By James R. Cook
Despite what you may read about the economy in the newspapers, there’s deterioration in every economic indicator that matters. The U.S. economy is slowing. The next big disappointment will be in first quarter GDP numbers. A further weakening throughout the year seems inevitable. The ramifications are horrendous. In 2004, consumers borrowed an additional one-thousand billion (virtually doubling since 2000). A weaker economy will end this borrowing binge and collapse retail trade and consumer spending, to say nothing of real estate.
The stock market appears to be noticing the approaching crisis. A slide in consumer confidence, a gargantuan trade deficit, weak employment numbers, a fall in retailing, disappointing earnings and poor guidance, combined to give the market a downward jolt. Throw in a substantial jump in the inflation numbers, oil prices and interest rate worries and overvalued stocks may be on the verge of a major downward price revision.
According to analyst and philosopher Richard Russell, "The Fed is in a terrific bind. If they don’t raise rates again, investors will think that the economy is so weak that it can’t take another boost. And if the Fed does raise rates again, it will put a real squeeze on the U.S. economy…As evidence of inflation fills the newspapers, the Fed is literally forced to raise rates. But if the Fed raises rates, it is entirely possible that the numerous bubbles will pop…If they raise rates again, the market will hate it."
The real estate bubble can’t withstand too many more rate hikes, nor can the heavily indebted consumer. Yet to stop raising rates in the face of inflation suggests more weakness than anyone suspects. There’s a great risk of a panic if they fail to hike rates. Newsletter author John Myers claims that, "Federal Reserve Chairman Alan Greenspan is trapped." Kenneth Parsons explains, "The Fed has lost control of the dollar. The mindless creation of credit has insured a mind-boggling meltdown of the entire financial system."
Following the downturn in 2000, the Federal Reserve overstimulated consumption by lowering interest rates. That provided a temporary fix, but didn’t cure anything. Actually, it’s made things worse. More and more credit now buys less and less growth. Savings and capital investment have collapsed. We are more vulnerable than ever to a severe downturn that bursts the stock and bond bubble and deflates the value of real estate. Here’s the truth from Dr. Kurt Richebacher that you’ll never hear on TV or read in the papers. "The real test of true prosperity is what happens to employment, incomes, savings and productive investment. On those four counts the U.S. economy is the worst performer in the world. Never before has an economy in recession been treated with such massive monetary and fiscal stimulus. Yet what has resulted has been a recovery that is the worst on record for wage growth and income that determines people’s living standards."