How accurate is this author's economic forecast?

One opinion on the economic situation.


...Higher interest rates in the US are a foregone conclusion, guaranteed by the US Budget Deficit. The Budget Deficit has to be financed by issuing bonds at a rate of five hundred billion dollars a year. There is no reason to believe the Budget Deficit will decline anytime soon; on the contrary, it is more likely to increase. Obviously issuing five hundred billion dollars' worth of bonds every year will have a negative impact on bond prices, hiking interest rates. Think of it this way: the annual Budget Deficit equals about seven percent of the total amount of outstanding Treasury Securities. Every bond investors and bond trader out there knows that the total amount of Treasury Securities outstanding is going to increase by, at least, seven percent per year for the foreseeable future. That's an enormous amount of overhanging supply, and the reason why interest rates have started moving up.

Higher interest rates are the Achilles Heel of the US economy. We have too much consumer debt, too much credit card debt, too much mortgage debt, too much corporate debt and too much government debt. Higher interest rates are not only going to choke economic growth in the US, they could easily precipitate a collapse in real estate and the stock market. Don't, for a minute, believe that the worst is behind us.

The probability of the US economy in its current state experiencing economic growth while bearing the weight of higher interest rates is slim. Even Alan Greenspan is worried about it.

Last week's Wall Street Journal (Online Edition) reported that Greenspan said the US Budget Deficit threatens the nation's economic stability. There is only one reason for him to worry about the Budget Deficit. He knows that it will cause interest rates to rise and that higher interest rates will kill any chance this economy has of averting a serious downturn.

But let's not forget about the Trade Deficit, which is also in the order of five hundred billion dollars. The Trade Deficit has to be financed with foreign investment and I find it very, very hard to believe that the United States will continue to attract half a trillion dollars in foreign investments every year. Especially when economic growth stagnates, or declines, under the burden of outstanding debt and higher interest rates.

Even though the US debt problem has been looming for decades, a crisis has not yet materialized because US bonds have been rising since 1981. The resultant decline in interest rates not only mitigated the impact of outstanding debt, but also enabled the debt to grow exponentially. Now, however, we are entering a period of increasing interest rates in an environment of severely compromised credit quality and a fragile economy.

The bond market has already figured out that the bottom is in; the twenty-three year bull market in bonds is over and from here onwards interest rates go up. The currency market, on the other hand, has not yet figured out that higher interest rates will spell the end of the US economic boom. When it does, the dollar will commence a second decline in its secular bear market, and that will cause the gold price to rise.

http://www.gold-eagle.com/editorials_04/vaneeden051604.html

I have got rid of almost all my bills and owe less than 1000 dollars with is on low rate credit cards. I have a fixed income so I am already watching food and gas.I have money in a trust that I do not control and it is in bonds as I was told when Bush came in things were going to get bad, from the bank that does my trust. It does cost me monthly income but I have not lost any principal. I am old so I do not need things like most of you people.I sold my home and built a mother-in-law apt which is just right for my age and income.Frankly it is not so bad being old in this day and age. I still work off and on.

A "Gold Bug". Due to the fact that they are heavily positioned in precious metals and want that market to do well, for purely selfish reasons, they tend to issue reports of doom and gloom in every other investment sector.

One would be wise to not place complete faith in the ruminations of "Gold Bugs". just as one should not invest in only one stock or sector. Diversification in all things, as well as moderation.

that "goldbugs" are heavily positioned necessarily. A lot of people have moved to gold in the last couple of years as part of their portfolio diversification and because gold has been going up. Many for the first time...and I'm talking about brokers as well as individuals.

I was aware of the author's perspective, but was hoping someone would actually evaluate the information he was presenting and comment on whether it was feasible or not as a scenario given current conditions. I've heard some other market people talk about these problems.....

are real. You are correct about the idea of diversification as well. Gold has played a part in a well diversified portfolio for decades, the idea went out of vogue in I believe the late 80's early 90's. Prior to that it was very common for portfolios to hold a percentage of gold as an inflation hedge. It was when the "economists" began shouting inflation has been defeated once and for all that it went out of style. That and the constant reminder that it was now simply another commodity since Nixon defaulted on the nations debt and closed the gold window. (He really had no other choice.)

