We U.S. citizens enjoy a magnificent and prosperous economy the rest of the world can only envy. Employment is humming along, inflation is tame, and the lines inside Starbucks (Nasdaq: SBUX) everywhere remain annoyingly long. Despite a number of hiccups this year, the stock market is still just a rock's throw from another all-time high.
But we're coming up on a bend in the yellow brick road, and going 'round it could cause the party lights to go dark quickly. That could change everything about the way we and future Americans live. Sound scary? It is.
A nation built on debt?Let's go back to the 1990s. It wasn't a bad time to be an American. Ace of Base was topping the charts, the economy was parading freely, and the stock market could make a Chihuahua look smart. With newfound wealth came newfound toys and spending habits, and a drive to leverage up to your eyeballs to fund the cars, boats, and multiple TVs for your second or third home. Since 1990, non-mortgage household debt has gone up more than threefold, outstripping economic growth and inflation.
But, heck, the amount of debt we had was not a problem! The economy kept buzzing at a pace that allowed consumers to fund their debt-laden habits. And with reasonable interest rates throughout the '90s, layering on consumption outside your earnings means wasn't that big a deal. The indulgences in spending kept going, and going ...
The music stopped. But the party's still kicking ...It wasn't until 2000 when the Nasdaq parade came to an end that the party looked like it truly might be over. With trillions of dollars of wealth purged from consumers' wallets, the economy was startled into a justified panic.
Then as the dust around the tech bubble cleared, Sept. 11 knocked us off our feet. An uncertainty we as a nation had never experienced before loomed over our heads. Federal Reserve Chairman Alan Greenspan prescribed a quick and drastic resuscitation in the form of a massive cut in interest rates to help revive the economy. And it worked, perhaps too well.
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Wednesday, December 12, 2007
Impending Destruction of the U.S. Economy
Editor's Note: EconomyInCrisis.org is not a partisan advocate for any particular party or candidate. However, the following article speaks to many causes of our current situation that an increasing number of Americans feel are critical for future voters and leaders to consider.
Hubris and arrogance are too ensconced in Washington for policymakers to be aware of the economic policy trap in which they have placed the U.S. economy. If the subprime mortgage meltdown is half as bad as predicted, low U.S. interest rates will be required in order to contain the crisis. But if the dollar's plight is half as bad as predicted, high U.S. interest rates will be required if foreigners are to continue to hold dollars and to finance U.S. budget and trade deficits.
Which will Washington sacrifice, the domestic financial system and overextended homeowners or its ability to finance deficits?
The answer seems obvious. Everything will be sacrificed in order to protect Washington's ability to borrow abroad. Without the ability to borrow abroad, Washington cannot conduct its wars of aggression and Americans cannot continue to consume $800 billion dollars more each year than the economy produces.
A few years ago, the euro was worth 85 cents. Today, it is worth $1.48. This is an enormous decline in the exchange value of the U.S. dollar. Foreigners who finance the U.S. budget and trade deficits have experienced a huge drop in the value of their dollar holdings. The interest rate on U.S. Treasury bonds does not come close to compensating foreigners for the decline in the value of the dollar against other traded currencies. Investment returns from real estate and equities do not offset the losses from the decline in the dollar's value.
China holds over $1 trillion, and Japan almost $1 trillion, in dollar-denominated assets. Other countries have lesser but still substantial amounts. As the U.S. dollar is the reserve currency, the entire world's investment portfolio is overweighted in dollars.
No country wants to hold a depreciating asset, and no country wants to acquire more depreciating assets. In order to reassure itself, Wall Street claims that foreign countries are locked into accumulating dollars in order to protect the value of their existing dollar holdings. But this is utter nonsense. The U.S. dollar has lost 60 percent of its value during the current administration. Obviously, countries are not locked into accumulating dollars.
The reason the dollar has not completely collapsed is that there is no clear alternative as reserve currency. The euro is a currency without a country. It is the monetary unit of the European Union, but the countries of Europe have not surrendered their sovereignty to the EU. Moreover, the United Kingdom, a member of the EU, retains the British pound. The fact that a currency as politically exposed as the euro can rise in value so rapidly against the U.S. dollar is powerful evidence of the weakness of the U.S. dollar.
