Huge Economic Collapse Looming in the US?

[Cube Inmate]

Originally Posted by Claeren

I think that is the wrong question.

It is not about it being on 'sound footing' by some standard that is not in place.

It is that there IS a standard (the dollar being reflective of the value of the economy relative to other economies) BUT that standard has been thrown out of wack for too long a period. Most obviously by China (mostly, but Dubai, India, Taiwan, Korea, Japan and others have played a part as well) providing unreasonably 'cheap money' for US consumers (and government) to borrow in order to fund further purchases of their own countries US-consumer oriented exports.

Throw in a low/negative savings rate, a housing bubble, massive social inequity, baby boomers looking to retirement, a lifestyle that is heavily energy dependent from the base up, and a less and less educated and dynamic workforce compared to the rest of the world and it is only a matter of time.

Claeren.

So, I'll try to paraphrase: the value of the dollar reflects the strength of the economy (I agree). Predictions of a collapse are therefore based on the belief that the American economy is over-valued, with much of its heft coming from borrowed wealth?

Perhaps.

If I were to predict a collapse anywhere, it would be based on the imbalance in Western economies between economic output that's truly a "value-added" output, and output that's somewhat parasitic, adding no true value. How much of Canada's (or America's) economy is based on production vs. "services??"

Production--natural resource exploitation, food production, manufacturing, construction, and other similar areas make up a small part of these economies.

Services--retail, banking & finance, social services, entertainment, and similar sectors produce no tangible output, but compose the largest fraction of the economies.

It's an interesting balancing act. I can't say it's a "house of cards" as Looger recently did, but I can see how you would say it's ... fragile.

[Lurch]

property values to me, seem to be simply the growth of debt and not much more. also an indicator of a boom economy i guess.

And what is debt, really, beyond a future call on earnings? Economy wide, I really doubt that you'd find a significant growth of land-backed debt. The growth in debt is really against consumables, ie credit card, etc. As much as doomsayers like to believe otherwise, you can't turn paper money/debt into hard goods by magic - it takes a real economy. Every dollar of debt is backed by something, whether its at the national debt level or your Visa card level. When debt goes bad, somewhere someone is left holding the bag and takes a hit to their wealth. It's a closed system at the global level, so I guess I'm just not clear where you're going with your thesis.

[Cowperson]

My two cents in a drive-by . . .

I would think that any stock market run-up would see insiders eventually and increasingly liquidating positions as normal diversification of their personal portfolios. Common sense.

Mr. Softy (Bill Gates) routinely sells hundreds of millions of dollars of Microsoft every year, if not more, rain or shine, citing "diversification" as the reason. I think he's the largest single shareholder of Canadian National Railways and recently increased his holdings . . . . transportation stocks are early predictors of recession so if he thinks a disaster is on the way, he has a strange way of showing it.

One of the articles Looger posted flatly states that the goal of the Federal Reserve is currency stabilization. As our friend Lurch and I agreed a week or so ago, central banks focus on inflation goals, with currency manipulation used as a tool in achieving those goals.

In 2003, then Treasury Secretary basically said the USA was backing off a strong dollar policy . . . . and the currency immediately tanked.

http://news.bbc.co.uk/2/hi/business/3019291.stm

That in turn brings up the interesting question of whether or not foreign governments actually want a weak USA currency, something that makes their own exports expensive in the all important American market . . . . and makes American exports cheaper in their own.

From a post I wrote in May:

In Canada, we're used to a fairly stable relationship with the USA dollar which might cloud our view of how currency relationships more often work.

It is very easy to demonstrate the USA dollar has had frequent and dramatic moves - both positive and negative -within relatively short time frames against other major and minor currencies through the last 25 years.

As an example, the high/low difference in the USA dollar/Japanese Yen relationship between 1990 and 1996 was 98%.

The USA dollar/Swiss Franc relationship varied 20%-25% six times - up and down - between 1990 and 1996.

The British Pound/USA dollar relationship varied 30% between October 1992 and February 1993.

