The US economy is in a precarious state partly because it's dependent on two engines that are working in opposing directions.
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The (pathetically small) growth of the US economy over the last few years has come from two sources:
1. the housing market
2. the need/willingness of investors, primarily foreign central banks to buy dollars and dollar denominated securities.
There are several major problems with an economy resting on this type of foundation, not least of which would be that they depend on several factors moving in completely opposite directions . Particularly, the housing market requires low or negative interest rates for ease of lending while foreign bankers require higher rates of interest for attractiveness of investment.
From 2002 until late 2004, the Fed under Greenspan quite intentionally lowered interest rates to near rock bottom. In fact, for several years, there has actually been a net negative interest rate on US securities (T-Bonds, T-Bills).
After about July 2004, the Fed raised rates for several reasons:
1. negative interest rate spreads (the difference between the percentage interest generated on an investment minus the percent depreciation of the currency) made dollar denominated investment unattractive, thereby making it difficult to finance Bush's Cronyist spending spree.
2. the lack of investment and dollar selloff ($1 in May,2006 is worth about $.65 in November, 2000 currency) cause the dollar to drop and small scale inflation (very dirty word for bankers, especially at the Fed) to set in.
This made dollar investments slightly more attractive and has been the only thing allowing America to run up its spiralling national and current accounts deficits.
The rate rise worked fine as long as the net rate remained low for borrowers to mortgage themselves to the hilt, allowing for over 40% of establishment job growth in this (depressingly almost jobless) recovery to be in construction and other trades related to new housing starts (Note: this figure AFAIK, largely excludes the explosive growth of real estate and financial services jobs), but the two trends are starting to grind against each other.
The reckoning is coming now, slowly at first, because, like all other speculative bubbles, the housing bubble is running on the "Greater Fool Theory" and we've just about tapped out our reserve of deep pocketed "fools". It's to the point that any move made by either John Snow, or Ben Bernanke could tip the scale. Moving forward, the economy could either:
A. go into stagflation-this is what would happen if the Fed stopped raising rates right now and John Snow (for lack of a better way to say it) kept his big fat stupid mouth shut. This is the nicest possibility, and also the least likely to happen.
B. go into major depression-If the Fed keeps raising rates by looking almost exclusively at inflationary figures and ignoring the housing bubble, it would burst violently. It should be noted that a similar situation with "credit tightening" during an economic panic was a major exacerbating factor in the Great Depression.
C. go into hyperinflation-If the Fed is forced to lower rates in the face of a collapsing housing market, then the dollar, and by extension, dollar denominated assets held worldwide, will be dumped onto the market. This combined with shortselling of the US currency would lead to a plummeting dollar, ruining people's savings and making long-term economic growth or planning effectively impossible. This doesn't even factor in the brutal "restructuring" international financiers will force upon the US if the currency plummets.
No matter which way it falls though, the economy is going down, and that right soon.