Tuesday, October 25, 2005


A Return Of Stagflation?

Forex News has this overview of the global economy. Highlights, "We believe there is another story behind the low rates of longer securities that is all too obvious: the US economy is slowing down. An economy that must offer 'employee discounts' to sell cars is in trouble. We had one airline after another declare bankruptcy; now the world’s largest automotive supplier, Delphi, has declared bankruptcy."

"General Motors and Ford are likely bankruptcy candidates. What is happening is that corporations cannot pass costs on to consumers. The Greenspan conundrum unplugged means: Our low long-term interest rates suggest that we are going to lose entire industries in the looming economic downturn. Industries that cannot adapt quickly enough to our global economy will be wiped out..as no developed country can compete with the cost of labor in Asia."

"Asia believes that it must generate economic growth at all cost to provide jobs and political stability. The result is a surge in world commodity prices (we had high commodity prices before the hurricanes) and low consumer goods. In addition, take a US consumer that is heavily in debt, and you end up with very little pricing power."

"This is not the place to discuss whether an economy can survive long-term if it entirely dismantles its manufacturing base and exclusively focuses on services. What we do know, though, is that the accommodating policies have created inflationary pressures in just about all sectors of the economy where we cannot import goods from Asia. And while we are at it, we also created a phenomenal housing bubble that has allowed the US consumer to increase its spending (by taking out home equity loans and refinancing) while real hourly wages have been on the decline."

"We do not see a conflict in low long-term rates and high gold prices, at least not for now. What about inflation and economic growth going forward? The Fed has been steadily raising rates. Bill Seidman..says Federal Funds rates would need to move to 5.5% just to have a neutral impact on economic growth. We agree: even with the many small increases in rates, we still have an accommodating monetary policy, one that fosters growth and inflation. At the same time, the economy is clearly slowing down."

"Corporate America has reasonable looking balance sheets, but we cannot rely on them to bail this economy out. The reason corporate America has not invested much of its cash, because it sees the shakiness of the American consumer and is reluctant to invest."

"We believe Asia will continue its path as long as it can afford it. We also believe that we cannot assume Asian countries will react rationally when US consumption slows. It is unclear whether Asian countries will try to devalue their currencies even further in a desperate attempt to continue to sell to the United States, even at a loss. Governments in Asia may be more interested in political stability."

"What does this all mean for the dollar? We believe the dollar continues to be at serious risk as the balance of payments between the United States and the rest of the world is unsustainable and further escalating..As countries look for alternatives to the US dollar as a reserve currency, gold and the euro are gaining a higher profile."

"The United States next year will pay more to foreigners in interest charges on its own debt than it receives in interest. With US debt growing rapidly, interest rates rising and much of US debt in short-term securities, this will have a negative impact on the balance of payments. Also, if US consumption slows just as the housing market enters a more serious decline, foreigners may be less willing to invest in US assets. We do not believe the fundamental pressure on the dollar will go away unless and until policies will be put in place to foster savings and investment rather than consumption. For now, consumers continue to believe that their real earnings will grow and have refused to cope with reality."

Congrats on the gold OC, looks like Bernake will be good for metals.
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