The Impending Destruction of the U.S. Economy (Part 1 & 2)

[Porsche-O-Phile]

Just came across this article on "Motley Fool", one of several sites I frequent. It summarizes pretty well many of my own thoughts and concerns, which I've stated here numerous times. Worth a read and discussion/comments:

http://www.fool.com/investing/general/2007/12/11/the-impending-destruction-of-the-us-economy-part-1.aspx?source=ihpdspmra0000001



The Impending Destruction of the U.S. Economy: Part 1
By Morgan Housel December 11, 2007

135 Recommendations

We U.S. citizens enjoy a magnificent and prosperous economy the rest of the world can only envy. Employment is humming along, inflation is tame, and the lines inside Starbucks (Nasdaq: SBUX) everywhere remain annoyingly long. Despite a number of hiccups this year, the stock market is still just a rock's throw from another all-time high.

But we're coming up on a bend in the yellow brick road, and going 'round it could cause the party lights to go dark quickly. That could change everything about the way we and future Americans live. Sound scary? It is.

A nation built on debt?
Let's go back to the 1990s. It wasn't a bad time to be an American. Ace of Base was topping the charts, the economy was parading freely, and the stock market could make a Chihuahua look smart. With newfound wealth came newfound toys and spending habits, and a drive to leverage up to your eyeballs to fund the cars, boats, and multiple TVs for your second or third home. Since 1990, non-mortgage household debt has gone up more than threefold, outstripping economic growth and inflation.

But, heck, the amount of debt we had was not a problem! The economy kept buzzing at a pace that allowed consumers to fund their debt-laden habits. And with reasonable interest rates throughout the '90s, layering on consumption outside your earnings means wasn't that big a deal. The indulgences in spending kept going, and going ...

The music stopped. But the party's still kicking ...
It wasn't until 2000 when the Nasdaq parade came to an end that the party looked like it truly might be over. With trillions of dollars of wealth purged from consumers' wallets, the economy was startled into a justified panic.

Then as the dust around the tech bubble cleared, Sept. 11 knocked us off our feet. An uncertainty we as a nation had never experienced before loomed over our heads. Federal Reserve Chairman Alan Greenspan prescribed a quick and drastic resuscitation in the form of a massive cut in interest rates to help revive the economy. And it worked, perhaps too well.

Since 2001, the U.S. has had the benefit of laughably low interest rates. Investors, still shell-shocked from the stock market turmoil, began salivating over another asset class they could exploit with those low rates -- real estate.

Savvy businessmen finessed ways to market exotic mortgage products to consumers most of us wouldn't lend a cup of sugar. Thus the birth of the subprime-mortgage calamity that propelled companies such as Countrywide (NYSE: CFC) into the stratosphere and allowed homebuilders such as Beazer (NYSE: BZH) and D.R. Horton (NYSE: DHI) to crank out as many subdivisions as they could dream of.

I'll save you the ending of this real estate saga -- we know how much of a mess we're in now. And it's probably worse than any of us could have dreamed, with massive write-downs from respected financial institutions, such as Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER).

What now? Many of us would like to believe Uncle Bernanke will bail us out by slashing interest rates and bringing back the good old days. Right?

Kind of -- and that's where the massive economic debacle begins, my friends. Those same spend-happy consumers raised in the go-go 1990s -- they're still alive and kicking, and you better believe they still love to spend.

Dollar, schmollar ... I'm gonna spend!
The massive account deficit we currently hold with the rest of the world totals some $800 billion per year. Where the heck is all that money coming from? From foreign investors in China, Japan, the Middle East, and nearly every other conceivable corner of the globe. They have no problem lending us the difference, because while we as a country spend more than we make -- we're still incredibly wealthy and good on our word.

But like a massive Ponzi scheme, the fun will certainly end. In the past six years, the value of the dollar has taken a serious beating. The euro, worth $0.85 a few years ago, is now worth $1.47. Yikes. But because the average American shops mostly within the borders, this probably isn't too pressing an issue, and so the greenback's plummet doesn't show its full effects.

How about the foreign investors funding our perilous spending party? You'd better believe they're keeping a close eye on the dollar's precipitous plunge. As a foreign investor holding assets denominated in dollars, every drop in the dollar erodes the value their investments will be worth when they choose to convert them back to their native currency, whether yuan, yen, euros, or pounds.