Some might even speculate the abrupt decline of the USA dollar a few years ago might have been a deliberate pulling of the plug to get China to float its currency versus the policy of pegging it at an artificially low value to the dollar (a conspiracy theory!!!). Certainly, European exporters trying to access the number one consuming market in the world, America, can't be too happy about a 7%-8% rise in the Euro against the dollar so far this year. But American exporters might be quite happy about it.

Also, in a thread here in the last week or so, I posted this link pointing out relative debt/GDP comparison numbers for countries around the world. The link:

http://www.answers.com/topic/list-of...by-public-debt

The eventual argument about whether deficits matter:

http://money.cnn.com/2004/02/02/news...dget/index.htm

Lastly, regarding the original intent of the thread, probably the most important point on whether the USA is in trouble or not, there have been six instances since 1960 where we have seen a yield curve inversion like we saw developing over the last summer.

In 100% of those six instances, an economic recession showed up an average of 10 months down the road . . . . which would make the timing roughly sometime in the spring or early summer this case.

When the curve inverts, economic indicators might still be looking fine . . . . but deteriorate as time moves on.

USA job numbers today:

http://www.usatoday.com/money/econom...november_x.htm

By coincidence, the New York Times today with a piece on wage growth:

http://www.nytimes.com/2006/12/08/bu...rtner=homepage

This issue has been brought up as a reason for the invasion of Iraq as Saddam was going to start selling oil in Euros instead of US dollars. Iran is threatening to do the same. The Saudi Arabia and OPEC sell oil in US dollars thus forcing everyone to buy US dollars in order to purchase oil. If OPEC switched to the Euro, the US is in big trouble.

Good grief.

Cowperson

[Lurch]

If I were to predict a collapse anywhere, it would be based on the imbalance in Western economies between economic output that's truly a "value-added" output, and output that's somewhat parasitic, adding no true value. How much of Canada's (or America's) economy is based on production vs. "services??"

Production--natural resource exploitation, food production, manufacturing, construction, and other similar areas make up a small part of these economies.

Services--retail, banking & finance, social services, entertainment, and similar sectors produce no tangible output, but compose the largest fraction of the economies.

It's an interesting balancing act. I can't say it's a "house of cards" as Looger recently did, but I can see how you would say it's ... fragile.If I were to predict a collapse anywhere, it would be based on the imbalance in Western economies between economic output that's truly a "value-added" output, and output that's somewhat parasitic, adding no true value. How much of Canada's (or America's) economy is based on production vs. "services??"

Production--natural resource exploitation, food production, manufacturing, construction, and other similar areas make up a small part of these economies.

Services--retail, banking & finance, social services, entertainment, and similar sectors produce no tangible output, but compose the largest fraction of the economies.

It's an interesting balancing act. I can't say it's a "house of cards" as Looger recently did, but I can see how you would say it's ... fragile.

I disagree, which I guess is the fundamental basis of a modern economy. The growth towards a services economy is simply a reflection of the reality that it takes much less labour/new investment to produce the goods people want. So, given that people want services, the true material wealth created by hewers and diggers gets spread around. Basically, your secondary and tertiary economies are simply a function of the ease with which modern economies perform the core chores of growing food, mining metals and building houses.

[Looger]

well, to be clear i don't have a thesis.

credit card debt i see as one thing, but isn't major serious central back debt literally created from nothing?

the US federal reserve lends the US government their entire budget, do they not? but with interest i really don't see how any of this has the mathematical possibility of payback. it can only get bigger.

all this debt has to eventually tip the scales, because borrowing against tomorrow's production is one thing, but what happens when you're doing nothing but paying interest? does that not make those debtors richer and richer as time passes? aren't they just creating wealth and sucking its perceived value out of production?

[Lurch]

credit card debt i see as one thing, but isn't major serious central back debt literally created from nothing?

the US federal reserve lends the US government their entire budget, do they not? but with interest i really don't see how any of this has the mathematical possibility of payback. it can only get bigger.

