It's important for
everyone to realize tho on a macro front the 'sky might be falling'...your
individual share of the fall-out is relatively small. It is at these times that Nostradamian prophecies are dusted off, sham investments offering 15% 'guaranteed' interest appear, and folks start tossing and turning at night.
As I see it, we have had a near 12 year run of good times...the tech sell-off of 2001 was a blip on the map that derailed it temporarily....but Greenspan, et al, lowered rates and we (in the US) spent our out of the morass back then. Like gravity itself, what goes up does eventually come down
Well, the normally powerful option of lowered interest rates and tax cuts to stimulate spending are
not going to perform magic this time....lotsa' people fell for the ponzi-esque trap of low interest rates and laddered adjustable loans (on homes and cars) and are tapped-out and retracting from purchases.
Meanwhile, the 'lid' that China provided in keeping manufactured goods prices worldwide the past 10-15 years is ending. Their currency has advanced against the $USD 8% in the past 14 months..and due to rise further in 2008. Export Tax Rebates to manufacturers there are ending, causing an
immediate bump in cost to any product made there, and
this discourages dumping of product.
Less product chasing buyers will result in higher prices - that's how it works
While the US is the world's greatest debtor, we have been fortunate that (bond) rates in other stable countries elsewhere in the world the past 10+ years have been comparable or lower. That has meant that creditor countries seeking the best rate of return on their money, and ultra-safety, have
largely invested in the US. If we lower our rates, we also make our Treasury bonds (which are our collective national debt) less attractive....at a time when the relatively stable EU has higher rates and even Japan has had to raise theirs.
So, smart money is escaping ever outside of the US in hopes of attaining higher rates on their money...and Bernanke and the Fed will have to keep interest rates relatively high because of it.
So, Bernanke won't have the free hand that Greenspan had to lower rates during this time, folks have already been burned the past few years in the ponzi-esque fame of laddered/adjustable loan rates, and costly militarized action in Afghanistan and Iraq will not allow a tax break for US citizens to be large enough to stimulate the economy...as Congress and President Bush is pushing to do.
It all adds up to something we haven't seen in 30 years -
STAGFLATION. A period where demand is slack for borrowing and building in the US, at a time of relatively high interest rates and ever-higher raw material and (this time around) higher prices on manufactured foreign goods as the USD has shrunk and raw material, labor and other factors have raised those manufactured goods prices.
Anyhow, we're in for a good run in the US of several years of
STAGFLATION...but don't jump out of a window, it's part of the inevitable cycle of things.
President Obama, Clinton, McCain, Romney or Bloomberg (or, whoever) will be inheriting one fine economic mess....but we'll claw our way thru somehow in a couple/few years. In the meantime, just enjoy the show inasmuch as you can
John
