempering any rise in yields. Inflation erodes the purchasing power of a bond's fixed payments. The median estimate in the last Bloomberg survey is again 5 percent.
Beyond 2006, Smith said the bond market is waving a caution flag on the economy. Two-year Treasury yields last week rose above those on 10-year notes, creating a so-called inverted yield curve for the first time since December 2000. An inversion preceded the last four U.S. recessions.
``When the curve inverts, run for the exits,'' said Smith, who served as an economist for the Fed from 1975 to 1977. ``It will stay that way until the Fed realizes it caused a recession in 2007. Investors should start planning for a recession.''
Smith is a professor at the Kenan-Flagler Business School at UNC. He received his bachelor's, master's and doctorate degrees in economics from Southern Methodist University in Dallas, making him the only person to graduate from the school with all three degrees, according to Smith.
Fed Outlook
Smith expects the Fed to raise its target rate for overnight loans between banks three more times to 5 percent from 4.25 percent. The U.S. central bank has raised rates by a quarter- percentage point at every meeting since June 2004, when the target was at a 46-year low of 1 percent.
``That's three more times than we need,'' said Smith, who has also served as the chief economist for the Society of Industrial and Office Realtors since July 2002. In the January survey, Smith expected the Fed to only raise rates to 3 percent last year, compared with the median estimate of 3.50 percent.
Prices for personal consumption expenditures excluding food and energy rose 1.8 percent in November from a year earlier, down from 1.9 percent in October, the government said on Dec. 22. The Fed uses the PCE index in making its semi-annual forecasts. In July, the central bank said it expected the core rate to rise 1.75 percent to 2 percent last year.
Lower Yields
David Berson, chief economist at Fannie Mae, the biggest U.S. mortgage finance company, isn't surprised that Smith ended the year as the top forecaster.
The two, who worked together at the consulting firm Wharton Econometric Forecasting Associates in 1986 and 1987, both serve on the National Business Economic Issues Council.
``Jim has done well,'' said Berson. ``Jim's basic view on interest rates is that they will remain low as inflation remains low. Given that rates have remained low for the last five years, his forecasts have worked out well.''
Ten-year Treasury yields have dropped 29 basis points, or 0.29 percentage point, since reaching a seven-month high of 4.68 percent on Nov. 4 amid speculation inflation is in check.
None of the economists surveyed by Bloomberg expect a recession this year, or two consecutive quarters of a decline in gross domestic product. The economy will likely grow by 3.4 percent in 2006, based on the median of 71 forecasts in a survey conducted from Nov. 30 to Dec. 8. Smith's forecast from last month is for the economy to expand 3.8 percent.
Fed Chairman Alan Greenspan said on Nov. 3 that the yield curve ``used to be one of the most accurate measures we used to have to indicate when a recession was about to occur,'' though ``it's lost its capability of doing so in recent years.''
Last year was the fifth in a row that 10-year yields finished below economists' year-end forecasts from the start of the year, making Smith's prediction even more noteworthy.
To contact the reporter on this story:
Joshua Krongold in New York at jkrongold2@bloomberg.net.
Last Updated: January 2, 2006 09:07 EST
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