Is the bottom about to fall out of the economy?

[Dover]

"SHARP DOLLAR DROP"?

US economy could withstand sharp dlr drop -Bernanke


WASHINGTON, March 21 (Reuters) - The chronic U.S. trade gap need not
fuel a "precipitous" decline in the dollar, but the economy may be able to
shrug it off if it did, Federal Reserve Chairman Ben Bernanke said on
Tuesday.

"Although U.S. trade deficits cannot continue to widen forever, these
deficits need not engender a precipitous decline in the dollar, nor should
such a decline, were it to occur, necessarily disrupt financial markets,
production or employment," Bernanke said in a letter to Rep. Brad Sherman, a
California Democrat.

The shortfall in the U.S. current account, the broadest measure of the
nation's overseas trade, widened to a record $804.9 billion last year, or
6.4 percent of U.S. gross domestic product. Some analysts have said the
widening of the trade gap could lead to a potentially damaging dollar drop.

While Bernanke downplayed those concerns, he said "the possibility of
a future disruptive correction of the U.S. trade deficit cannot be ruled
out."

"The best way to protect the U.S. economy from such an event is to
continue policies designed to maintain the stability of the financial system
and the flexibility and resilience of the economy," he added....cont'd


http://tinyurl.com/zkolh

_____________________________________________________________________

Tuesday, March 21, 2006 · Last updated 3:48 p.m. PT

Bernanke questions companies owning banks

http://seattlepi.nwsource.com/business/1310AP_Bernanke_Banks.html
_______________________________________________________________________


This is my interpretation of the article: I think we are about to experience a very serious drop (crash) within the next month. And this article is trying to interpret it for us ahead of time so that we don't panic, and instead believe that things are simply following this script. In other words, Bernanke is telling us what WILL happen. There WILL be a 'precipitous drop' in the dollar, and sometime afterwards things WILL recover. Or at least they will appear to recover. But I believe this drop will be an eye opening glimpse of a much worse and long-lived drop in the not-too-distant future. In actuality the dollar has been losing value for some time, but this sounds like a less than gradual drop.
He's also addressing the banking infrastructure, as weakened or failing state chartered banks become vulnerable to commercial buyers (especially during a big economic shock like a crash) which could ultimately change the whole power structure of our financial institutions and FDIC protections.

I'm no economist, obviously, but have been following this subject and am trying to read between the lines. I may be wrong. But I'll bet we begin to see things we haven't seen in our relatively short lifetimes that will reveal our true financial/economic situation, and which may finally provide undeniable evidence that even those with the rosiest of rose colored glasses will grok. I'm wondering if we may even see bank runs. Of course they rarely discuss the Iranian oil bourse and the switch of the petro-dollar to the Euro that occurs this month, but if other countries follow Iran's lead and also make the switch as most would like to (and the U.S. doesn't attack Iran), then this big piece in the global economic /currency equation may finally make it's way into our mainstream press.

By the way, Bernanke is a specialist on The Great Depression, which I believe may be one of the reasons why he was chosen to replace Greenspan.

[NMDemDist2]

1. it needs to hold on for 90 more days

til I sell my house.......

[applegrove]

2. Just like the US has been demanding China increase its dollar,

so too a drop in the US dollar will help US productivity. Help it perhaps not loose so many jobs to overseas.

Don't forget too that the rich have had a good 4 years of tax cuts. And the ability to place that money in oversease investment through stocks and the like. And stocks are not affected by dollar as much. Especially those bought in outside markets. But something like Microsoft is not going to loose money on the whole - as they depend on growth oversease for profit. Might even make them more competative - and hook the next generation of Asian middle class into microsoft products for life.

A high dollar can really turn off local industry and hurt local productivity. Germany is suffering these days because it went with the euro and has no ability to lower its currency - while it faces demographic crisis (different than its neighbours) that hurts its economy. The Germans wish they could lower theirs.

Lower dollar isn't a crisis. It is just something else.

[Sydnie]

3. Perhaps the Oil Bourse is in play? n/t

[swag]

4. Your subject line is misleading, and your interpretation of the

article constitutes a substantial and logical non sequitur.

But believe what you like.

Regards.

[Dover]

5. So the 'drop' that Bernanke suggests could be in our future

is basically harmless? Please do give your own counter interpretation.

[lostinacause]

6. My grasp of monetary theory is not my strong

point but so long as there is not wide scale panic everything will be as he says. Though you may not want to drive as much because gas prices will likely increase if (when) the US dollar falls.

The bigger problem at this point is the deficit/debt. As debt increases things do not remain stable as there are not the same degree of "automatic" stabilizers.

