Hard Times Coming

The Fed is in a trap.

To cut interest rates much more could collapse the dollar, which because of the huge US trade imbalance --and all the consumer goods and raw materials that are imported--would lead to serious inflation.

Plus with the current rate cut, the US now has the third lowest interest rates in the world. Any further cut makes the dollar a very undesirable currency for foreigner investors.

Yet if the Fed doesn't cut interest rates even further, the stock market will continue to plunge, which again discourages foreign investors from pouring their money into the U.S., which in turn puts downward pressure on the dollar.

So soaring inflation may be next, as strapped companies in China, India and elsewhere start raising their prices for goods shipped to the US and paid for in dollars. Then the Fed will have to respond by raising interest rates again, in an effort to shore up the currency. And with that will come deeper recession and an even lower stock market.

Oh, did I forget to mention the Trillion dollar military debacle that has no end in sight, that is sucking money out of the country like a giant industrial vacuum cleaner?

[Excerpt of an article by Dave Lindorff, Information Clearing House]

The Profile of a Third World Country

Seven years of the Bush Administration has seen the federal debt increase by two-thirds while US household debt doubled.

This massive Keynesian stimulus produced pitiful economic results. Median real income has declined. The labor force participation rate has declined. Job growth has been pathetic, with 28% of the new jobs being in the government sector. All the new private sector jobs are accounted for by private education and health care bureaucracies, bars and restaurants. Three and a quarter million manufacturing jobs and a half million supervisory jobs were lost. The number of manufacturing jobs has fallen to the level of 65 years ago.

This is the profile of a Third World economy.

The "new economy" has been running a trade deficit in advanced technology products since 2002. The The US does not earn enough to pay its import bill, and it doesn't save enough to finance the government's budget deficit. To finance its deficits, America looks to the kindness of foreigners to continue to accept the outpouring of dollars and dollar-denominated debt.

At the meeting of the World Economic Forum at Davos, Switzerland, this week, billionaire currency trader George Soros warned that the dollar's reserve currency role was drawing to an end. If the world is unwilling to continue to accumulate dollars, the US will not be able to finance its trade deficit or its budget deficit. As both are seriously out of balance, the implication is for yet more decline in the dollar's exchange value and a sharp rise in prices. As the dollar sheds value and loses its privileged position as reserve currency, US living standards will take a serious knock.

If the US government cannot balance its budget by cutting its spending or by raising taxes, the day when it can no longer borrow will see the government paying its bills by printing money like a Third World banana republic. Inflation and more exchange rate depreciation will be the order of the day.

[Excerpt of an article by Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration, Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review]

A Global Crash Coming

The credit storm that began in the United States with subprime mortgages has spread to markets across the globe.

CNN reports this morning that "Todays' [plunge of world markets] renews speculation that the crisis in the U.S. housing market may trigger a global recession."

According to the UN's World Economic Situation and Prospects 2008: "The major uncertainty for 2008 now emanates from the US economy. The domino effect of a US recession would be to knock down export growth from China, Europe and Japan, in turn reducing their demand for exports from developing countries," it said.

According to the Wall Street Journal: "Chinese authorities have slammed the brakes on bank lending, in their latest attempt to curb the runaway investment threatening to overheat what is soon to be the world's third-largest economy. In recent weeks, regulators have quietly ordered China's commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals."

China is awash in US Dollars and that surplus is causing a steady rise in food and energy costs. This could be mitigated by allowing their currency to "float" freely. But a sudden, steep increase in the Chinese yuan's value could also send the world headlong into a global recession. For now, the lending freeze and price fixing appear to be the way out.

The dollar continues to take a pasting. Gold and oil has shot up to record levels.

Jon Basile, economist at Credit Suisse, summed it up like this: "There's a heck of a lot of bad news out there." Indeed.

The recession message from Fed chairman Ben Bernanke

Fed chairman Ben Bernanke’s recent keynote on the state of the economy could have been accompanied by a funeral dirge. He made no effort to conceal the gloomy facts:

“Currently, about 21% of subprime ARMs are ninety days or more delinquent, and foreclosure rates are rising sharply ...The far-reaching financial impact of the subprime shock is that it has contributed to a considerable increase in investor uncertainty about the appropriate valuations of a broader range of financial assets …The market strains have been serious, and they continue to pose risks to the broader economy.”

Bernanke's grim (but realistic) forecast: “The baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced.”

When someone of Bernanke’s status makes statements to this effect, that says it all. We're entering a major recession.

U.S. Recession 'has arrived'

The feared recession in the US economy has already arrived, according to a report from Merrill Lynch.

An official ruling on whether the US is in recession is made by the National Bureau of Economic Research, but this decision may not come for two years. The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months".

Merrill Lynch said that the current consensus view on Wall Street that ‘there is a good chance of avoiding a recession’ is "in denial". "To say that the backdrop is 'recession like' is akin to an obstetrician telling a woman that she is 'sort of pregnant'," the report said.

[BBC excerpt]

2008 a new superpower is born

China's currency, the yuan, has just hit a new high against the U.S. dollar.

Meanwhile, largely due to China’s increasing consumption, oil prices soared to $100 a barrel for the first time ever, reaching that milestone amid an unshakeable view that global demand for oil and petroleum products will continue to outstrip supplies.

While the rest of the world is gloomily contemplating economic slowdown and even recession, China is set to make 2008 the year it asserts its status as a global colossus by flexing frightening economic muscle on international markets, enjoying unprecedented levels of domestic consumption and showcasing itself to a watching world with a glittering Olympic Games.

The world's most populous nation will confirm its transformation in three decades from one of the poorest countries of the 20th century into the globe's third-largest economy. (It is widely predicted to overtake Germany as the world's third largest economy this year.)

Last year, China surpassed America as the greatest driver of global economic demand.

The U.S., despite its vast wealth and power, presently places only in 12th position among industrial countries, in the United Nations Human Development Index that ranks countries in terms of life expectancy, literacy, education and standard of living.

In the Realm of the Dying Dollar

Great powers die slowly. The world is losing confidence in the dollar, in no small part because it has lost confidence in America's strategic judgment and in its sustainability as a great power in the face of record budget and trade deficits, which are forcing the United States to borrow ever more money from future rivals like China and Russia.

Meanwhile, Osama bin Laden seems to be achieving his publicly avowed goal of provoking the United States into overextending itself and draining its economy.

Nobel laureate Joseph Stiglitz, a former World Bank economist, notes that President Bush took a nation with a budget surplus upon assuming office and turned it into a global debtor, and he has underinvested in education and alternative energy. "The United States had not experienced a turnaround of this magnitude since the global crisis of World War II," Stiglitz writes.

If the passing of American hegemony happens, it will occur very slowly--death by a thousand cuts of credit.

While China and other big dollar-holding countries such as Singapore, Russia and the Persian Gulf states are very worried about the erosion in value of their dollar-denominated holdings and inflationary pressure, they also know that an abrupt move to cut their pegs to the dollar or to sell off in large amounts would force a run on the currency. That would leave them even poorer. Instead these countries are pursuing careful reallocations of their investment holdings, shifting slowly to the euro or a "basket" of currencies that will allow them to hedge against the dollar's decline. The effect will be more like a slow-acting poison: drip, drip, drip.

[Newsweek]