Why have an obsession about paying it back. If debt as a % of GDP is the measure, most of the world is not that bad off. Again, central debt is not something for nothing - you are basically creating a call on your resources that either your citizens or the rest of the world thinks you are good for. When things get to the point that either people don't think you are good for it or they actually start calling those goods to their economy, you have an issue.

Edit to add: the debtors are only getting richer to the extent you are good for the debt. If they let you get in so deep that your economy goes belly up (see New Zealand in the 80's) the debtor is the one to pay the piper. Again, there is no free lunch.

[Looger]

it's my understanding that a long time ago, countries simply printed their own currency, or 'issued' it, not creating debt per se but devaluing their currency by the percentage that they print that year.

why it must be 'borrowed' off someone else, seems to be linked to that 1913 federal reserve act.

this is all of course in relation to the US.

[Lurch]

it's my understanding that a long time ago, countries simply printed their own currency, or 'issued' it, not creating debt per se but devaluing their currency by the percentage that they print that year.

why it must be 'borrowed' off someone else, seems to be linked to that 1913 federal reserve act.

this is all of course in relation to the US.

Currency is by its very nature a debt to a nation. The mechanics don't matter all that much.

[JohnnyFlame]

Originally Posted by Lurch

I think Lanny trotted this out a while back - it is ridiculous really, but economic forces may end up moving the market in this direction to some extent. However, given that both the US and China will likely want to trade oil in US$ for the forseeable future, I think it will be a peripheral drag on the currency, not a catclysmic event.

I think the insider sales simply reflect a common view that we are at the end of a bull run and stock prices are high right now.

The big problem the US has IMO is that the currency float they have with the world implies a huge call on their productive capacity and standard of living. If you think about it, US$ outside the US simply indicate that the US owes the world hard goods that their economy will have a hard time producing without huge inflation. The US$ will need to fall when these notes start coming home, US imports will dry up (huring Canada) and US exports will shoot through the roof (also hurting Canada in areas where we compete).

This is the area that Harper has absolutely driven me nuts of late. He has to be smart enough to see the problem, but he has been busy putting our business relationship with China in the toilet and putting more eggs in the sinking ship, to badly mix metaphors.

Some points.

US imports drop and it hurts a whole LOT of countries including and very, very much so China. If the USA economy had some sort of huge crunch methinks the devastation would be worldwide.

China is a difficult market as well as many companies have discovered.

Plus I would expect that if the US dollar came tumbling down the Canadian dollar would likely drop as well.

A lot of factors with globalization and the dependency of countries on each other is scary.

[Looger]

Originally Posted by Lurch

Currency is by its very nature a debt to a nation. The mechanics don't matter all that much.

well, who's got the country by the balls may matter.

who's pulling the strings.

controlling the currency is quite a lever, and i just can't see a government being in control of its country's destiny when it has to answer to private interests.

[blankall]

People need to fresh up on their economics.....

The value of the dollar has very little to do with the strength of the economy. The value of the dollar is a meaningless number and is tied to the amount of currency in circulation. Vast amounts of inflation can be indicative of a spiralling economy, but this is not the case in the states.... the strength of the economy is measured by jobs, infrastructure, commerce etc.... Wheter or not people are trading with US dollars is going to have no effect on this. The US could care less if people stopped trading in US dollars, they would simply print less currency to compensate.

In fact the US has been purposely trying to lower the overinflated value of the dollar for years in order to fix its trade deficit.

If anyone is in trouble right now it is the EU. The European Union has vastly overspanded in order to include former soviet block countries. This will lead to an economic crisis on a massive scale.
There is a very good reason why England refused to adopt the Euro and is more complicated than just pride in the pound.

Basically every economic indicator indicates that the American economy is in the best shape it has been since september 11th (and it was vastly overinflated before then). If it were not for Katrina the US would have run an even deficit last year. An amazing accomplishment, and the decision to cut taxes by the republicans was one of the greatest economic decisions of our time.

