Post by unlawflcombatnt on Apr 7, 2007 13:38:32 GMT -6
In an April 5, 2007, article titled No More Legs to Stand On, Peter Schiff explains why a severe recession is an outright certainty. Below are some excerpts from the article.
"For those not lost in the inconsequential minutia, a severe recession is an outright certainty, regardless of what current statistics might indicate on a day-to-day basis.
Since the bursting of the dot.com bubble, the U.S. economy has been fueled by an enormous consumer spending spree. This largess has been artificially propped up by the largest real estate bubble in U.S. history. In fact, housing has acted as a three-legged stool upon which American consumers have been precariously perched. Those legs are: 1) home equity extractions; 2) adjustable rate mortgages; 3) the wealth effect....
These three factors combined to encourage consumer spending on an unprecedented scale relative to incomes, and allowed debt to rise to levels that would have been impossible had mortgage payments been fully amortized and real estate prices remained at historically reasonable levels. Of course, many economists confused this spending binge with legitimate economic growth, just as they confused rising home prices with increased savings. However, as with the dot.com bubble, the truth only becomes apparent to the inebriated when the punch bowl runs dry....
it is important to point out that as a collapse in consumer spending ushers in a recession, the Fed will not have the luxury of lowering interest rates to cushion the fall. Despite surging unemployment, “inflation” will only accelerate, as extreme dollar weakness abroad translates into higher consumer prices at home. In addition, long-term interest rates will be headed higher as well, as foreign savers look to be compensated for this loss of purchasing power. Higher interest rates and substantial increases in the cost of living will only exacerbate the housing downturn and the recession, turning what would normally have been simply a severe recession into something far worse.
Although this may sound like a sobering scenario, it is definitely not the worst case. The real doomsday would only come as a result of Fed-created hyper-inflation which could be used to pump up all varieties of falling asset prices. Let’s hope the boys at the Fed decide not to go there."
The full article can be found at www.europac.net/newspop.asp?id=8224
"For those not lost in the inconsequential minutia, a severe recession is an outright certainty, regardless of what current statistics might indicate on a day-to-day basis.
Since the bursting of the dot.com bubble, the U.S. economy has been fueled by an enormous consumer spending spree. This largess has been artificially propped up by the largest real estate bubble in U.S. history. In fact, housing has acted as a three-legged stool upon which American consumers have been precariously perched. Those legs are: 1) home equity extractions; 2) adjustable rate mortgages; 3) the wealth effect....
These three factors combined to encourage consumer spending on an unprecedented scale relative to incomes, and allowed debt to rise to levels that would have been impossible had mortgage payments been fully amortized and real estate prices remained at historically reasonable levels. Of course, many economists confused this spending binge with legitimate economic growth, just as they confused rising home prices with increased savings. However, as with the dot.com bubble, the truth only becomes apparent to the inebriated when the punch bowl runs dry....
it is important to point out that as a collapse in consumer spending ushers in a recession, the Fed will not have the luxury of lowering interest rates to cushion the fall. Despite surging unemployment, “inflation” will only accelerate, as extreme dollar weakness abroad translates into higher consumer prices at home. In addition, long-term interest rates will be headed higher as well, as foreign savers look to be compensated for this loss of purchasing power. Higher interest rates and substantial increases in the cost of living will only exacerbate the housing downturn and the recession, turning what would normally have been simply a severe recession into something far worse.
Although this may sound like a sobering scenario, it is definitely not the worst case. The real doomsday would only come as a result of Fed-created hyper-inflation which could be used to pump up all varieties of falling asset prices. Let’s hope the boys at the Fed decide not to go there."
The full article can be found at www.europac.net/newspop.asp?id=8224