How much trouble is the economy really in

[bubba99]

As always the FED and economic policy effect us all. Now we can only guesstimate the total value of FED policy. Ever since the FED stopped reporting M3 we have lost any way to gauge how much money is really in circulation. Low interest rates and a lot of credit available has kept the economy working in spite of the big deficits generated by american consumers. The home as an instant cash machine kept thing rosy even though real wages and employment looked anemic. The trade deficits will keep working as long as foreign investors keep buying US treasuries, or the FED prints more and more money. The hitch will be interest rates and protectionism.

The FED will need to raise interest rates to keep foreigners interested in the US dollar which is losing big against foreign currencies. It was 1.15 euros/dollar in January 2002, and now it is .78, a drop of 32% over 4 and a half years. This represents a loss of 3%/year against the 4% they get for US teasuries. How long will the world be willing to lend us money at a negative 3% interest rate. By the way, this negative 3% is really hiding the real rate of inflation. We are getting a 7% discount/year on our goods and services via devaluation of the dollar on the international market. Real interest rates need to be at least 7% to cover this hidden inflation without risk, with risk more like 10%. How the FED gets investors to buy debt at this level of loss is beyond me. It must be that foreign governments do not want to upset their growing economies that are completely dependent on US consumers, or the FED is really buying more of the debt than we think.

The FED will try not to push up rates before the elections, or if they do, wait until the result will not be visible until after November – but the rates must rise, or the fed print more money.

The more I study the current state of the economy, the more negative I get. When the fed stopped reporting M3 which includes the big foreign deposits, TBILLS of a million or more, and euro deposits in US banks, we lost the ability to track how much money the fed printed. The bulk of new money now goes unreported.

With interest rates of 8 to 10% on the horizon, a weak labor market, a crashing real estate market, and money supply now a secret, I can not help but get a little uncomfortable. Just a little negative push in the labor market and we are headed for a serious recession. If foreign investors start demanding a positive return on their US government debt, rates will hit 10% overnight. If the FED continues to print money, then interest rates need to climb even higher.

Does anyone see a bright spot on the horizon?

[Anonymous]

Bubba, I agree completely with your thoughts. The only way to avoid the coming bloodbath is for U.S. productivity to go through the roof to accomodate paying down the $12T in consumer and mortgage debt and keep buying goods and services. And for the Feds to quit running deficits. Neither is gonna happen anytime soon.

In lieu of tracking M3, I rely on Doug Noland's Credit Bubble Bulletin at PrudentBear.com:

http://www.prudentbear.com/creditbubblebulletin.asp

I've been 100% in a precious metals mining fund for nearly two years now (VGPMX), and it's been very, very good to me.  I'm now switching to UNWPX, which has a higher weighting on gold mining companies.  I'm wagering that when the recession fully registers, foreigners will back out of Treasuries, and into gold.  And, as you know, gold mining stocks amplify movements (up and down!) in gold.  It will be an exciting ride, and we'll either be really, really well off or really, really broke!

[powayseller]

Dr. Roubini is expecting the Fed to cut rates the next meeting, or the following one. Because the signs of recession will be so strong.

The only hope for our economy is:

1. Change from consumption to research and development, creating, producing ideas and innovations and products

2. Cut back on government spending, eliminate the Medicare bill that was just enacted, reduce social security promises and tell Americans they all have to work part-time in old age to pay for the excesses that they created. Else: the next generation which did not create this mess has to pay. Which is more fair?

3. Encourage saving over spending, by not taxing interest earned

4. Overhaul the tax code

5. Elect politicians with the will and ability to enact life-saving policies, and unite Americans in a common cause to improve our country

#3 and #4 are optional I think, but the others are a necessity. Without it, we are going the way of the Romans; in textbooks they will write about how America was once the super power.

[bubba99]

If the fed does cut rates next meeting, will our foreign friends accept losing even more on their US investments. If they dont buy the debt, sooner or later the FED will get caught buying the deb themselves and the dollar will calapse even faster.

I keep trying to find an investment strategy that can use this scenario to make money. The obvious plays, puts on HomeDepot, Lowes, the home builders are already priced like a recession is a reality. Gold is already doubled, gold mining up 85%. I was surprised to see calls also priced through the roof for early 2007, like the FED can create another dot com like bubble in the S&P or Dow.

