1. Most Discussed
  2. Gainers & Losers
TSC 0.7¢

Interesting read on US economy

  1. AnnaPhylaxis

    470 Posts.

    Read also Jim Puplava's recent update to his Perfect Storm series...



    Debt's Fusion Reactor + Gold & More Trading Notes

    By: Rick Ackerman, Market Wise Black Box

    Cycles master Bob Bronson thinks it will be at least another eight years before deflation has run its course. Hard to believe it could take so long to purge the U.S. economic system of bad debt -- but perhaps that’s what we’re in for. Last week’s mail brought a fresh reminder of how a domestic economy flooded to the gunwales with debt could remain afloat seemingly indefinitely -- and in stormy seas, no less. Specifically, I received from one of the banking giants a credit card offer that would allow me to carry sizable debt at no interest until March 2004(!). Surely I am not the only person in America who has received such a generous offer. But if it has gone out to millions of home and business owners, as I suspect it has, then quite a few who owe more than they can easily repay are in no imminent danger of drowning. Further delaying the day of reckoning for us all, no doubt, is the recently disgorged manna of sub-6 percent mortgages.

    I’m tempted to write that the U.S. economy cannot possibly collapse so long as mortgages are trending below 6 percent and furniture stores, appliance and auto dealers are aggressively shoveling money at us at zero percent. But then reality dawns, and I return to two predictions that I’ve reiterated here many times since I started writing about the threat of deflation a decade ago. To wit: 1) at some point, with asset values falling by 2-3% annually, "cheap" mortgages on the order of four percent will mutate into a suffocating burden to millions of homeowners; and 2) the deflationary endgame cannot begin until the dollar collapses. Bottom line, household borrowing power remains sufficient to sustain the economy at sup-par levels for at least another year, but all bets are off if the dollar starts to plummet.

    Dollar in Baby Bear

    The dollar has been falling, to be sure -- by enough to give pause to those who have viewed it as a natural correction in a long-term bull market. The dollar index is trading around 105, about 13.2 percent below long-term highs near 121 that were achieved about 20 months ago. My prediction is for the current decline to continue to at least 93, which would represent a 23 percent fall from last year's top. If I am right, that will nearly match the 25 percent decline in the dollar between 1986-87 that many blame for the October 1987 crash. But so far, the dollar has not fallen far enough or steeply enough to panic Uncle Sam’s many foreign creditors.

    Hard to imagine they could collectively be so stupid -- but there’s no getting around it. They hold 43 percent of all Treasury debt, and they are currently financing U.S. hyperconsumption to the tune of about half a trillion dollars per year. Someday it will dawn on them that the dollar may not be the best place to be. But so far, they seem…shall we say, a bit dense. Or even worse than dense, since, whatever they’ve gained from rising U.S. bond prices over the last year has been lost to a depreciating dollar. In any event, they remain manifestly oblivious to the implications of a U.S. credit expansion that is currently running at a $2 trillion annual rate. How much longer are they going to carry the American consumer? They’re going to abandon the dollar sooner or later, for sure, but we should pray that it does not happen overnight.

    Suicide Is Painless

    Meanwhile, stock market investors in the U.S. who buy into the current bear rally are probably as suicidally oblivious as the Europeans. "Today’s popular opinion with policy elites is that the U.S. economy’s fundamentals remain sound, " writes Jim Puplava in his most recent Storm Watch Update. "In fact, they have worsened. Growing government budget deficits, rising trade imbalances, declining business investment, zero savings, and record levels of debt on consumer and corporate balance sheets are not fundamentally sound. The current boost to the economy by the sharp drop in mortgage rates created additional bubbles in consumption and housing that will end when long-term rates begin to rise.

Before making any financial decisions based on what you read, always consult an advisor or expert.

The HotCopper website is operated by Report Card Pty Ltd. Any information posted on the website has been prepared without taking into account your objectives, financial situation or needs and as such, you should before acting on the information or advice, consider the appropriateness of the information or advice in relation to your objectives, financial situation or needs. Please be aware that any information posted on this site should not be considered to be financial product advice.

From time to time comments aimed at manipulating other investors may appear on these forums. Posters may post overly optimistic or pessimistic comments on particular stocks, in an attempt to influence other investors. It is not possible for management to moderate all posts so some misleading and inaccurate posts may still appear on these forums. If you do have serious concerns with a post or posts you should report a Terms of Use Violation (TOU) on the link above. Unless specifically stated persons posting on this site are NOT investment advisors and do NOT hold the necessary licence, or have any formal training, to give investment advice.


Thank you for visiting HotCopper

We have detected that you are running ad blocking software.

HotCopper relies on revenue generated from advertisers. Kindly disable your ad blocking software to return to the HotCopper website.

I understand, I have disabled my ad blocker. Let me in!

Need help? Click here for support.