Japan and China have willingly accumulated dollars as the counterpart of their penetration and capture of U.S. domestic markets. Japan and China have viewed the productive capacity and wealth created in their domestic economies by the success of their exports as compensation for the decline in the value of their dollar holdings.
Both countries have seen the writing on the wall, ignored by Washington and American economists, however: By offshoring production for U.S. markets, the United States has no prospect of closing its trade deficit. The offshored production of U.S. firms counts as imports when it returns to the United States to be marketed. The more U.S. production moves abroad, the less there is to export and the higher imports rise.
Japan and China -- indeed, the entire world -- realize that they cannot continue forever to give Americans real goods and services in exchange for depreciating paper dollars. China is endeavoring to turn its development inward and rely on its potentially huge domestic market. Japan is pinning hopes on participating in Asia's economic development.
The dollar's decline has resulted from foreigners accumulating new dollars at a lower rate. They still accumulate dollars, but fewer. As new dollars are still being produced at high rates, their value has dropped.
If foreigners were to stop accumulating new dollars, the dollar's value would plummet. If foreigners were to reduce their existing holdings of dollars, superpower America would instantly disappear.
Foreigners have continued to accumulate dollars in the expectation that sooner or later Washington would address its trade and budget deficits. Now these deficits seem to have passed the point of no return, however.
The sharp decline in the dollar has not closed the trade deficit by increasing exports and decreasing imports. Offshoring prevents the possibility of exports reducing the trade deficit, and Americans are now dependent on imports (including offshored production) for which there are no longer any domestically produced alternatives. The U.S. trade deficit will close when foreigners cease to finance it.
The budget deficit cannot be closed by taxation without driving up unemployment and poverty. American median family incomes have experienced no real increase during the 21st century. Moreover, if the huge bonuses paid to CEOs for offshoring their corporations' production and to Wall Street for marketing subprime derivatives are removed from the income figures, Americans have experienced a decline in real income.
Some studies, such as the Economic Mobility Project, find long-term declines in the real median incomes of some U.S. population groups and a decline in upward mobility.
The situation may be even more dire. Recent work by Susan Houseman concludes that U.S. statistical data systems, which were set in place prior to the development of offshoring, are counting some foreign production as part of U.S. productivity and GDP growth, thus overstating the actual performance of the U.S. economy.
Read Complete Story
Hubris and arrogance are too ensconced in Washington for policymakers to be aware of the economic policy trap in which they have placed the U.S. economy. If the subprime mortgage meltdown is half as bad as predicted, low U.S. interest rates will be required in order to contain the crisis. But if the dollar's plight is half as bad as predicted, high U.S. interest rates will be required if foreigners are to continue to hold dollars and to finance U.S. budget and trade deficits.
Which will Washington sacrifice, the domestic financial system and overextended homeowners or its ability to finance deficits?
The answer seems obvious. Everything will be sacrificed in order to protect Washington's ability to borrow abroad. Without the ability to borrow abroad, Washington cannot conduct its wars of aggression and Americans cannot continue to consume $800 billion dollars more each year than the economy produces.
A few years ago, the euro was worth 85 cents. Today, it is worth $1.48. This is an enormous decline in the exchange value of the U.S. dollar. Foreigners who finance the U.S. budget and trade deficits have experienced a huge drop in the value of their dollar holdings. The interest rate on U.S. Treasury bonds does not come close to compensating foreigners for the decline in the value of the dollar against other traded currencies. Investment returns from real estate and equities do not offset the losses from the decline in the dollar's value.
China holds over $1 trillion, and Japan almost $1 trillion, in dollar-denominated assets. Other countries have lesser but still substantial amounts. As the U.S. dollar is the reserve currency, the entire world's investment portfolio is overweighted in dollars.
No country wants to hold a depreciating asset, and no country wants to acquire more depreciating assets. In order to reassure itself, Wall Street claims that foreign countries are locked into accumulating dollars in order to protect the value of their existing dollar holdings. But this is utter nonsense. The U.S. dollar has lost 60 percent of its value during the current administration. Obviously, countries are not locked into accumulating dollars.
The reason the dollar has not completely collapsed is that there is no clear alternative as reserve currency. The euro is a currency without a country. It is the monetary unit of the European Union, but the countries of Europe have not surrendered their sovereignty to the EU. Moreover, the United Kingdom, a member of the EU, retains the British pound. The fact that a currency as politically exposed as the euro can rise in value so rapidly against the U.S. dollar is powerful evidence of the weakness of the U.S. dollar.