How do we keep our foreign investors happy? With a rapidly depreciating currency, there is but one way to keep them enticed: higher interest rates. You heard it: higher interest rates. With the housing and credit markets swimming in turmoil, the idea of higher interest rates sends shivers down the backs of homeowners facing foreclosure, and rightly so.

I think you can see the predicament we face: One part of our economy demands lower interest rates to bail out the housing debacle, and foreign investors who finance our massive spending habits demand higher interest rates to forestall the dollar's demise.

My goodness, this is looking scary. What will happen next? More importantly, what's a Fool to do?

Check back later this week for part 2 of the "Impending Destruction of the U.S. Economy."

[Porsche-O-Phile]

(Part 2)



In part 1, we took a look at the causes of the current tug-of-war between forces that will fight over lower and higher interest rates in the coming days of our American economy.

To recap, here's our problem: Americans spend much, much more than they probably should and rely heavily on debt to fund their purchases. A huge amount of this debt is funded by foreign investors who enjoy the relative stability of American markets. As a result, we have an enormous account deficit -- nearly $800 billion per year.

With this massive account deficit comes a weakening dollar. With a weakening dollar, foreign investors will begin to demand higher interest rates to make their investment in the American economy worth their while. Sounds easy enough! But we have that pesky problem of our current real estate and credit disruptions that could place our economy in a tailspin and, hence, require lower interest rates to bail us out. Who is going to win this battle?

In this Fool's mind, it certainly isn't the American consumer. We won't stop our spend-happy ways any time soon, and foreigners will happily look elsewhere to put their money. Here's why.

Superpower America?
Don't kid yourself. U.S consumers will go out kicking and screaming before they agree to slash consumption of foreign goods by $800 billion per year; not to mention doing so might self-destruct the economy in the first place. We can rule that option out: Americans won't retreat from their debt-laden spending habits. But can we count on foreign investors to keep the party rolling? Don't count on that, either.

For decades, there haven't been many attractive foreign currencies for foreign investors to place their massive stockpiles in -- the U.S dollar still remains a default choice. But times are certainly changing. With the massive increase in globalization in the past decade, the United States has surrendered part of its economic moat to once economically non-threatening countries like China and India. The longer this trend continues, the less the dollar will serve as the currency of choice for global investors.

The more and more the dollar continues to plunge -- and with little in sight to show an end to its slide -- other currencies such as the Japanese yen, the Chinese yuan, and the euro are becoming increasingly attractive in lieu of the greenback. With interest rates being slashed in an attempt to prop up the sickness in the housing market, the dollar's dive should stay firmly on track for a while to come.

Cue Taps?
It's a scary scenario: a U.S. economy staring a recession square in the face, credit markets all but frozen in place, real estate across the country sitting on a foreclosure time bomb, and a need for higher interest rates just to keep the foreign investors interested could spell trouble for this nation on a level we've never seen before. What's a Fool to do?

Before you begin constructing a fallout shelter in your backyard, you should know there are a few things you can do to prepare yourself for economic headwinds down the road. Some of the most basic investment principles you should already be following will become increasingly important should interest rates begin to rise in the future.

Avoid businesses that can't open their doors without debt
We've already seen some serious damage done to companies that even dabbled in credit markets in the past few years. Banking giants such as Citigroup (NYSE: C) and Washington Mutual (NYSE: WM) have been clobbered from real-estate-related writedowns, and even companies that have nothing to do with real estate, but rely on debt, such as US Airways (NYSE: LCC) and Blackstone (NYSE: BX), are certainly feeling the pinch from a roiled debt market. Think it's bad now? You certainly don't want to be on the bad end of these companies if rates start going up.

Instead, pay special attention to companies such as Microsoft (Nasdaq: MSFT), Texas Instruments (NYSE: TXN), or K-Swiss (Nasdaq: KSWS) -- all companies that don't count on any long-term debt to fund their operations. In turbulent times, not having to be at the whim of debt to finance their day-to-day business gives these companies a serious leg up.

Give yourself a cushion
With interest rates in a precarious position and the economic future of the U.S in shaky hands, it's increasingly important that you don't fall into any interest rate holes. The solution to this problem sounds as easy as it comes, but seems to elude many:

* Stay out of debt.
* Save your money.

