"The Biggest Slump in US Housing in the Last 40 Years"
By Nouriel Roubini
Every possible indicator of the housing sector that has been coming out in the last few weeks suggests that the housing market is in free fall. The effects of housing on US economic growth and the role of housing in tipping the US economy into a recession in early 2007 are more significant than the role that the tech sector bust in 2000 played in tipping the economy into a recession in 2001.
There are three reasons:
1. The direct effect of the fall in residential investment in aggregate demand will be as high as the effects of the fall in real investment in the 2000/01 episode. Then, real investment fell by about 2% of GDP. This time around the fall in residential investment alone -- let alone the role other components of real investment, such as software and equipment, that are already falling in Q2 will be as large as residential investment could fall from the peak of about 6.2% of GDP to as low as 4% of GDP at the bottom in 2007.
2. The wealth effect of the tech bust was limited to the elite of folks who had stocks in the NASDAQ. The wealth effect of now falling housing prices affects every home-owning household: the value of residential real estate has also increased to 48.5% of household wealth in 2006 from from 38.7% in 1996. Also, the link between housing wealth rising, increased home equity withdrawal (HEW) and consumption of durable and non durables is very significant, much more than the effect of the tech bubbles of the 1990s. Last year, out of the $800 billion of HEW at least $150 or possibly $200 billion was spent on consumption and another good $100 billion plus went into residential investment (i.e. house capital improvements/expansions). It is enough for house price to flatten as they already did recently let alone start falling, as they are doing now since they are beginning to fall in major markets, for the wealth effect to disappear, the HEW dribble to low levels and for consumption to sharply fall. Note that this year there will be large increases in the borrowing costs for $1 trillion of ARM's while this figure for 2007 will be $1.8 trillion. Thus, debt servicing costs for millions of homeowners will sharply increase this year and next.
3. The employment effects of housing are serious; up to 30% of the employment growth in the last three years was due directly and indirectly to housing. The direct effects are job lost in construction, building materials, real estate brokers and sales agents, and employees of the mortgage finance industry. The indirect effects imply that the role of housing is even larger than 30%. The housing boom led to a boom in consumer durables spending on home appliances and furniture. Indeed, in Q2 real consumption of such goods was already negative: as you have less new home built and purchased and less old homes refurbished and expanded, you get less purchases of home appliances and furniture. There are also other indirect effects of the housing bust on employment, even on the purchases of motor vehicles. Indeed, the current auto sector slump is not unrelated to the housing slump. As the Financial Times put recently, the sharp fall in the sales of Ford's pick-up trucks is related to the housing slump as such truck are widely purchased by real estate contractors. And indeed in Q2 real consumer durables (that include both cars, home appliances and furniture all related to housing) already fell, consistent with the view that we have now have a glut in the stock of consumer durables (durables consumption has a investment-like nature to it as such goods last for a long time). Thus, as housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy.
The simple conclusion is that this is indeed the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices. By itself this slump is enough to trigger a US recession: its effects on residential investment, wealth, consumption and employment will be more severe than the tech bust that triggered the 2001 recession. On top of the housing bust, US consumers are facing oil above $70, the delayed effects of rising Fed Fund and long term rates, falling real wages, negative savings, high debt ratios and higher debt servicing ratios. This is the tipping point for the US consumer and the effects will be ugly.
Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession.
By Nouriel Roubini
Every possible indicator of the housing sector that has been coming out in the last few weeks suggests that the housing market is in free fall. The effects of housing on US economic growth and the role of housing in tipping the US economy into a recession in early 2007 are more significant than the role that the tech sector bust in 2000 played in tipping the economy into a recession in 2001.
There are three reasons:
1. The direct effect of the fall in residential investment in aggregate demand will be as high as the effects of the fall in real investment in the 2000/01 episode. Then, real investment fell by about 2% of GDP. This time around the fall in residential investment alone -- let alone the role other components of real investment, such as software and equipment, that are already falling in Q2 will be as large as residential investment could fall from the peak of about 6.2% of GDP to as low as 4% of GDP at the bottom in 2007.
