“… Middle East oil producers will remain central to
world security. The [Persian] Gulf will be a primary
focus of U.S. international energy policy.”

Vice President Dick Cheney's Energy Task Force Report
of May 2001
"The worst evils which mankind has ever had to endure
were inflicted by bad governments."

Ludwig von Mises (1881-1973), Austrian economist
"The essence of so-called war prosperity; it enriches
some by what it takes from others. It is not rising
wealth but a shifting of wealth and income."

Ludwig von Mises (1881-1973), Austrian economist


The U.S. economy, as well as the world economy, is
proving to be most resilient. This has persuaded most
observers to expect moderate economic growth of 2 to 3
percent and a moderate inflation around 2 percent for
years to come, while unemployment remains at a thirty
year low.
Indeed, the consensus among strategists is now to bet
on international competition and productivity gains to
keep costs and prices tame, and on a lower dollar
to improve the trade balance; they place their hope on
a relatively stimulative monetary policy to keep
consumption and investment spending up and expect the
worst of the housing decline now to be over. They also
think that crude oil prices peaked near $80 a barrel
in July 2006, and that excess oil supply will keep
energy prices low — under $69.50 — after the current
Fibonacci rebound and the completion of a big head and
shoulder top. With stock prices making new highs, some
point out that presidential and stock market cycles are
favorable to higher stock prices, since investing
during the 27 months before a U.S. presidential
election has proved in the past to be more profitable
than investing during the 21 months after the
elections. — With such a rosy scenario, call it
scenario A, it is not surprising that many investors
are enthusiastic about financial markets, some
expecting double-digit earnings growth this year and
next.
While one may hope that economic conditions remain
favorable or even improve, the conditions for another
less rosy scenario, call it scenario B, are also
present and could unfold in the coming months, if
certain potential shocks were to materialize. What
probability can we assign to such an unraveling
scenario B? It is hard to say, but personally I would
give it one chance out of three to occur. Why?
As we explained in our blog of last October 16,
(Headwinds for the US Economy),
macroeconomic conditions make it a matter of months,
not years, before the U.S. economy and the U.S. dollar
begin to experience some downward pressures. We are
now approaching that point of reckoning. —Let us
remember that the U.S. gross domestic product (GDP)
is the largest in the world at more than $13 trillion,
that Americans have a net home equity
equal to about $ 14 trillion (but declining) while
American households have [a net ownership of corporate
equities ->http://www.econstats.com/FOF/fPP_12q.htm] of
about $ 10.5 trillion (still increasing). However,
home ownership is more widespread than stock
ownership: Slightly more than two thirds of Americans
own their homes, while somewhat less than half of
American households own equities. What is more, stock
ownership is fairly concentrated, with the top 10
percent of investors owning about 80 percent of all
stocks. — This may help to put into proper perspective
the possible impact on household finances of the
current housing crisis, as compared to the relative
ebullience in stock-related wealth.
Thus, what could be the reasons for slower economic
growth in the coming months? First, the artificial
short term stimulus that the Bush-Cheney
administration gave the economy before the 2004 and
2006 elections, through a combination of large tax
cuts and large increases in military outlays, is about
to run its course, and the piper will have to be paid.
Second, record budgetary and current account deficits
have severely neutralized the Fed's monetary policy
stance because interest rates cannot be reduced
substantially for fear of a collapse of the U.S.
dollar (and a resurgence of imported inflation), while
less stimulus is expected from the federal budgetary
deficits as they are being slowly reigned in. Third,
all this is taking place at the same time that the
construction industry is in disarray and housing
prices have tapered off or are declining, while [the
Kuznets real estate cycle
->http://en.wikipedia.org/wiki/Business_cycle] decline
that began in 2005 is expected to last until 2010-11.
Fourth, this raises the question of how long the
American consumer will keep up the high pace of
spending in such a context. During the years of the
housing boom, consumer spending was driven by the
accumulation of wealth and record consumer
indebtedness, most of it in the form of mortgages, as
the price of houses increased. Now that the reverse is
occurring and foreclosures
are on the way up, a retrenchment in consumer
spending cannot be ruled out. Logically, especially
with consumer confidence crumbling,
this should be expected.
A fifth factor is now entering the picture to make
matters potentially worse: The protectionist push from
the Democrat controlled Congress risks putting in
jeopardy the flow of capital of about $2 billion a day
that the U.S. economy is borrowing from abroad, mainly
from China and Japan. Looming trade frictions between
the U.S. and China could force the Fed to raise
interest rates, and not lower them as most observers
expect—in any case, the Fed would surely not lower
them as much as it would be warranted to alleviate the
housing crisis.
All that is needed now to complete the picture, as a
sixth factor, would be the collapse of one and
possibly several major financial institutions under
the pressures of bad loans and record foreclosures.
Particularly at risk is the some $2.5 trillion
mountain of debt concentrated in subprimes and Alt-A
loans. Already, one major sub-prime lender (New
Century Financial) has filed for [Chapter 11 bankruptcy
protection.
->http://news.bbc.co.uk/2/hi/business/6519051.stm]
Others are likely to follow, because 2007 is the year
when a large number of sub prime real estate loans
have to be renegotiated at higher interest rates. The
rate of foreclosure is bound to spike in the coming
months, possibly culminating in the next two years
into a financial hurricane.
A seventh geopolitical factor could also throw fuel on
the fire. Indeed, if the clumsy Bush-Cheney regime
goes ahead with its neocon plan to bomb and attack
Iran, the coming U.S. economic slowdown could be
transformed into something much worse. Indeed, during
the coming years, the world economy will have to
adjust to a peak in oil production and to higher energy
prices, after the current lull. If geopolitical
mistakes turn the richest oil producing region into a
hot war zone for many years to come, the worldwide
economic consequences will be disastrous.
What does it all mean in practice? It means that while
extrapolating the past is often a good way to see into
the future, it does happen that major turns can occur
anytime, when conditions are ripe and nobody expects
them. For example, the April 1960-February 1961
recession followed the end of President Dwight
Eisenhower's second term. Nothing in the presidential
politics cycle therefore precludes a 2008-09
recession. [Recession: a period of sustained
production decline: usually considered to last two
quarters in a row].
The above scenario B can likely be avoided if no major
shocks, such as a premature oil production peak, large
financial bankruptcies or a U.S.-Iranian war, do not
materialize. If they do, however, all bets are off. It
would seem only prudent to prepare and take measures
for the possibility of such a less palatable scenario
occurring
_______________________________________
Rodrigue Tremblay lives in Montreal and can be reached
at rodrigue.tremblay@yahoo.com
Visit his blog site.
Author's Website
Check Dr. Tremblay's coming book ["The Code for Global
Ethics" ->http://www.TheCodeForGlobalEthics.com]