Both of these tasks require little more than some basic knowledge and a healthy dose of perseverance. The Motley Fool provides a highly recommended 60-second guide to getting out of debt, as well as some money-saving tips even the most frugal of us should catch up on.

I will survive
Betting against the United States economy long term hasn't ever panned out well for anyone, and it certainly may continue that way for some time. While the sky won't be falling to the ground anytime soon, as an investor, it's important to be cognizant of the big-scale issues our nation is facing and how they can have an effect on your money. Develop a sound game plan, stay disciplined, and be prepared for whatever gets thrown at you down the road. In these crazy days, it's the surest path to financial success.

[Shaun @ Tru6]

Will be interesting to see what Bush says in his State of the Union address.

[frogger]

"War on Terror," "It's Not Torture if I say it's OK," "This Global Economy sure is Great," and to borrow from Daddy, "Stay the Course."

[Moneyguy1]

If the economy had to depend on people like me to spend irresponsibly, the economy would be even further in the tank.

AS for an economy living on debt, those of us in the financial business have personally been worrying about the long-term effects of this. What would happen if the government declared a
"War on Debt" like it did on smoking. Hmmmmm......

[Porsche-O-Phile]

Originally Posted by Shaun 84 Targa

Will be interesting to see what Bush says in his State of the Union address.

I'm hoping for "Mission Accomplished".

[legion]

Originally Posted by Moneyguy1

If the economy had to depend on people like me to spend irresponsibly, the economy would be even further in the tank.

AS for an economy living on debt, those of us in the financial business have personally been worrying about the long-term effects of this. What would happen if the government declared a
"War on Debt" like it did on smoking. Hmmmmm......

I can tell you exactly what will happen. The 1920's saw a similar rise in consumer debt.

[Moneyguy1]

And those who were disciplined made a (excuse the word) "killing".

[frogger]

Fiscal responsibility rocks.

[WI wide body]

Porsche-o-Phile,

You haved saved me!!!

I was beginning to think that I was the only semi-literate (a very generous rating) person in our nation who truly felt and believed almost exactly what you have listed.

We have two groups of dip*****s running for president and not a single one of them (except maybe Ron Paul but he's also a bit of a kook) seems to have a clue as to what you wrote. These jerks and the either crooked, immoral, or incredibly stupid "expert" economists actually say that this nonsense of sending what is currently over $2,000,000,000.00 per DAY to go flowing off to other nations is just fine and dandy.

Many of the above clowns say that since those foreign nations are using much of that cash to buy our debt it is of no consequence. Are they brain dead or what???

As you indicated, eventually........................................ .............that supply of our cash WILL come to an end. And then the scum in Washington will print even more phony money than they are doing now. And if at the same time the clever little guys who hold all of our debt decide to ask us to pay up...we will have the perfect storm of financial/economic ruin that will forever change (and not for the better) the way of life in the USA. I fear for my grandkids.

I truly believe that most ecoonomic "experts" much less simpltons like our preisdent and most of the clowns in Congress, do not even know or realize what is the major cause of inflation. They talk about but I personally don't believe that they know a damn thing about it! Along with most of the rest of the issues that they talk about.

Whew...glad I got that off my chest!

Thanx much.

Ed c

[widgeon13]

Stay out of debt.
Save your money.

Brilliant!

[The Gaijin]

"Betting against the United States economy long term hasn't ever panned out well for anyone.."

More brilliance.

[WI wide body]

Originally Posted by The Gaijin

"Betting against the United States economy long term hasn't ever panned out well for anyone.."

More brilliance.

However, as the disclaimer always says:
"Past results have no bearing on future performance."

That might be the one to remember!

[WI wide body]

Originally Posted by Shaun 84 Targa

Will be interesting to see what Bush says in his State of the Union address.

Shaun,

Asking President Bush to give anything even resembling a cognizant plan for our economy is akin to requesting a fish to give us a report on bicycles.

The man has probably never in his life paid a tax bill, a utility bill, or balanced his checkbook. His dad was simply amazed by bar codes a while back and lil Geo probably still is. He actually has said that "small business" is somehow the answer to our trade deficit problems. He apparently thinks that maybe flea markets or Americans dealing with each other will somehow magically rectify our current $800,000,000,000.00 imbalance of trade with foreign nations.