[lakeguy]

8. i would think the price of everything will increase as the dollar sinks

at least everything we buy from other countries that is. even the food we grow here generally is dependent upon foreign oil (i.e. pesticides, fertilizer, transport, etc.).

a drop in the value of the dollar will shrink the amount of money people have to spend on everyday items that will, in turn, reduce consumption. that could lead to an increase in unemployment and even less spending. it looks to me, depending on severity and timing of the drop, that this could lead to a very bad, cyclic sort of turn down. it's not like we will instantly be able to start producing more of the goods we depend upon (or want) here in the US. it will take time.

i think the impact could be softened by the gov., but i also think it has been shown that the gov. (at least the one we have now) won't lift a finger for the average joe like me.

[BR_Parkway]

7. Changing from Petrodollars to PetroEuros - and UAE is using "hurt

feelings" to shift 10% of their reserves out of dollars (yeah, right)

[Warpy]

9. Offshore jobs = screw up the balance of trade!!!

Honestly, why multinational corporations are still allowed to get away with this is a real mystery. Is the dogma of "free" trade that strong? Somebody call the pope, give him some clues in how to maintain such a rigid control of hearts in minds against all evidence.

Offshoring is KILLING THIS COUNTRY. Yes, it improves a corporate bottom line, and yes, it provides goods and some services that keep prices flat and hide inflation, which is temporarily good for consumers who still have jobs. However, it's offshored too many vital industries and is threatening to erode the consumer base to the point we are facing depression, not recession, while putting this country more deeply into debt every day it goes on.

We can't afford multinational corporations. The sooner those old boys in Washington figure that out, the better. If they don't, then it's incumbent upon us to throw them out of office in favor of people with a stronger grasp on reality.

[Dover]

10. Some economic disaster scenarios spelled out ...

Widening Global Imbalances

Rodrigo de Rato, Managing Director of the International Monetary Fund at a recent speech at the University of California at Berkeley, stated that "while global current account imbalances have been widening, the fact that they have been financed easily thus far seems to be inducing a sense of complacency among policy makers. I think they should be more concerned. This is not to say that the risk of a disorderly adjustment is imminent, but the problem is growing, and if a disorderly adjustment does take place, it will be very costly and disruptive to the world economy.

The most visible aspect of the global imbalances problem is a very large deficit in the current account of the balance of payments of the United States - amounting to about 6.25% of GDP. The main problem is that in the United States savings are too low. These global imbalances could unwind quickly, and in a very disruptive way, with either an abrupt fall in the rate of consumption growth (i.e. increased savings) in the United States which is holding up the world economy or by investors abroad becoming unwilling to hold increasing amounts of U.S. financial asset, and demand higher interest rates and a depreciation of the U.S. dollar, which in turn forces U.S. domestic demand to contract."

Economic Pain

Timothy Adams, Undersecretary of Treasury for International Affairs, stated recently that "the world economy is dangerously imbalanced and the U.S. current account deficit is now at levels that many experts fear could trigger a run on the dollar, soaring interest rates, and global economic pain."

Severe Consequences

Robert E. Rubin, director of Citigroup Inc. and former Secretary of the Treasury; Peter Orszag, Senior Fellow at Brookings Institution; and Allen Sinai, Chief Global Economist at Decision Economics Inc., made a presentation to a joint session of the American Economic Foundation and the North American Economics and Finance Association recently. They stated that "the scale of the nation's projected budgetary imbalances is now so large that the risk of severe consequences must be taken very seriously. Continued substantial deficits could cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad. This, in turn, could cause investors and creditors to reallocate funds away from dollar-based investments, causing a depreciation of the exchange rate, and to demand sharply higher interest rates on U.S. government debt. The increase of interest rates, depreciation of the exchange rate, and the decline in confidence could reduce stock prices and household wealth, raise the cost of financing to business, and reduce private-sector domestic spending."

Wild Ride

Paul Kasriel, Director of Economic Research at Northern Trust and co-author of the book 'Seven Indicators That Move markets', has stated that "If foreign creditors should question our ability and willingness to repay them without resorting to the currency printing press, there could be a run on the dollar, which would lead to sharply higher U.S. interest rates, which would do great harm to household finances and the housing market, which would put a crimp in consumer spending, which would increase unemployment, which would result in a spike in mortgage defaults, which would likely cripple the banking system given that a record 61% of total bank credit is mortgage related, which would, in turn, render future Fed interest rate cuts -expected on or about September 20th, 2006 - less potent in reviving the economy.