[Lurch]

Basically every economic indicator indicates that the American economy is in the best shape it has been since september 11th (and it was vastly overinflated before then). If it were not for Katrina the US would have run an even deficit last year. An amazing accomplishment, and the decision to cut taxes by the republicans was one of the greatest economic decisions of our time.

Are they really? Which indicators would those be? Is your assertion that Katrina cost the US Federal gov't over $320 billion, or roughly 2.6% of GDP. If you remove the budget deficit, US growth last year was well negative.

Wheter or not people are trading with US dollars is going to have no effect on this. The US could care less if people stopped trading in US dollars, they would simply print less currency to compensate.

Clearly untrue. If countries use US currency as a reserve currency, the US effectively exchanges paper for real goods. In effect, the world is loaning the US money with interest equal to the negative of inflation. If the US$ comes flooding back to the US b/c foreign economies stop holding it, this would cause massive problems for the US and the rest of the world.

[blankall]

Originally Posted by Lurch

Are they really? Which indicators would those be? Is your assertion that Katrina cost the US Federal gov't over $320 billion, or roughly 2.6% of GDP. If you remove the budget deficit, US growth last year was well negative.



Clearly untrue. If countries use US currency as a reserve currency, the US effectively exchanges paper for real goods. In effect, the world is loaning the US money with interest equal to the negative of inflation. If the US$ comes flooding back to the US b/c foreign economies stop holding it, this would cause massive problems for the US and the rest of the world.

Not sure how you make the leap to the US exchanging paper for goods? Holding US currency does not result in an exchange of title to the US's favor. Also the kind of flooding your talking about would not be caused merely by one oil market refusing to use US dollars. The iraqi oil market is quite large, but the amount of actual US currency used represents a small fraction when compared to that in circulation. The kind of effect it might have would be solved in a couple of hours.

Also US growth last year was definately not negative. It was approximately 3%. When calculating you never offset deficit directly with growth. Although the budget deficit was fairly large in 2005, it has gotten progressively smaller through 2006. It is expected to reach a balance before the end of George Bush's term. The projected deficit as of october was 247 billion (significantly down from the year before). And yes I am saying that Katrina had an effect on the US economy of several hundred billion dollars. It essentially wiped out the economies of large parts of several states, and resulted in millions of taxpayers not earning any tax money.

Basically George Bush is ahead of his schedule to cut the deficit in half from his peak of 521billion in 2004. He is right on pace for his goal to eliminate it by the time he leaves office.

Aside from that the US jobless rate has hit a five year low
http://news.bbc.co.uk/2/hi/business/6113978.stm
keep in mind that prior to september 11th people were expecting a major adjustment anyway, so you were expected to have lows about 5 years ago.

The only real problem facing the US right now is competition from emerging markets. the US is currently running a massive trade deficit with China. Many people think due to the overpricing of the US dollar. Hence attempts to purposely dive the price of the dollar.

[CarlW]

I've just skimmed the previous posts, but I don't think anyone has touched on Hedge Funds and why they were worried about them so i'll just tack on a little about what I know of them as I had to research a hedge fund for a class.
Basically they are like mutual funds for the really rich, a bunch of people with oodles of money invest in a hedge fund (you need to be an accredited investor meaning you need a networth of $1 million dollars or an annual salary of 200k for last few years) which then has super oodles of money to invest in all sorts of things, not to mention shorting stocks . But the hedge funds themselves aren't really regulated by governments, and since most are private companies they don't really share their investment information to others.

The danger here is that alot of them rely on total guess work for their investing, and many have lost millions of dollars, the most recent high profile case being the Amaranth case where Calgary trader Brian Hunter bet on natural gas and lost big time.

What governments are worried about is that one day some of these hedge funds will make a bad investment and many people will lose alot of money. You might think that isn't so bad seeing as these people are all millionaires and billionaires, but many pension funds and university/college endowment funds are investing in hedges so if one goes down many pensioners and universitys may be the most affected.