If the fed does start cutting rates, who knows where they will stop.

[bsrsharma]

Americans have economy on the brain

WASHINGTON (CNN) – The state of the economy is the number-one issue on the minds of Americans as the presidential election approaches, according to a CNN/Opinion Research Corporation poll released Wednesday morning.

Eighty-two percent of Americans said the economy will be extremely or very important to their vote for president. Economic conditions edged out Iraq by two points, with 80 percent of those surveyed saying that the war is ‘extremely or very important’ to their vote.

Also, among the top five issues on the public’s mind when contemplating their next vote for president are health care (76 percent), terrorism (76 percent), and Iran (73 percent).

The state of the overall economy weighed more heavily on the minds of voters than specific economic issues such as gas prices (67 percent), poverty (65 percent), taxes (63 percent) and immigration (61 percent).

The CNN/Opinion Research Corporation telephone poll of 1,024 American adults was conducted over the weekend and had a sampling error of plus-or-minus 3 percentage points.

http://politicalticker.blogs.cnn.com/2007/11/07/americans-have-economy-on-the-brain/#comments

[bsrsharma]

Americans have economy on the brain

WASHINGTON (CNN) – The state of the economy is the number-one issue on the minds of Americans as the presidential election approaches, according to a CNN/Opinion Research Corporation poll released Wednesday morning.

Eighty-two percent of Americans said the economy will be extremely or very important to their vote for president. Economic conditions edged out Iraq by two points, with 80 percent of those surveyed saying that the war is ‘extremely or very important’ to their vote.

Also, among the top five issues on the public’s mind when contemplating their next vote for president are health care (76 percent), terrorism (76 percent), and Iran (73 percent).

The state of the overall economy weighed more heavily on the minds of voters than specific economic issues such as gas prices (67 percent), poverty (65 percent), taxes (63 percent) and immigration (61 percent).

The CNN/Opinion Research Corporation telephone poll of 1,024 American adults was conducted over the weekend and had a sampling error of plus-or-minus 3 percentage points.

http://politicalticker.blogs.cnn.com/2007/11/07/americans-have-economy-on-the-brain/#comments

[bsrsharma]

Americans have economy on the brain

WASHINGTON (CNN) – The state of the economy is the number-one issue on the minds of Americans as the presidential election approaches, according to a CNN/Opinion Research Corporation poll released Wednesday morning.

Eighty-two percent of Americans said the economy will be extremely or very important to their vote for president. Economic conditions edged out Iraq by two points, with 80 percent of those surveyed saying that the war is ‘extremely or very important’ to their vote.

Also, among the top five issues on the public’s mind when contemplating their next vote for president are health care (76 percent), terrorism (76 percent), and Iran (73 percent).

The state of the overall economy weighed more heavily on the minds of voters than specific economic issues such as gas prices (67 percent), poverty (65 percent), taxes (63 percent) and immigration (61 percent).

The CNN/Opinion Research Corporation telephone poll of 1,024 American adults was conducted over the weekend and had a sampling error of plus-or-minus 3 percentage points.

http://politicalticker.blogs.cnn.com/2007/11/07/americans-have-economy-on-the-brain/#comments

[bsrsharma]

Americans have economy on the brain

WASHINGTON (CNN) – The state of the economy is the number-one issue on the minds of Americans as the presidential election approaches, according to a CNN/Opinion Research Corporation poll released Wednesday morning.

Eighty-two percent of Americans said the economy will be extremely or very important to their vote for president. Economic conditions edged out Iraq by two points, with 80 percent of those surveyed saying that the war is ‘extremely or very important’ to their vote.

Also, among the top five issues on the public’s mind when contemplating their next vote for president are health care (76 percent), terrorism (76 percent), and Iran (73 percent).

The state of the overall economy weighed more heavily on the minds of voters than specific economic issues such as gas prices (67 percent), poverty (65 percent), taxes (63 percent) and immigration (61 percent).

The CNN/Opinion Research Corporation telephone poll of 1,024 American adults was conducted over the weekend and had a sampling error of plus-or-minus 3 percentage points.

http://politicalticker.blogs.cnn.com/2007/11/07/americans-have-economy-on-the-brain/#comments

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