As most of us know, there is a possibility that we may head into recession later this year or, more likely, in 2007. Signs are fairly abundant, including enough evidence of a slowing economy to convince the Federal Reserve Board to hint that it will soon stop raising interest rates, out of the concern of triggering a recession. One of the Fed's biggest concerns, however, is that there is still a fair amount of inflation (mostly in energy prices and basic commodities needed to maintain global growth, like copper and other precious metals). This is largely attributable to the rapid pace of growth in Asia, especially in China, which has rapidly raised global demand for fossil fuels and commodities. We are actually now confronting BOTH stagnation (led by a slowing U.S. economy) AND inflation, or what is known as stagflation. In addition, the bond curve has been persistently inverted,
(in other words, short-term bonds and money markets pay more interest than long-term bonds pay), which basically means that bond traders are wagering or betting their money that a long-term investment in bonds is not worthwhile, since they believe the economy will be slowing down. Whenever there is a sustained inverted yield curve like this one, a recession usually follows (and the yield curve has been inverted most of the time, almost the whole Spring and Summer). The inverted yield curve is expected to become more and more inverted, and housing is likely to be especially hard-hit. The signs are somewhat alarming. The Fed has to walk a very fine line between preventing recession and preventing inflation. In the long run, inflation is the greater evil, since it wil drive down the value of our assets, and will weaken the dollar. By the way, the U.S. dollar is forecast to drop 5% to 10% in value by mid-2007. Now, it takes almost $1.30 to buy one Euro, but next year, it is expected to cost $1.40 to buy one Euro. A declining dollar will only contribute to more inflation. The Fed has to avoid letting the dollar weaken too much. It only has two ways to do this: First, it can keep hiking interest rates (which will pinch consumers, hurt the housing market, and especially hurt those with large credit card debt, and high mortgages). High interest rates will lower consumers' income, which will further slow our economy. Alternatively, the Fed can tighten the money supply to support the dollar and reduce inflation. But the Fed is limited in its ability to do this, since it has been increasing the money supply in order to fund the Bush Administration's irresponsible spending, especially on military expenditures--weapon systems and bombs.
So, essentially, it appears that we are up shit's crick without a paddle. We already have a certain amount of stagflation, and things may get quite a bit worse.
ADDENDUM: In the late 1990's, back in the good old days of the Clinton prosperity and economic boom, it only cost about 90 cents or $0.90 to buy 1 Euro. Our dollar has, thus, lost more than a third of its value since Clinton's Presidency, and seems to be heading toward a time in the near future when it will have lost about half of its value, if it gets to the projected point of costing $1.40 to buy one Euro.
LINK:
http://observer.guardian.co.uk/...
BRIEF EXCERPT:
Fed admits US recession on cards
Heather Stewart, economics correspondent
Sunday August 6, 2006
The Observer
The United States faces almost a 40 per cent chance of slipping into recession in the next 12 months, according to the Federal Reserve's own market model.
As Fed chairman Ben Bernanke prepares to decide whether to raise American interest rates for the 18th time on Tuesday, bond prices and the high level of borrowing costs are now showing a 38 per cent chance of recession, according to a model published by Fed economist Jonathan Wright earlier this year.