A Slowdown or a Recession in the U.S. in 2008?
“… Middle
East oil producers will remain central to world security. The [Persian] Gulf will be a primary focus of U.S.
international energy policy.”
Vice President Dick Cheney's Energy Task
Force Report of May 2001
"The
worst evils which mankind has ever had to endure were inflicted by bad
governments."
Ludwig von Mises (1881-1973), Austrian economist
"The
essence of so-called war prosperity; it enriches some by what it takes from
others. It is not rising wealth but a shifting of wealth and income."
Ludwig
von Mises (1881-1973), Austrian economist
Indeed, the consensus among strategists is now to bet
on international competition and productivity gains to keep costs and prices
tame, and on a lower dollar to
improve the trade balance; they place their hope on a relatively stimulative
monetary policy to keep consumption and investment spending up and expect the
worst of the housing decline now to be over. They also think that crude oil
prices peaked near $80 a barrel in July 2006, and that excess oil supply will
keep energy prices low—under $69.50—after the current Fibonacci
rebound and the completion of a big head and shoulder top. With stock prices
making new highs, some point out that presidential and stock market cycles are
favorable to higher stock prices, since investing during the 27 months before a
U.S. presidential election has proved in the past to be more profitable than
investing during the 21 months after the elections. —With such a rosy
scenario, call it scenario A, it is not surprising that many investors are
enthusiastic about financial markets, some expecting double-digit earnings
growth this year and next.
As we explained in our blog of last October 16, (Headwinds for the US Economy),
macroeconomic conditions make it a matter of months, not years, before the U.S.
economy and the U.S. dollar begin to experience some downward pressures. We are
now approaching that point of reckoning. —Let us remember that the U.S.
gross domestic product (GDP) is the largest in the
world at more than $13 trillion, that Americans have a net home equity equal to about $ 14 trillion (but declining) while American households
have a net ownership of corporate
equities of
about $ 10.5 trillion (still increasing). However, home ownership is more
widespread than stock ownership: Slightly more than two thirds of
Americans own their homes, while somewhat less than half of American households
own equities. What is more, stock ownership is fairly concentrated, with the top 10 percent of investors owning about 80 percent of
all stocks. —This may help to put into proper perspective the
possible impact on household finances of the current housing crisis, as
compared to the relative ebullience in stock-related wealth.
Fourth, this raises the question of how long the
American consumer will keep up the high pace of spending in such a context.
During the years of the housing boom, consumer spending was driven by the
accumulation of wealth and record consumer indebtedness, most of it in the form
of mortgages, as the price of houses increased. Now that the reverse is
occurring and foreclosures are
on the way up, a retrenchment in consumer spending cannot be ruled out.
Logically, especially with consumer confidence crumbling,
this should be expected.
A fifth factor is now entering the picture
to make matters potentially worse: The protectionist push from the Democrat
controlled Congress risks putting in jeopardy the flow of capital of about $2
billion a day that the U.S. economy is borrowing from abroad, mainly from China
and Japan. Looming trade frictions between the U.S. and China could force the
Fed to raise interest rates, and not lower them as most observers
expect—in any case, the Fed would surely not lower them as much as it
would be warranted to alleviate the housing crisis.
All that is needed now to complete the picture, as a
sixth factor, would be the collapse of one and possibly several major financial
institutions under the pressures of bad loans and record foreclosures.
Particularly at risk is the some $2.5 trillion
mountain of debt concentrated in subprimes and Alt-A loans. Already, one
major sub-prime lender (New Century Financial) has
filed for Chapter 11 bankruptcy protection. Others are likely to follow, because 2007 is the
year when a large number of sub prime real estate loans have to be renegotiated
at higher interest rates. The rate of foreclosure is bound to spike in the
coming months, possibly culminating in the next two years into a financial
hurricane.
A seventh geopolitical factor could also
throw fuel on the fire. Indeed, if the clumsy Bush-Cheney regime goes ahead
with its neocon plan to bomb and attack Iran, the coming U.S. economic slowdown
could be transformed into something much worse. Indeed, during the coming
years, the world economy will have to adjust to a peak in oil production and to higher energy prices, after the current lull. If geopolitical
mistakes turn the richest oil producing region into a hot war zone for many
years to come, the worldwide economic consequences will be disastrous.
What
does it all mean in practice? It means that while extrapolating the past is
often a good way to see into the future, it does happen that major turns can
occur anytime, when conditions are ripe and nobody expects them. For example,
the April 1960-February 1961 recession followed the end of President Dwight
Eisenhower's second term. Nothing in the presidential politics cycle therefore
precludes a 2008-09 recession. [Recession: a period of sustained
production decline: usually considered to last two quarters in a row].
The
above scenario B can likely be avoided if no major shocks, such as a premature
oil production peak, large financial bankruptcies or a U.S.-Iranian war, do not
materialize. If they do, however, all bets are off. It would seem only prudent
to prepare and take measures for the possibility of such a less palatable
scenario occurring.
_____________________________________________
Rodrigue
Tremblay lives in Montreal and can be reached at rodrigue.tremblay@yahoo.com
Visit
his blog site at: www.thenewamericanempire.com/blog.
Author's
Website: www.thenewamericanempire.com/
Check
Dr. Tremblay's coming book "The Code for Global Ethics"
at: www.TheCodeForGlobalEthics.com
_______________________________________________
Posted,
May 7, 2007, at 5:30 am
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