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US Economic Outlook 2008-11+ (Updated)


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US Economic Outlook 2008-11+ (Updated 28 May 08); Discussion of Money, Federal Reserve, Dollar as World's Reserve Currency, Inflation, Deflation, Oil, OPEC, Debt, Saving Rate, Housing Bubble and Future Outlook for US Economy

Published in: Business, Economy & Finance
  • This website can be a useful resource to find out what started the financial crisis
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  • Your presentation is interesting. However, the relationship between money supply growth and inflation is I think not that strong. First, the money supply is becoming increasingly Byzantine to define (M1, M2, MZM) and sometimes not quite relevant since the Federal Reserve does not control it anymore due to overwhelming international money flows. Second, the equation related to the quantity of money is unstable: GDP = Price x Quantity = Money supply x Velocity of Money. A while back, we thought the velocity of money was constant. It turns out it is highly volatile and it is why money supply growth and inflation have become decoupled.

    Similarly, debt levels are always very impressive when expressed in $ but when expressed as a % of related assets or % of GDP those towers of debt come down to earth. And, by comparison the US debt level is actually acceptable. Japan, Italy, France, Germany have much higher debt levels than the U.S. This may be true even after the current rounds of massive bail outs as some of those countries are doing large bail outs of their own.
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  • Really appreciate the feedback from all of you - thanks for taking the time to post up comments.

    If you enjoyed this presentation and want to learn MUCH more about the US Dollar's history and where we're going, please click this link: Dollar: Faltering Foundation of US Economic Strength - Note: I wrote this article in Jan 2008 so some of the charts and figures are slightly dated.

    Best regards
    Randy S
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  • Superb :)
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  • On Slide 19, LTCM collapsed in September 1998, not 1994
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US Economic Outlook 2008-11+ (Updated)

  1. 1. US Economic Outlook 2008 - 2011 Randy S. Economicrot . blogspot .com
  2. 2. Agenda <ul><li>Money </li></ul><ul><li>Fed Reserve </li></ul><ul><li>US Dollar – World’s Reserve Currency </li></ul><ul><li>Inflation </li></ul><ul><li>Debt </li></ul><ul><li>Housing Bubble </li></ul><ul><li>Current and Future Economic Outlook </li></ul><ul><li>What to do </li></ul>
  3. 3. Money — what is it? Money is a good that acts as a unit of account, a store of value, and a medium of exchange
  4. 4. <ul><li>Before the development of Currency, people had to barter to obtain the </li></ul><ul><li>goods and services they needed -- but bartering had its flaws </li></ul><ul><li>Commodity money eventually replaced bartering for advancing economies </li></ul><ul><ul><ul><li>Colonialists, for example, used beaver pelts and dried corn as </li></ul></ul></ul><ul><ul><ul><li>currency for transactions. They were widely desired (and therefore </li></ul></ul></ul><ul><ul><ul><li>valuable), but they were also durable, portable and easily stored. </li></ul></ul></ul><ul><li>Another example of commodity money was the U.S. currency before 1971, </li></ul><ul><li>which was backed by gold. </li></ul>Bartering & Commodity Money
  5. 5. Fiat Money <ul><li>In a fiat money system , money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. </li></ul><ul><ul><li>Nixon removed the US Dollar from the Gold standard in 1971 – thus changing the US dollar from a Commodity money to a Fiat currency </li></ul></ul><ul><li>In a fiat monetary system, there is no restraint on the amount of money that can be created. This allows unlimited credit creation </li></ul><ul><li>Initially, rapid growth in the availability of credit (money) is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices. </li></ul><ul><ul><li>In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit </li></ul></ul><ul><ul><ul><li>This is where we are today </li></ul></ul></ul>
