Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How to Trade Binance Vanilla Options for the First Time on Bitcoin Crypto's - 2nd Aug 21
From vaccine inequality to economic apartheid - 2nd Aug 21
Stock Market Intermediate Top Reached - 2nd Aug 21
Gold at a Crossroads of Hawkish Fed and High Inflation - 2nd Aug 21
Bitcoin, Crypto Market Black Swans from Google to Obsolescence - 1st Aug 21
Gold Stocks Autumn Rally - 1st Aug 21
Earn Upto 6% Interest Rate on USD Cash Deposits with Binance Crypto Exchange USDC amd BUSD - 1st Aug 21
Vuze XR VR 3D Camera Takes Near 2 Minutes to Turn On, Buggy Firmware - 1st Aug 21
Sun EXPLODES! Goes SuperNova! Will Any planets Survive? Jupiter? Pluto? - 1st Aug 21
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Economy - No More Legs to Stand On

Economics / UK Interest Rates Apr 05, 2007 - 05:38 PM GMT

By: Peter_Schiff

Economics

As investors and market strategists sift through every new economic tea leaf for clues about the health of the U.S. economy, I am reminded of a group of railroad engineers discussing the structural qualities of the track bed while an overloaded fright train careens around a sharp turn. For those not lost in the inconsequential minutia, a severe recession is an outright certainty, regardless of what current statistics might indicate on a day-to-day basis.

Since the bursting of the dot.com bubble, the U.S. economy has been fueled by an enormous consumer spending spree. This largess has been artificially propped up by the largest real estate bubble in U.S. history. In fact, housing has acted as a three-legged stool upon which American consumers have been precariously perched. Those legs are: 1) home equity extractions; 2) adjustable rate mortgages; 3) the wealth effect.


First, rising real estate prices allowed Americans to routinely borrow against home equity and repeatedly refinance loans of any stripe (be they mortgage, credit card or automobile) at lower rates. If the home equity was turned into cash, or used to pay off other debts, the result was additional spending beyond what consumers could have afforded based solely on their incomes.

Second, adjustable rate mortgages, especially the "negative amortization" or the "interest only" varieties, allowed Americans to enjoy temporarily low mortgage payments despite accumulating bigger mortgages. The difference between those temporarily low rates and the normal rates, to which these loans would ultimately reset, was available to be spent by homeowners.

Third, as real estate prices rose, homeowners felt wealthier, which has been shown to be a stimulant to spending. In addition, the pervasive belief that home prices would continue to rise indefinitely led many Americans to make false assumptions regarding their financial circumstances and their need to save to meet future obligations and retirement goals. As a result, money that would have typically been applied to savings was spent.

These three factors combined to encourage consumer spending on an unprecedented scale relative to incomes, and allowed debt to rise to levels that would have been impossible had mortgage payments been fully amortized and real estate prices remained at historically reasonable levels. Of course, many economists confused this spending binge with legitimate economic growth, just as they confused rising home prices with increased savings. However, as with the dot.com bubble, the truth only becomes apparent to the inebriated when the punch bowl runs dry.

Now that ARMs are being reset to market rates, home prices are falling, and the wealth effect is working in reverse, consumers will be forced to atone for a prolonged period of conspicuous consumption by enduring an even longer one of frugality. Excess spending will be replaced by excess savings. On the mortgage front, higher payments on ARMs mean less money available for discretionary spending. On the cash-out side, lower real estate prices mean houses will no longer act like ATM machines. Finally, as homeowners have to adjust their financial expectations to the new reality, saving will have to become the new national pastime, as millions of homeowners desperately try to make up for lost time.

However, it is important to point out that as a collapse in consumer spending ushers in a recession, the Fed will not have the luxury of lowering interest rates to cushion the fall. Despite surging unemployment, "inflation" will only accelerate, as extreme dollar weakness abroad translates into higher consumer prices at home. In addition, long-term interest rates will be headed higher as well, as foreign savers look to be compensated for this loss of purchasing power. Higher interest rates and substantial increases in the cost of living will only exacerbate the housing downturn and the recession, turning what would normally have been simply a severe recession into something far worse.

Although this may sound like a sobering scenario, it is definitely not the worst case. The real doomsday would only come as a result of Fed-created hyper-inflation which could be used to pump up all varieties of falling asset prices. Let's hope the boys at the Fed decide not to go there.

For a more in depth analysis of the precarious state of the American economy and its dependence on foreign lenders and producers, order a copy of my new book "Crash Proof: How to Profit from the Coming Economic Collapse" by clicking here.

By Peter Schiff
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

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