2. The wealth effect of the tech bust was limited to the elite of folks who had stocks in the NASDAQ. The wealth effect of now falling housing prices affects every home-owning household: the value of residential real estate has also increased to 48.5% of household wealth in 2006 from from 38.7% in 1996. Also, the link between housing wealth rising, increased home equity withdrawal (HEW) and consumption of durable and non durables is very significant, much more than the effect of the tech bubbles of the 1990s. Last year, out of the $800 billion of HEW at least $150 or possibly $200 billion was spent on consumption and another good $100 billion plus went into residential investment (i.e. house capital improvements/expansions). It is enough for house price to flatten as they already did recently let alone start falling, as they are doing now since they are beginning to fall in major markets, for the wealth effect to disappear, the HEW dribble to low levels and for consumption to sharply fall. Note that this year there will be large increases in the borrowing costs for $1 trillion of ARM's while this figure for 2007 will be $1.8 trillion. Thus, debt servicing costs for millions of homeowners will sharply increase this year and next.
3. The employment effects of housing are serious; up to 30% of the employment growth in the last three years was due directly and indirectly to housing. The direct effects are job lost in construction, building materials, real estate brokers and sales agents, and employees of the mortgage finance industry. The indirect effects imply that the role of housing is even larger than 30%. The housing boom led to a boom in consumer durables spending on home appliances and furniture. Indeed, in Q2 real consumption of such goods was already negative: as you have less new home built and purchased and less old homes refurbished and expanded, you get less purchases of home appliances and furniture. There are also other indirect effects of the housing bust on employment, even on the purchases of motor vehicles. Indeed, the current auto sector slump is not unrelated to the housing slump. As the Financial Times put recently, the sharp fall in the sales of Ford's pick-up trucks is related to the housing slump as such truck are widely purchased by real estate contractors. And indeed in Q2 real consumer durables (that include both cars, home appliances and furniture all related to housing) already fell, consistent with the view that we have now have a glut in the stock of consumer durables (durables consumption has a investment-like nature to it as such goods last for a long time). Thus, as housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy.
The simple conclusion is that this is indeed the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices. By itself this slump is enough to trigger a US recession: its effects on residential investment, wealth, consumption and employment will be more severe than the tech bust that triggered the 2001 recession. On top of the housing bust, US consumers are facing oil above $70, the delayed effects of rising Fed Fund and long term rates, falling real wages, negative savings, high debt ratios and higher debt servicing ratios. This is the tipping point for the US consumer and the effects will be ugly.
Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession.
Authored by Roubini not me, although I think the housing shakeout will impact consumer spending and therefore the overall market soon. How much of an impact remains to be seen !ajaskey said:
Meanwhile, the contrarian view from Charlie, who is cautiously bullish on the Dow.
"Was today the first baby step in a little localized bull run? Long term projections based upon a single day's data is always dangerous. But, there are several positive factors coming together this evening, suggesting that the answer is yes. ......Most people have already forgotten that Ben openly told us that we are going up from here. And, on World-Wide TV, at that! Why should we be surprised?...... .......The COMPX chart shows a rising market, on the lowest Monday volume yet.......It will take about 2 weeks to really confirm that today's "baby step" is indeed what I believe it is."
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Charlie sez 12,000 by October
Charlie seems to be quite bullish at the moment !
"As I painfully pointed out yesterday, I believe that the direction is gradually up from here. The very best news........is that it is in perfect agreement with Ben's recent statement that the economy has now returned to "a sustainable pace of economic growth." So far, so good. Now for the VERY BEST NEWS. Look at ANY trading channel. What you see is up and down movement. That's the normal, and NECESSARY market action that defines the channel. The ups are exhilarating. The downs are devastating. Remember the 1990's? Even as everything was going up, there were up and down waves........I believe that we are done suffering through the recent trough and headed up the next wave, as the tide carries us ever higher.
Can I be more bullish? We cannot disregard the fact that we are approaching the 5th anniversary of the 9/11 attacks, as a lead in to the caveat of ",,, assuming no major negative news..." Or, I could just plain be WRONG! But, applying only good news it looks like we should break Dow 12,000 before mid October."
Could he be right ?
Aug. 30 (Bloomberg) -- The Federal Reserve signaled it's in no rush to resume raising interest rates, and may even be done tightening as the slowing economy eases inflation. Chairman Ben S. Bernanke's team regards the benchmark lending rate of 5.25 percent as potentially ``consistent with satisfactory economic performance,'' minutes of the Fed's Aug. 8 policy meeting showed yesterday. The language reinforced investor expectations that the Fed will leave borrowing costs unchanged when policy makers meet on Sept. 20 and Oct. 24 and 25. Economic reports since this month's gathering, where rates were held steady for the first time in two years, show a deepening housing slump, worsening consumer confidence and signs of slowing inflation. ``The Fed seems to be moving from a pause, which connotes further rate increases, to a full-fledged stop,'' said Paul Kasriel, director of economic research at Northern Trust Securities in Chicago and a former Fed economist. ``The next move is more likely to be a cut in rates.''