  6. 6. Federal Reserve Banking System <ul><li>The Federal Reserve Act was railroaded through Congress at 4:30 am on Monday, December 22, 1913 </li></ul><ul><ul><li>Numerous members absent/sleeping & many who voted for the Act didn’t really understand what they were voting for </li></ul></ul><ul><li>President Woodrow Wilson, p ressured by political/financial backers, signed Fed Reserve Act into law on Dec 23 rd & stated : </li></ul><ul><ul><ul><li>We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world -- no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men. </li></ul></ul></ul><ul><li>Federal Reserve Act transferred US money supply </li></ul><ul><li>and banking system controls from Congress to a </li></ul><ul><li>private banking elite </li></ul><ul><ul><li>These private bankers could now create money from </li></ul></ul><ul><ul><li>nothing, loan it to our Gvt. & charge interest (our </li></ul></ul><ul><ul><li>federal income tax system) for privilege of doing so </li></ul></ul>
  7. 7. <ul><li>&quot;Give me control of a nation's money and I care not who makes the laws.&quot; Mayer Amschel Rothschild (1744 -1812) Godfather, Rothschild Banking Cartel Europe </li></ul><ul><li>&quot;Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they have done or ever will do good.&quot; John Adams(1735-1826) Founding Father, 2nd US President </li></ul><ul><li>“ If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, (i.e., the &quot;business cycle&quot;) the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.” Thomas Jefferson, US President 1801-1809 </li></ul><ul><li>I believe that banking institutions are more dangerous to our liberties than standing armies. Thomas Jefferson,1816 </li></ul><ul><li>&quot;History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling the money and its issuance.&quot; James Madison (1751-1836), Father of the Constitution, 4th US President </li></ul><ul><li>It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.&quot; Henry Ford (1863-1947) Founder of Ford Motor Company </li></ul>Quotes on Federal Reserve Banking
  8. 8. US Dollar – World’s Reserve Currency <ul><li>British Pound Sterling was primary reserve currency 18 th & 19th centuries </li></ul><ul><li>The Bretton Woods Accord, Post World-War II, established US dollar as the newest world reserve currency </li></ul><ul><ul><li>All currencies would trade in relationship to the US Dollar and the dollar would be tied to a gold standard at $35 oz. (dollar was said to be “good as gold”) </li></ul></ul><ul><li>Major problems with gold standard in the 1960’s </li></ul><ul><ul><li>Foreigners demanded gold for payment of debt, rather than US dollars </li></ul></ul><ul><ul><ul><li>Understood the US was printing far more money, to finance Vietnam conflict and fund new social programs, than was available in US owned gold reserves </li></ul></ul></ul><ul><ul><li>A worried President Nixon abolished the Bretton Woods accord in August 1971 </li></ul></ul><ul><ul><ul><li>Dollar/Gold standard was removed – US Dollar became a Fiat Currency </li></ul></ul></ul><ul><ul><ul><li>Currencies around the globe went into turmoil; dollar lost ½ value vs. gold in 1 yr </li></ul></ul></ul><ul><ul><ul><li>Needed a new solution to reestablish faith and trust in the falling US Dollar </li></ul></ul></ul><ul><li>The US-Saudi Arabian Joint Commission on Economic Cooperation of 1974 </li></ul><ul><ul><li>Agreed that any country purchasing oil from OPEC had to pay in U.S. dollars </li></ul></ul><ul><ul><ul><li>Oil importing countries now had to earn or borrow dollars to pay for their oil </li></ul></ul></ul><ul><ul><ul><li>This 1974 act reestablished the dollar as the global monetary instrument and oil replaced gold as the basis for a strong dollar </li></ul></ul></ul><ul><ul><ul><li>OPEC oil countries were soon overflowing with petrodollars and most of them ended up recycled through accounts in London and New York banks. </li></ul></ul></ul>
  9. 9. INFLATION — what is it? Wikipedia defines Inflation as : a rise in the general level of prices over time. It may also refer to a rise in the prices of a specific set of goods or services (e.g. energy, food, housing, etc). In any case, inflation is measured as a percentage in the rate of change of a price index . But that inflation definition (like most others you will find) is like putting the cart before the horse. Inflation is caused by a net expansion of money supply that “ causes ” rising prices -- by devaluing a currency Stated differently: the expansion of a nation’s money supply increases available currency beyond the proportion of available goods and services – causing more dollars to chase the same number of goods/services. Thus it creates a supply/demand situation that drives prices higher. In Reality:
  10. 10. Growth of US Money Supply 1959-2005 Came off gold standard here $10 Trillion $700 Billion
  11. 11. Growth of US “Fiat” Money 2004 + Fed is printing money at 20% annual rate; money supply to double in 4 years Yes, $14 Trillion Dollars! Yes, a 20% rate of growth !
