growth will slow in 2007 and OPEC will cut oil output if prices drop, how is the USA going to grow?

Answer 1

It amazes me how much people fail to know or take into consideration things outside of the U.S. If Hyronimus was paying attention, he'd see the yield curve has been inverted for most of 2006 and an inverted yield curve is a very accurate predictor of a coming recession (usually about 12 months after the curve inverts).

Then you've got First L saying let the dollar drop and we can export more. Okay. Answer me one question - what does the U.S. make any more? And First has failed to see other things; 1) 70% of GDP is consumer spending, meaning over 2/3rds of our economy is based on us just buying things. 2) The majority of items Americans purchase are imported. A drop in the dollar would make them more expensive thus curtailing consumer spending, thus causing GDP to fall and contracting the economy. The dollar gotten so battered lately that OPEC countries are now looking to to move away from dollar denominated oil transactions to Euros. A further drop in the dollar would cause OPEC to switch to Euro denominated sales quicker, thus prompting many countries to dump their dollar reserves which would cause the dollar to plummet which would push oil prices way up. China has $700 billion on USD reserves, so every 1 penny drop in the value of the USD means China is losing $7 billion. China has already made it very clear that they are going to diversify out of their dollar reserves. That will not bode well for the U.S. as other countries are also starting to shun the dollar. All those dollars will hit U.S. shores thus driving up inflation and most likely prompting the Fed to raise rates.

Days says that lowering rates will cause people to buy more houses and cars, etc. Problem. When the fed raises rates, there is a lag time of about 12-18 months before it affects the economy. The housing market topped in August 2005, a little over 12 months after the 1st Fed rate hike from 1%. Which means the rate hikes of 2006 won't be felt till mid to late 2007. Already the housing market is faltering, how much worse is it going to be when the recent hikes take effect. Also, days has failed to factor in something else. The housing market is what kept the economy afloat after the the stock bubble popped in 2000. Now consider this, according the the BLS (Bureau of Labor Statistics) the average American is making roughly the same amount now as they did in 1972. What that means is that although nominal wages have gone up, real wages of actually gone down. Since 70% of GDP is consumer spending, how then did Americans keep spending? It's called debt. Think about in, when credit cards first came out, only the most credit worthy people could get them. Now, if you have a pulse you can get a credit card. During the stock boom, people spent based on their unrealized paper profits. When the stock bubble burst, the fed flushed the system with liquidity and lowered rates. That caused investors that had money in stocks to take it out and invest in real estate, which caused the r.e. boom of 2000-2005. Real Estate prices rose so fast that people's equities jumped. They then used their equity as ATM's withdrawing something like $3 trillion in equity extraction of the past several years. That's what's been fueling consumer spending. But, now that the real estate bubble has popped and home prices are falling, the equity in their homes are drying up, so they won't have any left to take out any more cash. Now, because of this real estate boom, lending standards dropped and many people that couldn't get a conventional mortgage, now had the chance with ARM loans, interest only loand and Option ARM loans. This fueled a boom in the sub-prime markets, which was the fastest growing sector in the mortgage lending industry. Here's the problem - even if the U.S. lowered rates, it doesn't matter because the majority of sub-prime loans are based not on U.S. interest rates, but LIBOR (London Interbank Offered Rate) which means if the BoE (Bank of England) raises rates, the rates on these sub-prime loans will go up and the BoE just recently raised rates again. These sub-prime loans have a margin of about 5+% meaning that with LIBOR currently in the 5.3% range, a sub-prime borrower is going to pay a minimum of 10.3% when the ARM in their loans reset. This will force a lot of them into foreclosure adding more inventory to the already bloated stockpile, thus pushing down prices and values, thus further eroding equity spreads.

How can the US grow? It can't, it's worked itself into a major mess and only rebalancing can put it back on track (and that rebalancing is going to be painful).