We have the most highly leveraged economy in the postwar period and the Fed is still raising rates and in the past 30 years or so, whenever the Fed has raised interest rates, we have usually had financial accidents. Our federal government is spending like a drunken sailor so my advice is to put on your safety harness as it is going to be a wild ride. My bet is that we are going to end up on the rocks."

Category 6 Fiscal Storm

Isabel V. Sawhill, Vice President and Director and Alice M. Rivlin, Senior Fellow of Economic Studies at the Brookings Institution have said that "the federal budget deficits pose grave risks - a category 6 fiscal storm - to the U.S. economy. The current course is simply not sustainable. Promises to the elderly, especially about medical care, cannot be kept unless taxes are raised to levels that are unprecedented or other activities of the government are slashed. Postponing such action would be reckless and short-sighted. Massive amounts of capital have flowed in from around the world, financing much of America's federal deficit, as well as its international (or current account) deficit. While this inflow of foreign capital has kept investment in the American economy strong it means that Americans are accumulating obligations to service these debts and repay foreigners out of their future income. As a result, the future income available to Americans will be lower than it would have been without the government deficits. Foreign borrowing also makes the United States vulnerable to the changing whims of foreign investors. There is a risk that Asian central banks, or other large purchasers of dollar securities, will lose confidence in the ability of the United States to manage its fiscal affairs prudently and shift their purchases to euros or other currencies. Such a shift could precipitate a sharp fall in the value of the dollar, which could cause a spike in interest rates, a plunge in the stock and bond markets, and possibly a severe recession. The risk of such a meltdown is unknown, but it seems foolish to run the risk in order to perpetuate large fiscal deficits, which will ultimately reduce Americans' standard of living."

Drastic Fall

Sebastian Edwards, the Henry Ford ll Professor of International Business Economics at UCLA's Anderson School of Management and a research associate of the National Bureau of Economic Research and has been a consultant to the Inter-American Development Bank, the World Bank, the OECD and a number of national and international corporations, has stated that "The future of the U.S. current account - and thus of the dollar - depend on whether foreign investors will continue to add U.S. assets to their investment dollars. Any major reduction in the USA's ability to obtain sufficient foreign financing would cause the dollar to fall by 21% to 28% during the first three years of any adjustment period, cause a deep GDP growth reduction, and push the USA into recession."

Substantial Macroeconomic Consequences

Ian Morris, Chief US Economist at HSBC, has said that "about half the US housing market may be overvalued by as much as 35-40%. When these housing bubbles begin to deflate, it is likely to have a substantial macroeconomic consequence."

Serious Collapse

Ian Shepherdson, Chief US Economist for High Frequency Economics, has warned that "house price increases are going to slow much further dragging down expectations for future price gains and therefore raising real mortgage rates. This, in turn, will be the trigger for a serious collapse in home sales. The housing market is a bubble, and it will burst."

Economic Earthquake

Robert R. Prechter, President of Elliott Wave International and author of 'At the Crest of the Tidal Wave' and 'Conquer the Crash,' calls for "a slow motion economic earthquake that will register 11 on the financial Richter scale.

The Great Asset Mania of recent years is in its final euphoric months and the next event will be a sharp decline of historic proportion in stock prices - the Dow should fall to below the starting point of its mania which was 777 in August 1982 and probably below 400 by no later than 2008 - resulting in a deep economic depression lasting until about 2011. If an across-the-board deflation occurs, which has a substantial probability, then real estate, commodities and all bonds issued by other than those rated AAA will fall in value as well. That we are in the midst, and apparently near the end, of the greatest debt build-up in world history suggests that the resulting deflation and depression will be the biggest deflation in history by a huge margin. A corollary of deflation will be a soaring value for the U.S. dollar, contrary to virtually all current expectations. Credit expansion is a major reason why stocks have kept rising and the dollar has kept falling but when the bubble begins to deflate, the investment markets will go down and the dollar will start up. The period after the market crash will be the most vulnerable in terms of the potential for hyperinflation. The ultimate result will be the destruction of any value remaining in bonds and the wipe-out of all dollar-denominated paper assets."

Giant Speculative Bubble

Ravi Batra, Professor of Economics at Southern Methodist University, in his book 'The Crash of the Millennium' foresees not a deflationary depression but an inflationary one. He sees "the giant speculative bubble that we are currently in bursting, the stock market crashing and then the U.S. dollar collapsing almost immediately followed by a rise in interest rates and plunging bond prices culminating in a depression made doubly damaging by rising inflation through the early part of this decade. In spite of the inflationary nature of the coming depression, property values will tumble in most parts of the United States. In the long run, home prices will probably continue to climb but in the short run, however, they could sink and sink hard."