  12. 12. INFLATION-1900-2000 <ul><li>2000 Dollar worth $.4 Cents compared to 1900 dollar </li></ul><ul><li>Additionally, since 2000 the US Dollar has lost a further 60% vs. EURO </li></ul><ul><ul><li>Bottom Line: Today’s dollar worth ~ 2 cents vs. 1900 Dollar </li></ul></ul>
  13. 13. Actual Inflation Rate Today <ul><li>Government States “core” inflation is 4%, but our wallets and bank accounts </li></ul><ul><li>feel differently. Why? Because our wallets/accounts know better </li></ul><ul><ul><li>Today’s actual rate of inflation (as measured w/metrics abandoned in the </li></ul></ul><ul><ul><li>80’s) is 12% and growing (recall – inflation is caused by monetary growth) </li></ul></ul>By understating inflation, the US Gvt. pays its obligations (Social Security, Welfare, Pension Benefits, Military Pay/retirements, Medicare obligations, and even foreign held debt) with significantly devalued dollars over time
  14. 14. By “understating” Inflation US GDP is “overstated” Gvt’s “massaged” figures say we’re not in recession The Real figures say we are in Recession ** Negative Growth **
  15. 15. Total Credit Market Debt Came off gold standard here 2008 is ~ 400% - Debt ~ $53 tril - GDP ~ $13 tril
  16. 16. Total US Debt Through 2007 Note that income hasn’t kept up with Debt levels
  17. 17. US Personal Savings Rate
  18. 18. Housing Bubble
  19. 19. Some Housing Bubble Causes <ul><li>Alan Greenspan’s “easy money” policies of the 90’s created massive speculation and NASDAQ bubble </li></ul><ul><ul><li>Maestro would cut rates and inflate at any sign of trouble: </li></ul></ul><ul><ul><ul><li>US Stock Market Crash of 1987 </li></ul></ul></ul><ul><ul><ul><li>Japan’s Economic Crash 1990 </li></ul></ul></ul><ul><ul><ul><li>LTCM Hedge Fund Collapse 1994 </li></ul></ul></ul><ul><ul><ul><li>Asian Currency Crisis 1997 </li></ul></ul></ul><ul><ul><ul><li>Russian Bond Default 1998 </li></ul></ul></ul><ul><ul><ul><li>Several other issues of the time </li></ul></ul></ul><ul><li>NASDAQ bubble popped/followed by 9/11 & recession </li></ul><ul><ul><li>Trillions wiped out (fear for deflation/depression) </li></ul></ul><ul><ul><li>Caused Alan Greenspan and the Government to Panic </li></ul></ul><ul><ul><ul><li>Cut rates 13 times and held interest rates at 40 year low (1%) </li></ul></ul></ul><ul><ul><ul><li>Printed/injected lots of new money into banking system </li></ul></ul></ul><ul><ul><ul><ul><li>US consumers able to borrow money very cheaply </li></ul></ul></ul></ul>
  20. 20. Housing Bubble Causes (cont.) <ul><li>Mortgage Loan Securitization </li></ul><ul><ul><li>Banks bundled/sold mortgage loans to investors (your retirement plan, hedge funds, other countries, etc) </li></ul></ul><ul><ul><ul><li>Made quick money on both sides of the transaction </li></ul></ul></ul><ul><ul><ul><li>Low risk – they didn’t own the loan </li></ul></ul></ul><ul><li>Significantly relaxed lending/underwriting standards </li></ul><ul><ul><li>Bank didn’t care if people couldn’t qualify – note to be sold </li></ul></ul><ul><ul><li>Allowed more people qualify for homes they couldn’t afford </li></ul></ul><ul><ul><ul><li>Many qualified on teaser rate ARMs & stated income (no-qual) </li></ul></ul></ul><ul><ul><ul><li>Banks even pushed pick-a-payment (exploding ARM) & NINJA loans </li></ul></ul></ul><ul><li>Appraisers encouraged to embellish home values </li></ul><ul><ul><li>If house didn’t appraise for requested amount – appraiser blacklisted and never used again for future business </li></ul></ul><ul><li>Supply/Demand imbalance </li></ul><ul><ul><li>Lots of cheap new money chasing dwindling supply homes </li></ul></ul>
