«All is not well. If it were, we wouldn’t have the Fed considering desperate policy measures. Having cut interest rates 11 times in 2001 and then again in November of 2002, the Fed is once again contemplating lowering rates when it meets tomorrow in Washington. The problem is after 12 rate cuts and near zero interest rates, the patient isn’t healing and responding as expected. After creating the largest credit boom in history the economy is in danger of running out of steam. Capacity utilization is still anemic with one out of four factories idle in the U.S. The unemployment rate is still rising as companies lacking pricing power move to slash payrolls to improve profitability and save cash.
The problem with credit is that it is like a narcotic. With repeated use, the body, or in this case the economy, gets immune to it and requires even larger doses to maintain a high. In the case of the U.S. it is now taking almost $5 dollars of debt to produce $1 dollar of GDP. The Fed’s answer to the problem is to inject even larger doses of credit into the system but the patient isn’t responding as readily as in the past. »
«In Japan after more than a decade of deflation the government is now considering desperate measures to force engrained savings habits to disappear. The government in Japan is considering taxing all cash and savings in an effort to force people to spend money. A new plan being outlined by government calls for an annual tax of 3-5% on all savings and cash. The aim would be to get people to spend money or invest it in the stock market, bond market, or in real estate. »
«What does it do next when interest rate cuts fail to revitalize the economy or the financial markets? Unlike the Japanese saver/investor the average American is a borrower/consumer. The problem here in the U.S. is just the opposite in Japan. Americans hardly save at all. Not only do Americans not save, but we borrow from the rest of the world consuming about 80 percent of the rest of the world’s savings. The U.S. problem is too much debt. How do you get people or business to borrow more money when they are tapped out? Homeowners seem to be the only group within the U.S. that still has the capacity to borrow, mainly through tapping the equity from their inflated homes. But what happens when housing prices no longer rise, or if interest rates go up instead of down? That is when the real problems begin. Unless the Fed can create another asset bubble to tap to replace those that are in the process of deflating, we may be approaching the end of the road.»
1) Falling prices
2) Declining money velocity
3) Falling nominal and real interest rates
4) Debt Liquidation
5) Distressed selling
6) Falling net worth
7) Rising bankruptcies
8) Falling profits
9) Reduction in output and employment
10) Falling confidence
Of the ten conditions listed above, we have close to seven that are visible. Prices are falling for everything you want; while the price of everything you need is going up. This is stagflation. Money velocity is also dropping which is why Japan and the U.S. are floating the idea of a “carry tax” on cash if things don’t improve soon. Net worth is mixed. Stocks have fallen over the last three years but have risen this year. Real estate prices are still going up so most people feel that they are getting wealthier. Bankruptcies are increasing with mortgage foreclosures hitting a record high. With more people losing their jobs home mortgage foreclosures climbed to 1.2 percent of all mortgages during the first quarter of this year. And although there has been an improvement in the profit picture for most, companies that profit is coming at the expense of rising unemployment as companies try to slash costs in an effort to return to profitability. Distressed selling has subsided if only for a short while. Company capex spending has fallen precipitously since 2000 and has only partially recovered. One of the big “if’s” for the economy going forward in the second half of the year is capital spending by business. At the current moment there is a lot of hope but very few signs of improvement. Capex spending depends on profitability. With companies struggling to remain profitable business spending will remain a big “if.”»
Já chega :-), sugiro que consultem o site Financial Sense para ler o texto na íntegra.
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