Charlie seems to be quite bullish at the moment !
"As I painfully pointed out yesterday, I believe that the direction is gradually up from here. The very best news........is that it is in perfect agreement with Ben's recent statement that the economy has now returned to "a sustainable pace of economic growth." So far, so good. Now for the VERY BEST NEWS. Look at ANY trading channel. What you see is up and down movement. That's the normal, and NECESSARY market action that defines the channel. The ups are exhilarating. The downs are devastating. Remember the 1990's? Even as everything was going up, there were up and down waves........I believe that we are done suffering through the recent trough and headed up the next wave, as the tide carries us ever higher.
Can I be more bullish? We cannot disregard the fact that we are approaching the 5th anniversary of the 9/11 attacks, as a lead in to the caveat of ",,, assuming no major negative news..." Or, I could just plain be WRONG! But, applying only good news it looks like we should break Dow 12,000 before mid October."
Could he be right ?
Aug. 30 (Bloomberg) -- The Federal Reserve signaled it's in no rush to resume raising interest rates, and may even be done tightening as the slowing economy eases inflation. Chairman Ben S. Bernanke's team regards the benchmark lending rate of 5.25 percent as potentially ``consistent with satisfactory economic performance,'' minutes of the Fed's Aug. 8 policy meeting showed yesterday. The language reinforced investor expectations that the Fed will leave borrowing costs unchanged when policy makers meet on Sept. 20 and Oct. 24 and 25. Economic reports since this month's gathering, where rates were held steady for the first time in two years, show a deepening housing slump, worsening consumer confidence and signs of slowing inflation. ``The Fed seems to be moving from a pause, which connotes further rate increases, to a full-fledged stop,'' said Paul Kasriel, director of economic research at Northern Trust Securities in Chicago and a former Fed economist. ``The next move is more likely to be a cut in rates.''
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Dow is up over a 100pts since Charlies comments on Wednesday !kriesau said:
However John Maudlin is currently bearish.
"In September of 2000, economists and bullish money managers were telling us that "This time it is different." They specifically pointed to the fact that the market was close to making new highs. We were heading for a soft landing. Not one of the Blue Chip economists at the time was predicting a recession. As an aside, we now know the economy was slowing dramatically and would be in recession by March of 2001, two quarters before the normal four quarters the Fed study suggested. In 2000, we were still in the midst of the bursting of the stock market bubble of the late '90s. Today, we are seeing a housing bubble implode in slow motion.
It looks eerily like September 1, 2000. It is the point in the western where someone says, "It's quiet out there, too quiet!"
To be a bull today, you have to think that this time it is different. You must believe that the inverted yield curve, which has yet to be wrong about a future recession, is giving us a false positive. Because if we do get a recession or even a "mere" serious slowdown, then the stock market is going to drop. It always has. Always.
To be a buyer today, you have to think that the housing market is not going to be all that big a problem, that consumers will be able to once again maintain their increase in spending. I don't think Mr. Market, or at least the price action, can tell us when the economy is getting ready to turn over. Prior to every market drop and recession, the market has made new cycle highs. As more than a few commentators have noted, the market works diligently at creating the most pain for the most number of people. I sadly think there is some pain in the future as this economy slows down."
kriesau,i've noticed you are posting a lot of doom and gloom,no doubt this mrkt will go back down,in the meantime they will keep pushing up on small volume til they've squeezed out the last short,thats the trend go with it ,fading this mrkt early may cost you,beware of your opinion,follow the trend and resistance points
House sales in US point to an economy beginning to feel the pinch
03 September 2006 By Caroline Baum
Housing headlines are dominating the news in the United States just as the Nasdaq did in the late 1990s. And no wonder. Successive years of sizzling sales and spectacular price appreciation have given way to falling sales and starts, record inventories of unsold homes (new and existing), a plunge in housing affordability and a nationwide flattening out of prices. The big debate is whether housing will a) stabilise at a lower level, b) slide for an extended period, or c) sink fast and take the economy down with it. Each option carries its own flow chart of possibilities.