  21. 21. History of Home Values 1890 benchmark factoring out inflation
  22. 22. US Mortgage Rate Reset Chart We’re here today (Note: 6-9 month lag to future foreclosures) Exploding ARMs to be next wave; many were “pick-your- payment loans”
  23. 23. Current/Future Outlook (1) <ul><li>Credit/Debt bubble is popping; Housing market plummeting </li></ul><ul><ul><li>Resets/Foreclosures & Inventory Increasing; won’t subside till 2011+ </li></ul></ul><ul><ul><ul><li>(Extremely Deflationary in Nature) </li></ul></ul></ul><ul><li>Mortgage Securitization Market is FROZEN SOLID (can’t sell) </li></ul><ul><ul><li>Marked to “Model” Assets (CDO, MBS, SIV’s, etc) losing value quickly </li></ul></ul><ul><ul><ul><li>Default ratios much higher than “Models” anticipated </li></ul></ul></ul><ul><ul><ul><li>Projected default levels prevents establishment of a “price floor” </li></ul></ul></ul><ul><ul><ul><li>Auto/credit card defaults increasing – this securitized debt is also failing </li></ul></ul></ul><ul><ul><ul><li>(Extremely Deflationary in Nature) </li></ul></ul></ul><ul><li>Many Banks are Insolvent (Securitized, Tier-III, off balance sheet assets far surpass underlying Banking System Capital ) </li></ul><ul><ul><li>Banks unwilling to lend to each other; lending standards much tighter </li></ul></ul><ul><ul><ul><li>Compounding the housing dilemma – fewer buyers for larger inventory </li></ul></ul></ul><ul><ul><ul><li>HELOC’s being yanked back by the $ Billions </li></ul></ul></ul><ul><ul><li>Auto loans and credit cards to follow suit </li></ul></ul><ul><ul><ul><li>New credit will become very scarce in the future </li></ul></ul></ul><ul><ul><ul><ul><li>Projected 45% cut in credit card credit lines by 2010 </li></ul></ul></ul></ul><ul><ul><ul><li>(Extremely Deflationary in Nature) </li></ul></ul></ul>
  24. 24. Current/Future Outlook (2) <ul><li>Government and Federal Reserve are in a state of PANIC </li></ul><ul><ul><li>Trying to fight the aforementioned “Deflation” with new “Inflation” </li></ul></ul><ul><ul><li>Cutting rates, printing new money and injecting into banking systems </li></ul></ul><ul><ul><ul><li>Over $1 Trillion in financial injections since Aug 07 </li></ul></ul></ul><ul><ul><ul><ul><li>(Highly Inflationary in Nature) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Banks using this money to shore up balance sheets – not as capital for new loans like the Fed wants </li></ul></ul></ul></ul><ul><li>New “unprecedented” Federal Reserve lending mechanisms recently enabled to help shore up bank balance sheets </li></ul><ul><ul><ul><li>Trading toxic/securitized Tier-III garbage for Gvt. Treasuries </li></ul></ul></ul><ul><ul><ul><ul><li>(Highly Inflationary in Nature) </li></ul></ul></ul></ul><ul><li>Gvt.& Fed will eventually have to rescue bond, housing & various other markets via Taxpayer funded bailouts </li></ul><ul><ul><li>Expect more stimulus checks to be cut for the masses </li></ul></ul><ul><ul><ul><li>“ Money from Helicopters” </li></ul></ul></ul><ul><ul><ul><ul><li>(Highly Inflationary in Nature) </li></ul></ul></ul></ul>