So if I were a betting man (and I am) I would bet that we will get a whole lot of sincere but goofy looking eye squints, several forceful stares while hinching over, and the required religious/patriotic ending but not anything even resembling a plan or a solution.

I could be wrong, but I dout that. So stay tuned!

[sammyg2]

I'll agree that Greenspan (and most economists) are screwed up but I'd also say that the US economy is too strong to collapse. It will rebound as it always has. That is, unless the economists kill it.

Grenspan and most other economists have such large egos that they think they can control natural economic cycles. Most of the time they shouldn't even try. Their heavy-handed meddling causes drammatic swings and counter-corrections that often do more damage that what they were trying to correct.
Greenspan's politically motivated manipulation did more damage to our economy that most realize. We would have been better off without him. Bernanke is just as bad if not worse.
While trying to save the mortgage melt-down that greenspan orchestrated, he is hurting the value of the dollar and driving up domestic oil prices. leave it alone, put interest rates back up where they belong and let it run it's course. In the long run we will all be stronger for it.

[sammyg2]

Originally Posted by WI wide body

Shaun,

Asking President Bush to give anything even resembling a cognizant plan for our economy is akin to requesting a fish to give us a report on bicycles.

The man has probably never in his life paid a tax bill, a utility bill, or balanced his checkbook. His dad was simply amazed by bar codes a while back and lil Geo probably still is. He actually has said that "small business" is somehow the answer to our trade deficit problems. He apparently thinks that maybe flea markets or Americans dealing with each other will somehow magically rectify our current $800,000,000,000.00 imbalance of trade with foreign nations.

So if I were a betting man (and I am) I would bet that we will get a whole lot of sincere but goofy looking eye squints, several forceful stares while hinching over, and the required religious/patriotic ending but not anything even resembling a plan or a solution.

I could be wrong, but I dout that. So stay tuned!

Government 101 lesson for the day:
Pesidents have staffs. They employ experts. They don't have to be experts themselves.

A CEO of a widget company doesn't have to know how to make widgets. He has to know how to choose and run his staff well. That's it.

Small business typically means people buying domestically. Large business often means outsourcing and buying internationally. Not a hard concept to grasp.

[WI wide body]

Originally Posted by sammyg2

I'll agree that Grenspean (and most economists) are screwed up but I'd also say that the US economy is too strong to collapse. It will rebound as it always has. That is, unless the economists kill it.

Grenspan and most other economists have such large egos that they think they can control natural economic cycles. Most of the time they shouldn't even try. Their heavy-handed meddling causes drammatic swings and counter-corrections that often do more damage that what they were trying to correct.
Greenspan's politically motivated manipulation did more damage to our economy that most realize. We would have been better off without him. Bernanke is just as bad if not worse.
While trying to save the mortgage melt-down that greenspan orchestrated, he is hurting the value of the dollar and driving up domestic oil prices. leave it alone, put interest rates back up where they belong and let it run it's course. In the long run we will all be stronger for it.

Sammy,

Neither Greenspan or the current Fed. Bank chief or the interest or any economist is the chief culprit. Our trade policy is the true long range issue. It's a freight rain heading right at us and we have goobers like Bush and the spineless Dems in charge and sending Paulson on useless trips to China to pretend to be doing something about it.

The problem is not China. They are simply going to do what is best for their nation. Our problem is in Washington, DC where the clods who are supposed to be doing what is best for OUR nation are ignoring the problem. And our kids and grand kids will pay dearly for the politicians economic immorality.

[frogger]

They're just faith-based free-traders living the dream.

[Shaun @ Tru6]

Originally Posted by WI wide body

He actually has said that "small business" is somehow the answer to our trade deficit problems.

he actually said this? Wonder why he's gutted the SBA then? Harder than ever to get an SBA backed loan. Staff, funding, etc. have been slashed under 7 years of Bush.

My partner and I started a new company late last year (out of the ashes of a failed one). We had very strong sales this year and were planning heavily on an SBA loan to help us grow.

Don't think it's going to happen now based on reading up on the SBA.

[Porsche-O-Phile]

Betting against the Confederate States of America economy long term never panned out well for anyone either. Until it did. Same with WW2 Germany.

Governments are always stable and great investments. Until they're not.