Residential real estate accounts directly for 5 per cent of real gross domestic product and indirectly for a greater share - newly built homes require furnishings and appliances. What’s more, the length and strength of the housing boom, with its rapidly rising house prices, has enabled many owners to refinance their mortgages and take out a bigger loan, providing an additional spending accelerator. Ever since former Federal Reserve Chairman Alan Greenspan became fixated on the amount of money that homeowners were extracting from their homes, and instructed his staff to quantify it, private sector economists have been dutifully estimating MEW (mortgage equity withdrawal) or HEE (home equity extraction).
Greenspan never believed in the intangible aspect of the wealth effect. For him, it was the actual dollars in consumers’ pockets that mattered - maybe that’s why he never grasped the stock market bubble in real time. When prices stop rising, the game is up. The endgame is contributing to the practice of ‘short sales’ according to an August 21 story in California’s Sacramento Bee. Homeowners who owe the bank more than the house is currently worth try to convince the lender to accept less than the loan value to avoid the costs of foreclosing on the property. With Sacramento County home prices down 5 per cent in the past year and foreclosures rising, short sales are reappearing according to the Bee. Nationwide, foreclosures rose 5 per cent in July from the previous month and 18 per cent from a year earlier, according to RealtyTrac, publisher of a US database of pre-foreclosure and foreclosure properties. That translates to one new foreclosure filing for every 1,245 US households. While foreclosures and delinquencies are still low by historical standards, the proliferation of exotic adjustable-rate mortgages (ARMs) may backfire for borrowers, not to mention lenders.
Late payments (more than 30 days) on sub-prime ARMs rose to 12 per cent in the first quarter from 11.6 per cent in the fourth, according to the Mortgage Bankers Association in the US. The delinquency for these borrowers with poor credit histories was the highest in two years. After rising 17 per cent year-on-year as recently as last October, median home prices rose 1 per cent in July, according to the National Association of Realtors. With a brake on the spending accelerator, economists at UBS in Stamford, Connecticut look for housing to cut one percentage point from annual GDP growth in the second half of this year, compared with a 0.5 percentage point addition on average from 2003 to 2005.
Morgan Stanley’s Stephen Roach, a born-again bear, expects housing to subtract at least two percentage points from the growth rate. Some analysts think that with single-family starts down 16.5 per cent in the last year, the worst is over for the housing market. But ‘‘even if starts level off, we’re still working on houses started last year,” said Michael Carliner, an economist with the National Association of Home Builders (NAHB). In other words, construction is contributing more to GDP than it will next year, when construction-related job growth and building activity taper off. Residential investment fell 9.8 per cent in the second quarter, according to revised US Commerce Department data, a third consecutive quarterly decline. The NAHB expects housing to continue falling into the middle of next year. The forecast assumes no change in the federal funds rate ‘‘from here to the middle of 2007, at which point the Fed will start to reduce it,’’ Carliner said.
The US economy has weathered a stock market collapse, a terrorist attack and sky-high oil prices without much noticeable effect on aggregate statistics. So it’s unlikely the decline in residential real estate will be enough to bring the whole house down. However, the risk to the banking system - as seen by Japan’s broken banking system crippling its economy in the 1990s - cannot be overlooked.
Caroline Baum is a columnist for Bloomberg News.
03 September 2006 By Caroline Baum
Housing headlines are dominating the news in the United States just as the Nasdaq did in the late 1990s. And no wonder. Successive years of sizzling sales and spectacular price appreciation have given way to falling sales and starts, record inventories of unsold homes (new and existing), a plunge in housing affordability and a nationwide flattening out of prices. The big debate is whether housing will a) stabilise at a lower level, b) slide for an extended period, or c) sink fast and take the economy down with it. Each option carries its own flow chart of possibilities.
Residential real estate accounts directly for 5 per cent of real gross domestic product and indirectly for a greater share - newly built homes require furnishings and appliances. What’s more, the length and strength of the housing boom, with its rapidly rising house prices, has enabled many owners to refinance their mortgages and take out a bigger loan, providing an additional spending accelerator. Ever since former Federal Reserve Chairman Alan Greenspan became fixated on the amount of money that homeowners were extracting from their homes, and instructed his staff to quantify it, private sector economists have been dutifully estimating MEW (mortgage equity withdrawal) or HEE (home equity extraction).
