Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

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

© 2005-2019 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

6 Critical Money Making Rules