Systemic Banking Crisis

Richard Duncan, a former consultant for the International Monetary Fund, current Financial Sector Specialist (Asia) at the World Bank and author of the book, 'The Dollar Crisis', writes that "the United States' net indebtedness to the rest of the world, already at record highs, will continue to increase every year into the future until a sharp fall in the value of the dollar against the currencies of all its major trading partners puts an end to the gapping US current account deficit or until the United States is so heavily indebted to the rest of the world that it become incapable of servicing the interest on its multi-trillion dollar debt. In the meantime, as long as the US current account deficit continues to flood the world with US dollar liquidity, new asset price bubbles are likely to inflate and implode; more systemic banking crises can be expected to occur; and intensifying deflationary pressure can be anticipated as low interest rates and easy credit result in excess industrial capacity and falling prices (i.e. deflation)."

[Dover]

11. Some economic disaster scenarios spelled out ...

Widening Global Imbalances

Rodrigo de Rato, Managing Director of the International Monetary Fund at a recent speech at the University of California at Berkeley, stated that "while global current account imbalances have been widening, the fact that they have been financed easily thus far seems to be inducing a sense of complacency among policy makers. I think they should be more concerned. This is not to say that the risk of a disorderly adjustment is imminent, but the problem is growing, and if a disorderly adjustment does take place, it will be very costly and disruptive to the world economy.

The most visible aspect of the global imbalances problem is a very large deficit in the current account of the balance of payments of the United States - amounting to about 6.25% of GDP. The main problem is that in the United States savings are too low. These global imbalances could unwind quickly, and in a very disruptive way, with either an abrupt fall in the rate of consumption growth (i.e. increased savings) in the United States which is holding up the world economy or by investors abroad becoming unwilling to hold increasing amounts of U.S. financial asset, and demand higher interest rates and a depreciation of the U.S. dollar, which in turn forces U.S. domestic demand to contract."

Economic Pain

Timothy Adams, Undersecretary of Treasury for International Affairs, stated recently that "the world economy is dangerously imbalanced and the U.S. current account deficit is now at levels that many experts fear could trigger a run on the dollar, soaring interest rates, and global economic pain."

Severe Consequences

Robert E. Rubin, director of Citigroup Inc. and former Secretary of the Treasury; Peter Orszag, Senior Fellow at Brookings Institution; and Allen Sinai, Chief Global Economist at Decision Economics Inc., made a presentation to a joint session of the American Economic Foundation and the North American Economics and Finance Association recently. They stated that "the scale of the nation's projected budgetary imbalances is now so large that the risk of severe consequences must be taken very seriously. Continued substantial deficits could cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad. This, in turn, could cause investors and creditors to reallocate funds away from dollar-based investments, causing a depreciation of the exchange rate, and to demand sharply higher interest rates on U.S. government debt. The increase of interest rates, depreciation of the exchange rate, and the decline in confidence could reduce stock prices and household wealth, raise the cost of financing to business, and reduce private-sector domestic spending."

Wild Ride

Paul Kasriel, Director of Economic Research at Northern Trust and co-author of the book 'Seven Indicators That Move markets', has stated that "If foreign creditors should question our ability and willingness to repay them without resorting to the currency printing press, there could be a run on the dollar, which would lead to sharply higher U.S. interest rates, which would do great harm to household finances and the housing market, which would put a crimp in consumer spending, which would increase unemployment, which would result in a spike in mortgage defaults, which would likely cripple the banking system given that a record 61% of total bank credit is mortgage related, which would, in turn, render future Fed interest rate cuts -expected on or about September 20th, 2006 - less potent in reviving the economy.

We have the most highly leveraged economy in the postwar period and the Fed is still raising rates and in the past 30 years or so, whenever the Fed has raised interest rates, we have usually had financial accidents. Our federal government is spending like a drunken sailor so my advice is to put on your safety harness as it is going to be a wild ride. My bet is that we are going to end up on the rocks."