Greenspan never believed in the intangible aspect of the wealth effect. For him, it was the actual dollars in consumers’ pockets that mattered - maybe that’s why he never grasped the stock market bubble in real time. When prices stop rising, the game is up. The endgame is contributing to the practice of ‘short sales’ according to an August 21 story in California’s Sacramento Bee. Homeowners who owe the bank more than the house is currently worth try to convince the lender to accept less than the loan value to avoid the costs of foreclosing on the property. With Sacramento County home prices down 5 per cent in the past year and foreclosures rising, short sales are reappearing according to the Bee. Nationwide, foreclosures rose 5 per cent in July from the previous month and 18 per cent from a year earlier, according to RealtyTrac, publisher of a US database of pre-foreclosure and foreclosure properties. That translates to one new foreclosure filing for every 1,245 US households. While foreclosures and delinquencies are still low by historical standards, the proliferation of exotic adjustable-rate mortgages (ARMs) may backfire for borrowers, not to mention lenders.
Late payments (more than 30 days) on sub-prime ARMs rose to 12 per cent in the first quarter from 11.6 per cent in the fourth, according to the Mortgage Bankers Association in the US. The delinquency for these borrowers with poor credit histories was the highest in two years. After rising 17 per cent year-on-year as recently as last October, median home prices rose 1 per cent in July, according to the National Association of Realtors. With a brake on the spending accelerator, economists at UBS in Stamford, Connecticut look for housing to cut one percentage point from annual GDP growth in the second half of this year, compared with a 0.5 percentage point addition on average from 2003 to 2005.
Morgan Stanley’s Stephen Roach, a born-again bear, expects housing to subtract at least two percentage points from the growth rate. Some analysts think that with single-family starts down 16.5 per cent in the last year, the worst is over for the housing market. But ‘‘even if starts level off, we’re still working on houses started last year,” said Michael Carliner, an economist with the National Association of Home Builders (NAHB). In other words, construction is contributing more to GDP than it will next year, when construction-related job growth and building activity taper off. Residential investment fell 9.8 per cent in the second quarter, according to revised US Commerce Department data, a third consecutive quarterly decline. The NAHB expects housing to continue falling into the middle of next year. The forecast assumes no change in the federal funds rate ‘‘from here to the middle of 2007, at which point the Fed will start to reduce it,’’ Carliner said.
The US economy has weathered a stock market collapse, a terrorist attack and sky-high oil prices without much noticeable effect on aggregate statistics. So it’s unlikely the decline in residential real estate will be enough to bring the whole house down. However, the risk to the banking system - as seen by Japan’s broken banking system crippling its economy in the 1990s - cannot be overlooked.
Caroline Baum is a columnist for Bloomberg News.
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Well done kriesau, a very interesting article!
All that glitters IS gold !
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose."
John Maynard Keynes
During the final two decades of the twentieth century, the US economy was the envy of the world. It created 30 million new jobs while Europe and Japan were creating virtually none. It imposed its technological and ideological will on huge sections of the global marketplace and produced new millionaires the way a Ford plant turns out pickup trucks. US stock prices rose twenty fold during this period, in the process convincing most investors that it would always be so. Toward the end, even the federal government seemed well run, accumulating surpluses big enough to shift the debate from how to allocate scarce resources to how long it would take to eliminate the federal debt. As the coin of this brave new realm, the dollar became the world's dominant currency. Foreign central banks accumulated dollars as their main reserve asset. Commodities like oil were denominated in dollars, and emerging countries linked their currencies to the dollar in the hope of achieving US-like stability. By 2000, there were said to be more $100 bills circulating in Russia than in the US.
But as the century ended, so did this extraordinary run. Tech stocks crashed, the Twin Towers fell, and Americans' sense of omnipotence went the way of their nest eggs. The federal government is borrowing $450 billion each year to finance the war on terror as well as an array of new or expanded social programs. The dollar, meanwhile, has become the world's problem currency, falling in value versus other major currencies and plunging versus gold. The whole world is watching, scratching its collective head, and wondering what has changed.
The answer is that everything has changed, and nothing has. The spectacular growth of the past two decades, it now turns out, was a mirage generated by the smoke and mirrors of rising debt and the willingness of the rest of the world to accept a hoard of new dollars. Just how much the US owes will shock you. But even more shocking is the fact that we're still at it. Like a family that has maintained its lifestyle by maxing out a series of credit cards, America is at the point where new debt goes to pay off the old rather than to create new wealth. Hence the past few years' slow growth and steady loss of jobs.
