Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Recession Avoidable - The Falling US Dollar and the US Economy

Economics / US Economy Nov 26, 2007 - 11:55 AM GMT

By: Gerard_Jackson

Economics What a week that was. Australia's conservative government gets thrashed by a bunch of unioncrats, lefty journalists and an economic illiterate with intellectual pretensions while at the same time as the US dollar goes high diving. These are certainly interesting times.


The falling dollar has got a number of people running around like headless chooks, as we say down here. What is generally overlooked is that the dollar has been declining for years. Anyone with a basic grasp of supply and demand analysis would know why. Regardless of what some commentators think the law of supply and demand applies to money just as it applies to all other economic goods.

I have occasionally pointed out that though the boom-bust cycle has a fundamental cause not every cycle share identical characteristics. It seems that it was only yesterday -- and maybe it was -- that bears were predicting an imminent recession. My opinion, however, was that the US economy still had steam in its boiler. To begin with, manufacturing is still expanding and investing, though at a somewhat slower rate, and productivity seems to be growing. Even if manufacturing was contracting it can still be a fairly long time before unemployment rises.

This was certainly the case with the Clinton recession where consumer spender actually increased. It now appears that current consumer spending is advancing at an increasing rate. (As Yogi Berra said: "It's like deja vu all over again"). In addition, I also figured that a depreciating dollar would stimulate the export of manufactures and that this in turn would help prolong the boom. And this certainly appears to be the case.

The textbook tells you that a depreciating currency has the effect of closing current account deficits. Although there certain conditions, it's pretty clear that the textbook is right for a change. (I have to admit that my 'latest' textbook is more than 30 years old). Exports are quickly shrinking the deficit and it has now dropped from a record 7 per cent of GDP to 5 per cent and still shrinking. The same monetary process is basically responsible for reducing the domestic deficit to about 1 per cent of GDP.

The sheer size of the US economy and the importance of the dollar ensures that the depreciation is likely to play havoc with European economies as their own exports to the US fall off and imports of US goods, including services, rise. This situation will be aggravated by China's dollar peg. Now this can only be maintained by China flooding the market with its own currency in an effort to prevent the yuan rising against the dollar, causing the prices of Chinese goods in terms of European currencies to fall even further. Naturally this state of affairs cannot continue indefinitely.

What we are witnessing is monetary disorder, a product of two dangerous monetary theories: the one theory has it that central banks should maintain a stable price level while the other theory maintains that interest rates should be used to control economic activity so that the economy is "not too hot or too cold". This is like trying to square the circle: something has to give and it has. The Fed knows that further cuts in rates could drive the dollar even lower. On the other hand, if it does not make more cuts the economy could come to a halt. My guess -- and it is only a guess -- is that Bernanke will go for further cuts. (Let us not forget that the spirit of Keynes is still abroad in the Fed).

All the doomsaying about the sub-prime mortgage crisis has, as I predicted, come to nought. It was argued that mortgage write offs would be at least $400 billion and this would come out at about 3 per cent of GDP. But as I have pointed out so many times before, GDP is not a genuine gross figure. Total spending is about $30 trillion which means that the write offs would amount to about 1.3 per cent of the true gross figure. As for the "mortgage crisis" hurting car sales by curbing bank lending, doomsayers are overlooking the fact that car companies have their own financing arrangements.

As usual the pessimists are looking in the wrong places. Although a recession is on its way it has still yet to arrive. When it does -- please blame monetary policy instead of the market.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Gerard Jackson Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Brian Ages
30 Dec 08, 09:42
PMI Private Mortgage Insurance Requirements

Can you discover what happened to the PMI premiums designed to protect investors for losses on loans over an 80% loan to value?

PMI has been required on all loans (other than VA) that involved less than a 20% down payment. During our real estate boom years these funds collected a lot of money with very little payout. This insurance was purchased to protect the lender in the event of defaults and value loss.

I believe the banking crisis is based on the second trust deeds which have no protection and the greatest risk. I also believe that something is seriously wrong with the managing or investment of the PMI funds. For some reason no one has discussed this issue.

Did AIG have anything to do with the PMI market?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in