Japan and China have willingly accumulated dollars as the counterpart of their penetration and capture of U.S. domestic markets. Japan and China have viewed the productive capacity and wealth created in their domestic economies by the success of their exports as compensation for the decline in the value of their dollar holdings.
Both countries have seen the writing on the wall, ignored by Washington and American economists, however: By offshoring production for U.S. markets, the United States has no prospect of closing its trade deficit. The offshored production of U.S. firms counts as imports when it returns to the United States to be marketed. The more U.S. production moves abroad, the less there is to export and the higher imports rise.
Japan and China -- indeed, the entire world -- realize that they cannot continue forever to give Americans real goods and services in exchange for depreciating paper dollars. China is endeavoring to turn its development inward and rely on its potentially huge domestic market. Japan is pinning hopes on participating in Asia's economic development.
The dollar's decline has resulted from foreigners accumulating new dollars at a lower rate. They still accumulate dollars, but fewer. As new dollars are still being produced at high rates, their value has dropped.
If foreigners were to stop accumulating new dollars, the dollar's value would plummet. If foreigners were to reduce their existing holdings of dollars, superpower America would instantly disappear.
Foreigners have continued to accumulate dollars in the expectation that sooner or later Washington would address its trade and budget deficits. Now these deficits seem to have passed the point of no return, however.
The sharp decline in the dollar has not closed the trade deficit by increasing exports and decreasing imports. Offshoring prevents the possibility of exports reducing the trade deficit, and Americans are now dependent on imports (including offshored production) for which there are no longer any domestically produced alternatives. The U.S. trade deficit will close when foreigners cease to finance it.
The budget deficit cannot be closed by taxation without driving up unemployment and poverty. American median family incomes have experienced no real increase during the 21st century. Moreover, if the huge bonuses paid to CEOs for offshoring their corporations' production and to Wall Street for marketing subprime derivatives are removed from the income figures, Americans have experienced a decline in real income.
Some studies, such as the Economic Mobility Project, find long-term declines in the real median incomes of some U.S. population groups and a decline in upward mobility.
The situation may be even more dire. Recent work by Susan Houseman concludes that U.S. statistical data systems, which were set in place prior to the development of offshoring, are counting some foreign production as part of U.S. productivity and GDP growth, thus overstating the actual performance of the U.S. economy.
Read Complete Story
Tuesday, December 11, 2007
Dollar dips against euro
The dollar dipped against the euro and yen on Monday on the eve of a key US interest rate decision.
In early European trading, the euro rose to $1.4677 from $1.4656 late on Friday in New York. And the dollar eased to 111.55 yen from 111.65 late on Friday. Market players were awaiting a Federal Reserve meeting on Tuesday when the US central bank was expected to cut its key interest rate by at least 25 basis points from the current level of 4.5 percent, dealers said.
It would be the third cut to the benchmark fed funds rate since September in response to the credit squeeze that has roiled world markets in recent months.
But speculation that the Fed might slash the rate by a hefty 50 basis points because of looming fears of a recession receded following better-than-expected US employment figures, dealers said. “The dollars could benefit if the Fed does deliver a 25bps given the more dovish expectation priced into the futures market,” Calyon analyst Mitul Kotecha said.
Read Complete Story
In early European trading, the euro rose to $1.4677 from $1.4656 late on Friday in New York. And the dollar eased to 111.55 yen from 111.65 late on Friday. Market players were awaiting a Federal Reserve meeting on Tuesday when the US central bank was expected to cut its key interest rate by at least 25 basis points from the current level of 4.5 percent, dealers said.
It would be the third cut to the benchmark fed funds rate since September in response to the credit squeeze that has roiled world markets in recent months.
But speculation that the Fed might slash the rate by a hefty 50 basis points because of looming fears of a recession receded following better-than-expected US employment figures, dealers said. “The dollars could benefit if the Fed does deliver a 25bps given the more dovish expectation priced into the futures market,” Calyon analyst Mitul Kotecha said.
Read Complete Story
As credit crisis festers, Fed set to cut rates
The U.S. Federal Reserve is widely expected to cut interest rates on Tuesday by at least a quarter-percentage point to fortify the economy against a credit crunch and housing slump that some economists fear could bring a recession.