So why say that nothing has changed? Because today's problems are new only in terms of recent US history. A quick scan of world history reveals them to be depressingly familiar. All great societies pass this way eventually, running up unsustainable debts and printing (or minting) currency in an increasingly desperate attempt to maintain the illusion of prosperity. And all, eventually, find themselves between the proverbial devil and deep blue sea: Either they simply collapse under the weight of their accumulated debt, as did the US and Europe in the 1930s, or they keep running the printing presses until their currencies become worthless and their economies fall into chaos.
This time around, governments the world over have clearly chosen the second option. They're cutting interest rates, boosting spending, and encouraging the use of modern financial engineering techniques to create a tidal wave of credit. And history teaches that once in motion, this process leads to an inevitable result: Fiat (ie. government-controlled) currencies will become ever less valuable, until most of us just give up on them altogether. The collapse in the value of the dollar mean many things for the US, mostly bad but some potentially very good. First, it hurts people on a fixed income, because the value of each dollar they receive plunges. Ditto for those who are owed money, because they'll be paid back in less-valuable dollars (hence the disaster about to hit many banks). Bonds, which are basically loans to businesses or governments that promise to make fixed monthly payments and then return the principal, will be terrible investments, since they'll be repaid in always-depreciating dollars. For stocks and real estate, the picture is mixed, with a weak dollar helping in some ways and hurting in others.
The only unambiguous winner is gold. For the first 3,000 or so years of human history, gold was, for a variety of still-valid reasons, humanity's money of choice. As recently as 1970, it was the anchor of the global financial system. And since the world's economies severed their links to the metal in 1971, it has acted as a kind of shadow currency, rising when the dollar is weak and falling when the dollar is strong. Not surprisingly, gold languished during the 1980s and '90s, drifting lower as the dollar soared, and being supplanted by the greenback as the standard against which all things financial are measured. But now those roles are about to reverse once again.
In the coming decade, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system, and its value, relative to most of today's national currencies, will soar. The result: Gold coins, gold-mining stocks, and gold-based digital currencies will be vastly better ways to preserve and/or grow wealth than dollar-denominated bonds, stocks, or bank accounts.
James Turk has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a BA degree in International Economics. He is the author of two books and several monographs and articles on money and banking. He is the co-author of "The Coming Collapse of the Dollar" (Doubleday, December 2004).
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose."
John Maynard Keynes
During the final two decades of the twentieth century, the US economy was the envy of the world. It created 30 million new jobs while Europe and Japan were creating virtually none. It imposed its technological and ideological will on huge sections of the global marketplace and produced new millionaires the way a Ford plant turns out pickup trucks. US stock prices rose twenty fold during this period, in the process convincing most investors that it would always be so. Toward the end, even the federal government seemed well run, accumulating surpluses big enough to shift the debate from how to allocate scarce resources to how long it would take to eliminate the federal debt. As the coin of this brave new realm, the dollar became the world's dominant currency. Foreign central banks accumulated dollars as their main reserve asset. Commodities like oil were denominated in dollars, and emerging countries linked their currencies to the dollar in the hope of achieving US-like stability. By 2000, there were said to be more $100 bills circulating in Russia than in the US.
But as the century ended, so did this extraordinary run. Tech stocks crashed, the Twin Towers fell, and Americans' sense of omnipotence went the way of their nest eggs. The federal government is borrowing $450 billion each year to finance the war on terror as well as an array of new or expanded social programs. The dollar, meanwhile, has become the world's problem currency, falling in value versus other major currencies and plunging versus gold. The whole world is watching, scratching its collective head, and wondering what has changed.
The answer is that everything has changed, and nothing has. The spectacular growth of the past two decades, it now turns out, was a mirage generated by the smoke and mirrors of rising debt and the willingness of the rest of the world to accept a hoard of new dollars. Just how much the US owes will shock you. But even more shocking is the fact that we're still at it. Like a family that has maintained its lifestyle by maxing out a series of credit cards, America is at the point where new debt goes to pay off the old rather than to create new wealth. Hence the past few years' slow growth and steady loss of jobs.