How did we tame the inflation beast? We didn't. We simply exported it, first to Japan, and more recently in the last decade to China. So the question is, can Greenspin continue to inflate his way out of this predicament as he has for the past nearly 2 decades? Where would we export it to next? South America could be a candidate, but I doubt it.

Krugman has stated we cannot inflate our way out of deflation, yet that is exactly what the folks at the Fed are trying to do. Will it work, I doubt it. We are either in for some serious hyper-inflation or devastating deflation. I just don't see how they can get the perfect Goldilocks scenario where rates rise slowly enough to not hurt the carry trades, derivatives and consumer debt, but quickly enough to continue to attract foreign investors. Then there is the trade deficit, and the only real way out of that one is to increase our exports while decreasing our imports - that means the dollar value has to decline in the foreign currency exchange markets. Quite the balancing feat, should they be able to pull it all off.

But then, I'm more of a doom and gloomer.

it's that balancing act and all it's parts that has perplexed me in trying to figure this puzzle out. And then there are the unplanned and/or unexpected things that can come into play as well that could upset that delicate balance.

tip the cart. What's that old saying - may you live in interesting times? Wasn't that some sort of ancient Chinese curse?

In other words, with all the new bond issues needed to cover the yearly deficit, won't the bond rate of return rise to attract investors to that investment?

If the bond rate of return did not go up there would be too few investors for the bonds to be sold and the deficit spending could not be covered by new bond issues.

foreign investors to finance our debt. The value of the dollar also needs to be stable. But it has to go down if we are going to make any dent at all in the trade deficit. Sort of a catch 22. What good are attractive rates if the dollar value declines?

If they don't rise gold prices will go up.

rising interest rates after the initial movements in the markets settle down. It has more to do with both confidence in and the foreign exchange rate of the dollar. Things have been pretty fickle the last few years. We've even seen the strange behavior of gold, bonds, and stocks all rise together. Gold tends to move opposite of the dollar, but even that general rule has been broken many times over the past couple of years.

What's it all mean? I got no friggen clue, things just seem rather unstable these days. These ain't no ordinary days!

and their analyses are a mixture of sales pitch and wishful thinking.

But, what he's saying here isn't all that much different than what a lot of people are saying-- we are living in a very fragile economic house of cards. No nation or economic entity can carry negative balances forever.

The problem with most of these analyses, even from real financiers and economists, is that they look largely at the macro level-- money and capital flows, investment levels... They often ignore underlying fundamentals.

The real problem, and the solution, is in micro analysis. All economies are demand driven, and we have to look at where demand is, and how to properly increase it to maintain stable growth.

We create and sell goods and services. All the capital flows, banking systems, trade deals, etc. are ultimately there simply so that you and I can buy stuff. Moving money or securities around means absolutely nothing if the money doesn't buy something that the securities financed. Should that demand stay high, the other problems tend to solve themselves. With a little help.

So, in a nutshell, we need more people with more expendable income to buy more stuff, and there be more stuff for them to buy. Not just replacement TVs or food, but whole new industries have to be created on a regular basis to add to, or replace, the mature ones.

For most Americans, disposable income is decreasing. Income and wealth is being rapidly shifted to a select few, and while there are all sorts of moral objections to this being loudly preached, the real problem is that this slows down overall economic demand, and things get sluggish. As businesses lose sales and lay off, it becomes a very vicious spiral.

Some day, I might come up with a neat answer for how to solve this little problem, and transfer vast amounts of wealth to me if I do.

All analysts seem to be protecting their interests and market analysts have only been the most recent culprits to be called on charges of self serving conflicts of interest ...and I agree that either intentionally or by shortsightedness, their analysis is not providing the big picture in part because it is ignoring the small and perhaps subtler details and/or unfamiliar markers. Also they cetainly wouldn't say/do anything to cause a flight from the dollar or the markets. We also seem to be dealing with new situations that don't have a historical basis.

Perhaps our entire currency system is changing, or even more fundamentally...how and to what we assign value, and who assigns it.