Steady if unspectacular hiring and signs the consumer has yet to fold suggest the economy, while cooling, has not entered a precipitous slide. At the same time, deteriorating conditions in financial markets recently led the Fed to make clear it saw risks rising and was ready to respond.
"They now believe the dysfunctional credit markets present more risk to the economy and the financial system than anything found in the economic or inflation statistics," economists at financial services giant Wachovia wrote in a note to clients.
"For the time being, the Fed will focus on righting the financial markets and making sure there is enough stimulus in place to offset the tightening in credit markets and ongoing unraveling of the housing market," they said.
The U.S. central bank meets against a backdrop of widespread unease over the sagging housing market and deepening gloom over exposure to delinquent mortgages at major financial institutions around the world.
Financial markets are betting the Fed lowers the benchmark federal funds rate by a quarter-percentage point to 4.25 percent from its current level at 4.50 percent, and think a surprise half-point reduction is not out of the question.
At its last meeting on Oct. 30-31, the central bank lowered rates by a quarter point, following up a surprisingly large half-point reduction in September. At the time, the October easing was "a close call," minutes of the meeting released later said, because evidence of a pronounced weakening of the broader economy was not evident to all policy-makers.
RIVERS OF RED INK
But since that decision, money center banks like Citigroup, Bank of America, and HSBC have announced billions of dollars worth of write-downs due to exposures to subprime mortgages. As financial market angst has spread over the extent of subprime problems, credit availability has stiffened, fueling heightened worry at the Fed.
"These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors," Fed Chairman Ben Bernanke said on Nov. 29.
So far, outside of the housing and financial services sectors, the U.S. economy has exhibited resilience. In addition to a steady labor market, many retailers reported stronger-than-expected November sales and a slumping dollar helped boost demand for U.S. exports.
Read Complete Story
Steady if unspectacular hiring and signs the consumer has yet to fold suggest the economy, while cooling, has not entered a precipitous slide. At the same time, deteriorating conditions in financial markets recently led the Fed to make clear it saw risks rising and was ready to respond.
"They now believe the dysfunctional credit markets present more risk to the economy and the financial system than anything found in the economic or inflation statistics," economists at financial services giant Wachovia wrote in a note to clients.
"For the time being, the Fed will focus on righting the financial markets and making sure there is enough stimulus in place to offset the tightening in credit markets and ongoing unraveling of the housing market," they said.
The U.S. central bank meets against a backdrop of widespread unease over the sagging housing market and deepening gloom over exposure to delinquent mortgages at major financial institutions around the world.
Financial markets are betting the Fed lowers the benchmark federal funds rate by a quarter-percentage point to 4.25 percent from its current level at 4.50 percent, and think a surprise half-point reduction is not out of the question.
At its last meeting on Oct. 30-31, the central bank lowered rates by a quarter point, following up a surprisingly large half-point reduction in September. At the time, the October easing was "a close call," minutes of the meeting released later said, because evidence of a pronounced weakening of the broader economy was not evident to all policy-makers.
RIVERS OF RED INK
But since that decision, money center banks like Citigroup, Bank of America, and HSBC have announced billions of dollars worth of write-downs due to exposures to subprime mortgages. As financial market angst has spread over the extent of subprime problems, credit availability has stiffened, fueling heightened worry at the Fed.
"These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors," Fed Chairman Ben Bernanke said on Nov. 29.
So far, outside of the housing and financial services sectors, the U.S. economy has exhibited resilience. In addition to a steady labor market, many retailers reported stronger-than-expected November sales and a slumping dollar helped boost demand for U.S. exports.
Read Complete Story
Housing Bubble: The Bailout: just Another Fraud
It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
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But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
Read Complete Story
Bernanke May Risk `Fool in Shower' Label for Economy
Federal Reserve Chairman Ben S. Bernanke may have to risk becoming the proverbial ``fool in the shower'' to keep the U.S. economy out of recession.
Renewed turbulence in financial markets puts Bernanke, 53, under pressure to open the monetary spigots wider to pump up the economy. Traders in federal funds futures are betting it's a certainty the Fed will cut its benchmark interest rate from 4.5 percent tomorrow, and they see a better-than-even chance the rate will be 3.75 percent or below by April.