For example, last year Congress passed a bill that required the Treasury to produce accounting reports that were based on GAAP standards, not the usual cash basis. On Dec 15th, the Treasury released it's report based on GAAP. Now, you've probably heard that the National Debt is like $8 trillion. That's based on the old cash basis report. The Dec. 15th report based on GAAP gives a truer picture of our financial position. The cash basis was only reporting current debt. If you take current debt along with long term debt and unfunded liabilites, do you know how much the U.S. is in debt? According to the Treasury report release on 12/15, total U.S. government debt is - get this - $53 trillion. That's just U.S. government. If you take into consideration all goverment debt (federal, state, local, etc.) corporate and private debt, the figures is somewhere around $80 trillion. How are we ever supposed to pay that back?

The US is in a major financial mess and the rest of the world is seeing it. That's why the Treasurer of Australia, Peter Costello, called for Asian countries to move out of dollars. That's why OPEC is moving away from completely dollar denominated oil sales to Euro's. That's why China is converting its dollar reserves to anything but dollars.

The financial storm that's going to hit the U.S. is going to make the Great Depression seem mild in comparison. If we had taken action back when, we may have avoided it, but the U.S. has passed the "fail safe" point and it's going to hit the proverbial fan soon.

You can no longer look at the U.S. in a vacuum, you must take into consideration the global economic situation in regards to the U.S. economy. Because 70% of GDP is consumer spending and because the U.S. doesn't really manufacture anything anymore, we have to import the majority of our goods. The countries that sell us these goods then take all those dollars and buy U.S. securities. Japan owns $750 billion in U.S. treasuries and $680 billion in dollar reserves, China has $700 billion in dollar reserves and $300 billion in US Treasuries. That dollar is in freefall and this in turn affects dollar denominated assets. Do you think Japan & China will continue to hold over $2 trillion in dollar denominated assets as the value of the dollar erodes? I think at some point, they'll have enough and dump their holdings to get out as much as possible before they lose more.

The U.S. is on the edge of the financial cliff. It's only a matter of time before she falls off. I am an American and I love my country, but I am a realist also, and the U.S. is headed for a massive financial collapse.

Answer 2

You are correct. OPEC is attempting to drive the price of oil and their obscene profits back up. You didn't believe the liberals when they whined and complained about the US oil companies did you? OPEC is the culprit and always has been. If the USA drills for it's own oil and boosts our production, we could break the backs of OPEC once and for all. When they cut production, we could increase production. OPEC would soon stop these games which hurt real people all over the world. With the bad world economy this move may back fire on OPEC. We can only hope at this point. That may keep prices low.

Answer 3

If producer and consumer prices stay under control, the federal reserve has room to cut interest rates. Lower rates will mean more liquidity and more growth. More smaller businesses that couldnt afford a loan will be able to and more people can buy houses, cars, etc...

If producer prices and consumer prices rise while growth is slowing in the US, an unlikely scenario as growth and prices generally tend to go in the same direction, then there could be a 1970's type stag-flation. The worst of both worlds, with rising prices and slowing growth.

Oil is an important variable, but still just one variable in the equation. The stock market has shown it can stomach 50-70$ / barrel of oil and still make record highs.

Answer 4

As always, some industry may suffer a downturn while another one is enjoying booms.

If the pictures is gloomy, just prepare for impact.

The only way I can think of is to lower the interest rate. That should stimulate growth. The housing market will go up again and so will the job related housing. Bank will be benefit as more people are buying and borrowing money. But people who rent will suffer as the cost of houses goes up.

Another way to boost is to allow US currency to drop, we will export more. More jobs will stay in U.S.
But the cost of living will go up as oil price will be even higher and there may be inflation due to the cost of everything will go up.

Answer 5

this may be true but remember the 2000 crash was lead by only 7 stocks unlike todays market. as long as interates stay lows and unemployment stays lows there will be growth.And to make a piont if oil get low enough for OPEC to cut production. but remember it wasn't long ago go they were pleased with 30 to 45 dollar oil

Answer 6

How do you know this? And if you really can look into the future there are a few stock tips i would like to get if we can get together.

Answer 7

Making more ethanol and biodiesel.

Answer 8

Thanks Jimmy Carter!