So why say that nothing has changed? Because today's problems are new only in terms of recent US history. A quick scan of world history reveals them to be depressingly familiar. All great societies pass this way eventually, running up unsustainable debts and printing (or minting) currency in an increasingly desperate attempt to maintain the illusion of prosperity. And all, eventually, find themselves between the proverbial devil and deep blue sea: Either they simply collapse under the weight of their accumulated debt, as did the US and Europe in the 1930s, or they keep running the printing presses until their currencies become worthless and their economies fall into chaos.
This time around, governments the world over have clearly chosen the second option. They're cutting interest rates, boosting spending, and encouraging the use of modern financial engineering techniques to create a tidal wave of credit. And history teaches that once in motion, this process leads to an inevitable result: Fiat (ie. government-controlled) currencies will become ever less valuable, until most of us just give up on them altogether. The collapse in the value of the dollar mean many things for the US, mostly bad but some potentially very good. First, it hurts people on a fixed income, because the value of each dollar they receive plunges. Ditto for those who are owed money, because they'll be paid back in less-valuable dollars (hence the disaster about to hit many banks). Bonds, which are basically loans to businesses or governments that promise to make fixed monthly payments and then return the principal, will be terrible investments, since they'll be repaid in always-depreciating dollars. For stocks and real estate, the picture is mixed, with a weak dollar helping in some ways and hurting in others.
The only unambiguous winner is gold. For the first 3,000 or so years of human history, gold was, for a variety of still-valid reasons, humanity's money of choice. As recently as 1970, it was the anchor of the global financial system. And since the world's economies severed their links to the metal in 1971, it has acted as a kind of shadow currency, rising when the dollar is weak and falling when the dollar is strong. Not surprisingly, gold languished during the 1980s and '90s, drifting lower as the dollar soared, and being supplanted by the greenback as the standard against which all things financial are measured. But now those roles are about to reverse once again.
In the coming decade, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system, and its value, relative to most of today's national currencies, will soar. The result: Gold coins, gold-mining stocks, and gold-based digital currencies will be vastly better ways to preserve and/or grow wealth than dollar-denominated bonds, stocks, or bank accounts.
James Turk has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a BA degree in International Economics. He is the author of two books and several monographs and articles on money and banking. He is the co-author of "The Coming Collapse of the Dollar" (Doubleday, December 2004).
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Gold will never be a practical alternative to fiat currency in order to "create prosperity". The fundamental problem is twofold, one, the population is far to large at 6 billion, and two, its not a convenient device to oil the wheels of commerce, also due to practicalities.
All that glitters is a good dose of bird flu to kill off about 4 billion (vaccines and pharmas anybody?), subsequently returning to a temporary gold standard if a boost of confidence is required (not likely to happen), then you can all rise and bow down to the electronic Euro! (which will save chopping down tree's too, easy!)
All that glitters is a good dose of bird flu to kill off about 4 billion (vaccines and pharmas anybody?), subsequently returning to a temporary gold standard if a boost of confidence is required (not likely to happen), then you can all rise and bow down to the electronic Euro! (which will save chopping down tree's too, easy!)
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DepthTangent
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Gold
“Gold has gained every September since 2000 as jewellers buy the metal for the winter holidays, the Indian wedding season and as investors in Europe and the US return to work after the summer,” Apparently gold has only fallen nine times during the month of September since it began trading on exchanges in 1975. As Ambrose Evans-Pritchard puts it in The Telegraph: “Even when [gold] churned ever-down from a peak of $850 an ounce in 1980 to $255 in March 2001, it usually managed to eke out a meagre counter-rally each September.” We happen to think that Mr Evans-Pritchard is a very good journalist. This may well be because we agree with him most of the time.
So will gold rally this September? And might that take it back towards the heights of $730 an ounce, from where it plunged in May? As Evans-Pritchard points out, if you put your faith in charts (and UK investing legend Anthony Bolton does, so unless your portfolio returns are better than his, perhaps you shouldn’t just dismiss them out of hand), it just might. Gold may have taken a dive in May, but it “bounced straight off the crucial 200-day moving average watched by chartists and is now forming a base around $620 - technically undamaged.”
Meanwhile, the September 26 deadline for European central banks to sell this year’s 500 tonne quota of gold is approaching and so far only 340 tonnes has been sold. UBS precious metals strategist John Reade, says: “It will be a bullish signal if they fail to take up their quota.”