``The Fed has to assure the markets that it's ready to ride to the rescue and cut rates by as much as necessary,'' says Lyle Gramley, a former Fed governor who's now a senior economic adviser in Washington for the Stanford Group Co., a wealth- management firm.
The danger of such a strategy is that Bernanke may become like the bather, in an analogy attributed to the late Nobel- Prize-winning economist Milton Friedman, who gets scalded after turning the hot water all the way up in a chilly shower. The monetary-policy equivalent would be faster inflation or another asset bubble in the wake of aggressive Fed action to tackle the slowdown in the economy.
Bernanke opened the door to a rate cut at tomorrow's meeting when he signaled in a speech on Nov. 29 that the market turmoil had led to tighter credit conditions that might slow economic growth.
`Something More'
Read Complete Story
Renewed turbulence in financial markets puts Bernanke, 53, under pressure to open the monetary spigots wider to pump up the economy. Traders in federal funds futures are betting it's a certainty the Fed will cut its benchmark interest rate from 4.5 percent tomorrow, and they see a better-than-even chance the rate will be 3.75 percent or below by April.
``The Fed has to assure the markets that it's ready to ride to the rescue and cut rates by as much as necessary,'' says Lyle Gramley, a former Fed governor who's now a senior economic adviser in Washington for the Stanford Group Co., a wealth- management firm.
The danger of such a strategy is that Bernanke may become like the bather, in an analogy attributed to the late Nobel- Prize-winning economist Milton Friedman, who gets scalded after turning the hot water all the way up in a chilly shower. The monetary-policy equivalent would be faster inflation or another asset bubble in the wake of aggressive Fed action to tackle the slowdown in the economy.
Bernanke opened the door to a rate cut at tomorrow's meeting when he signaled in a speech on Nov. 29 that the market turmoil had led to tighter credit conditions that might slow economic growth.
`Something More'
Read Complete Story
Monday, December 10, 2007
Demand Grows For Toys Made In The U.S.A.
These workers aren't elves, and their workshop isn't that far north. But Vermont's "Maple Landmark" toymakers are working overtime in a holiday season unlike any they've seen before.
They're hammering parts in place late into the night. The staff's doubled, and they're still hiring. But, as CBS News correspondent Joie Chen reports, it may not be enough.
"Um, we don't, we hope we don't run out," says Michael Rainville. "But there clearly are limits to what we can produce."
He can pinpoint the moment when his orders suddenly hit overdrive: When parents learned foreign-made toys might be dangerous.
"It was like a dam broke or something. It was clear, it was obvious," Rainville says. "It's all about the recalls."
Shopkeepers, too, find themselves facing a question parents rarely posed before the recalls:
"They ask specifically now, 'are your toys made in this country?'" says Polly Brooks of Appalachian Spring.
Toymakers and retailers are playing up the 'made in the USA' label. But analysts warn it could be a tough holiday season.
One of every three Americans polled will buy fewer toys because of safety worries and 45 percent will avoid buying toys from Chinese factories, a Harris Interactive poll found.
Parents who go looking for made in the U.S.A discover it can be hard to find. Even some American classics are among the 85 percent of toys sold in this country made in China.
Read Complete Story
They're hammering parts in place late into the night. The staff's doubled, and they're still hiring. But, as CBS News correspondent Joie Chen reports, it may not be enough.
"Um, we don't, we hope we don't run out," says Michael Rainville. "But there clearly are limits to what we can produce."
He can pinpoint the moment when his orders suddenly hit overdrive: When parents learned foreign-made toys might be dangerous.
"It was like a dam broke or something. It was clear, it was obvious," Rainville says. "It's all about the recalls."
Shopkeepers, too, find themselves facing a question parents rarely posed before the recalls:
"They ask specifically now, 'are your toys made in this country?'" says Polly Brooks of Appalachian Spring.
Toymakers and retailers are playing up the 'made in the USA' label. But analysts warn it could be a tough holiday season.
One of every three Americans polled will buy fewer toys because of safety worries and 45 percent will avoid buying toys from Chinese factories, a Harris Interactive poll found.
Parents who go looking for made in the U.S.A discover it can be hard to find. Even some American classics are among the 85 percent of toys sold in this country made in China.
Read Complete Story
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