To the economist out there!!!?

Question

Is there a possibility that the US economy might fall into a recession by late next year because the "fall" of the US dollar on the global market, and the falling housing market???

Answer 1

as the US dollar falls relative to other currencies that attracts more investors into our markets (the decide to "buy" our currency by holding bonds) and foreigners buy more of our goods because they are relatively cheaper. but that also means foreign goods get more expense for us :(. as this happens it could push interest rates up. as interest rates rise people rather-->people begin to save money in the bank and spend less. this slow down in spending could lead to a recession.

fall in the housing market exacerbates this situation. as housing prices fall, people's networth decreases. so, people tend to spend less. (e.g. lets say your house was worth $1million and now is worth $100,000. before you might have taken out a loan for $30,000 to purchase a new car...you are more likely to do this and the bank is more likely do give you the loan if your house is worth so much. but if your house is only worth $100,000 then you might not get that loan because 1) you think you cant afford it 2) the bank might not give it to you)
-->the main point here is that the perceived value of your house affects your current consumption of goods and services.

as house value drops you spend less. as you spend less this slows down the economy. this exacerbates the problem with the falling dollar and the economy may begin to really slow down.

note: effective monetary policy (federal reserve changing interest rates and controlling infationary pressure) can mitigate the downword pressure of the falling dollar and housing market.

Answer 2

Yes, it's always possible there could be a recession in the future, and yes it could possibly be triggered by a fall in the housing market, as that's a substantial piece of consumer demand that is linked with lots of other products (washing machines, ladders, furniture, etc).

However, it's unlikely that the *falling dollar* would trigger a recession. Whatever bad things people expect from the falling dollar are mostly imaginary. It's more likely to be stimulative, as US-produced goods are cheaper overseas, and cheaper domestically compared with foreign goods. A falling dollar would tend to reduce imports (which count against GDP) and increase exports (which add to GDP).

A falling currency can really hurt a 3rd world nation but for reasons that do not apply to the US: 1) people tend to mistrust 3rd world currencies and are quick to lose confidence completely in them and 2) they often take out debts denominated in US dollars, which make repayment difficult if that currency falls versus the dollar. The US has the advantage of owning the currency our debts are in; and despite the occasional political rhetoric there is no possibility of the US having a "3rd world" currency.

Rather than causing a recession, a falling dollar is more likely to be a RESULT of a recession -- as a recession typically coincides with lower interest rates and a falling stock market, both of which chase foreigners out of US markets, which reduces foreign demand for dollars.