Category 6 Fiscal Storm

Isabel V. Sawhill, Vice President and Director and Alice M. Rivlin, Senior Fellow of Economic Studies at the Brookings Institution have said that "the federal budget deficits pose grave risks - a category 6 fiscal storm - to the U.S. economy. The current course is simply not sustainable. Promises to the elderly, especially about medical care, cannot be kept unless taxes are raised to levels that are unprecedented or other activities of the government are slashed. Postponing such action would be reckless and short-sighted. Massive amounts of capital have flowed in from around the world, financing much of America's federal deficit, as well as its international (or current account) deficit. While this inflow of foreign capital has kept investment in the American economy strong it means that Americans are accumulating obligations to service these debts and repay foreigners out of their future income. As a result, the future income available to Americans will be lower than it would have been without the government deficits. Foreign borrowing also makes the United States vulnerable to the changing whims of foreign investors. There is a risk that Asian central banks, or other large purchasers of dollar securities, will lose confidence in the ability of the United States to manage its fiscal affairs prudently and shift their purchases to euros or other currencies. Such a shift could precipitate a sharp fall in the value of the dollar, which could cause a spike in interest rates, a plunge in the stock and bond markets, and possibly a severe recession. The risk of such a meltdown is unknown, but it seems foolish to run the risk in order to perpetuate large fiscal deficits, which will ultimately reduce Americans' standard of living."

Drastic Fall

Sebastian Edwards, the Henry Ford ll Professor of International Business Economics at UCLA's Anderson School of Management and a research associate of the National Bureau of Economic Research and has been a consultant to the Inter-American Development Bank, the World Bank, the OECD and a number of national and international corporations, has stated that "The future of the U.S. current account - and thus of the dollar - depend on whether foreign investors will continue to add U.S. assets to their investment dollars. Any major reduction in the USA's ability to obtain sufficient foreign financing would cause the dollar to fall by 21% to 28% during the first three years of any adjustment period, cause a deep GDP growth reduction, and push the USA into recession."

Substantial Macroeconomic Consequences

Ian Morris, Chief US Economist at HSBC, has said that "about half the US housing market may be overvalued by as much as 35-40%. When these housing bubbles begin to deflate, it is likely to have a substantial macroeconomic consequence."

Serious Collapse

Ian Shepherdson, Chief US Economist for High Frequency Economics, has warned that "house price increases are going to slow much further dragging down expectations for future price gains and therefore raising real mortgage rates. This, in turn, will be the trigger for a serious collapse in home sales. The housing market is a bubble, and it will burst."

Economic Earthquake

Robert R. Prechter, President of Elliott Wave International and author of 'At the Crest of the Tidal Wave' and 'Conquer the Crash,' calls for "a slow motion economic earthquake that will register 11 on the financial Richter scale.

The Great Asset Mania of recent years is in its final euphoric months and the next event will be a sharp decline of historic proportion in stock prices - the Dow should fall to below the starting point of its mania which was 777 in August 1982 and probably below 400 by no later than 2008 - resulting in a deep economic depression lasting until about 2011. If an across-the-board deflation occurs, which has a substantial probability, then real estate, commodities and all bonds issued by other than those rated AAA will fall in value as well. That we are in the midst, and apparently near the end, of the greatest debt build-up in world history suggests that the resulting deflation and depression will be the biggest deflation in history by a huge margin. A corollary of deflation will be a soaring value for the U.S. dollar, contrary to virtually all current expectations. Credit expansion is a major reason why stocks have kept rising and the dollar has kept falling but when the bubble begins to deflate, the investment markets will go down and the dollar will start up. The period after the market crash will be the most vulnerable in terms of the potential for hyperinflation. The ultimate result will be the destruction of any value remaining in bonds and the wipe-out of all dollar-denominated paper assets."

Giant Speculative Bubble

Ravi Batra, Professor of Economics at Southern Methodist University, in his book 'The Crash of the Millennium' foresees not a deflationary depression but an inflationary one. He sees "the giant speculative bubble that we are currently in bursting, the stock market crashing and then the U.S. dollar collapsing almost immediately followed by a rise in interest rates and plunging bond prices culminating in a depression made doubly damaging by rising inflation through the early part of this decade. In spite of the inflationary nature of the coming depression, property values will tumble in most parts of the United States. In the long run, home prices will probably continue to climb but in the short run, however, they could sink and sink hard."

Systemic Banking Crisis

Richard Duncan, a former consultant for the International Monetary Fund, current Financial Sector Specialist (Asia) at the World Bank and author of the book, 'The Dollar Crisis', writes that "the United States' net indebtedness to the rest of the world, already at record highs, will continue to increase every year into the future until a sharp fall in the value of the dollar against the currencies of all its major trading partners puts an end to the gapping US current account deficit or until the United States is so heavily indebted to the rest of the world that it become incapable of servicing the interest on its multi-trillion dollar debt. In the meantime, as long as the US current account deficit continues to flood the world with US dollar liquidity, new asset price bubbles are likely to inflate and implode; more systemic banking crises can be expected to occur; and intensifying deflationary pressure can be anticipated as low interest rates and easy credit result in excess industrial capacity and falling prices (i.e. deflation)."