  25. 25. Current/Future Outlook (3) <ul><li>Growing worldwide demand for oil straining supply lines </li></ul><ul><ul><li>Swiftly developing industrial economies like China and India taking a much larger oil market share than in years past </li></ul></ul><ul><ul><li>World can extract and bring to market 87Mb Daily; using 86Mb Daily </li></ul></ul><ul><ul><li>Many older “whale oil fields” are in a rapid state of decline </li></ul></ul><ul><ul><li>Many new oil finds are small in scale and difficult/expensive to extract </li></ul></ul><ul><ul><ul><li>New finds not keeping up with increasing global demand </li></ul></ul></ul><ul><li>IRAN no longer accepts Dollars for oil; opened their own oil Bourse Feb 08 </li></ul><ul><ul><li>Very negative for US Dollar and oil pricing </li></ul></ul><ul><li>Vietnam, Qatar & Kuwait all recently de-pegged from US Dollar </li></ul><ul><ul><li>With Dollar peg, they have to print money as fast as we do </li></ul></ul><ul><ul><ul><li>Inflation is raging internal to their own domestic economies </li></ul></ul></ul><ul><li>OPEC threatening to de-peg and also to price oil in Euros </li></ul><ul><ul><li>Currently demanding more “Devalued Dollars” for same tangible product </li></ul></ul><ul><ul><ul><li>Increasing demand from China, India, etc, plus falling dollar are the reasons why we are now seeing $135 barrel oil </li></ul></ul></ul><ul><ul><li>Huge negative implications for US Dollar and the future price of oil </li></ul></ul>
  26. 26. Current/Future Outlook Bottom Line: <ul><li>US cost of living to rise/standard of living to fall </li></ul><ul><li>The housing market will NOT recover soon (expect 2011+) </li></ul><ul><li>Gvt and Fed are trying to fight “Deflation” with new “Inflation” </li></ul><ul><ul><li>At 20% annual growth rate, expect Money Supply to double in 4 years </li></ul></ul><ul><ul><ul><li>Expect dollar’s purchasing power to be halved (at least) during same period </li></ul></ul></ul><ul><ul><ul><li>Inflation to increase significantly (food, energy, oil & imports more expensive) </li></ul></ul></ul><ul><li>Dollar’s status as World’s reserve currency in serious jeopardy </li></ul><ul><ul><li>Currently at lowest levels in history & potentially going much lower </li></ul></ul><ul><ul><ul><li>If OPEC drops the Dollar Peg (likely) – major dollar problems </li></ul></ul></ul><ul><ul><ul><li>If oil is exchanged for Euros vs. dollar (possible) – massive dollar problems </li></ul></ul></ul><ul><ul><ul><li>If Asians and OPEC dump their $6 Tril in dollar reserves/bond holdings </li></ul></ul></ul><ul><ul><ul><ul><li>Expect a hyperinflationary blowout! </li></ul></ul></ul></ul><ul><li>If Gvt/Fed are unsuccessful in reopening credit markets soon </li></ul><ul><ul><li>Expect “MAJOR” recession w/potential for economic depression ~ 2011+ </li></ul></ul>
  27. 27. What to do? <ul><li>Get out of debt </li></ul><ul><li>Don’t take on any new debt </li></ul><ul><li>Stay conservative (volatile markets in future) </li></ul><ul><li>Don’t speculate (flipping houses, get rich quick, schemes, etc) </li></ul><ul><li>Be thankful you have a job – try to keep it! </li></ul><ul><ul><li>Many layoffs coming in the not so distant future </li></ul></ul><ul><li>Take a proactive role in your financial future </li></ul><ul><li>Save money for potentially difficult times ahead </li></ul><ul><li>If you can afford it, as a hedge against inflation and the devaluing dollar, buy some physical Gold and Silver for the rainy days & potentially years ahead! </li></ul>