It may not be such a surprise then, to learn that UBS has also seen increased demand for December 2006 gold call options, at a strike price of over $1,000. If the price doesn’t reach $1,000 by the strike date, the options are worthless to whoever holds them at that point. But are these buyers being too optimistic? With the US economy slowing down, and threatening to drag the rest of the world with it, won’t the boom in metals prices end, dragging the gold price down with it? Evans-Pritchard points out that gold hasn’t always been a good hedge during hard times, falling during the French Revolution and the First World War. “But then it was the world’s currency. Now it is the counter-currency, waiting in the wings to challenge an ever more deformed and fragile dollar system.”
Despite this belief, he can’t bring himself to imagine that the dollar will actually collapse. “It ought to fall, perhaps, to correct the world’s vast imbalances, but there is no credible currency for it to fall against…the Japanese and Eurozone governments will not let it happen…they will counter the US devaluation with devaluation of their own, setting off a fresh cycle of negative real interest rates.” He may or may not be correct on this point. Certainly, the idea that the world’s central bankers will happily compete with each other to see who can slash interest rates the fastest is entirely in keeping with what they’ve done in the past. But in any case, it doesn’t matter. In either scenario, a dollar collapse or an interest rate race to the bottom - gold wins. Both situations would cripple belief in the global fiat monetary system and send gold soaring.
“Gold has gained every September since 2000 as jewellers buy the metal for the winter holidays, the Indian wedding season and as investors in Europe and the US return to work after the summer,” Apparently gold has only fallen nine times during the month of September since it began trading on exchanges in 1975. As Ambrose Evans-Pritchard puts it in The Telegraph: “Even when [gold] churned ever-down from a peak of $850 an ounce in 1980 to $255 in March 2001, it usually managed to eke out a meagre counter-rally each September.” We happen to think that Mr Evans-Pritchard is a very good journalist. This may well be because we agree with him most of the time.
So will gold rally this September? And might that take it back towards the heights of $730 an ounce, from where it plunged in May? As Evans-Pritchard points out, if you put your faith in charts (and UK investing legend Anthony Bolton does, so unless your portfolio returns are better than his, perhaps you shouldn’t just dismiss them out of hand), it just might. Gold may have taken a dive in May, but it “bounced straight off the crucial 200-day moving average watched by chartists and is now forming a base around $620 - technically undamaged.”
Meanwhile, the September 26 deadline for European central banks to sell this year’s 500 tonne quota of gold is approaching and so far only 340 tonnes has been sold. UBS precious metals strategist John Reade, says: “It will be a bullish signal if they fail to take up their quota.”
It may not be such a surprise then, to learn that UBS has also seen increased demand for December 2006 gold call options, at a strike price of over $1,000. If the price doesn’t reach $1,000 by the strike date, the options are worthless to whoever holds them at that point. But are these buyers being too optimistic? With the US economy slowing down, and threatening to drag the rest of the world with it, won’t the boom in metals prices end, dragging the gold price down with it? Evans-Pritchard points out that gold hasn’t always been a good hedge during hard times, falling during the French Revolution and the First World War. “But then it was the world’s currency. Now it is the counter-currency, waiting in the wings to challenge an ever more deformed and fragile dollar system.”
Despite this belief, he can’t bring himself to imagine that the dollar will actually collapse. “It ought to fall, perhaps, to correct the world’s vast imbalances, but there is no credible currency for it to fall against…the Japanese and Eurozone governments will not let it happen…they will counter the US devaluation with devaluation of their own, setting off a fresh cycle of negative real interest rates.” He may or may not be correct on this point. Certainly, the idea that the world’s central bankers will happily compete with each other to see who can slash interest rates the fastest is entirely in keeping with what they’ve done in the past. But in any case, it doesn’t matter. In either scenario, a dollar collapse or an interest rate race to the bottom - gold wins. Both situations would cripple belief in the global fiat monetary system and send gold soaring.
rav700
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Any one hear with bearish views on the dow
In the last 5 years From mid september to mid october the dow has fallen up to 400 to 500 points in all.....has anyone got any comments on this......If this is true and Dow fails to break the 420 mark then....is this not the right time to short the market.....
In the last 5 years From mid september to mid october the dow has fallen up to 400 to 500 points in all.....has anyone got any comments on this......If this is true and Dow fails to break the 420 mark then....is this not the right time to short the market.....