Thursday, December 29, 2016
THE PERFECT STORM
Back on March 14, 2008, I wrote the article below for Gather.com, for whom I was a Money Correspondent. Given that the financial crisis began in September, 2008, just six months later, this proved to be somewhat prescient.
I highlighted the numerous problems plaguing the U.S. economy and how they were like spokes on a wheel, converging in a central hub. I could clearly see a crisis unfolding. Many of these problems have not gone away; in some cases they have worsened. Since many of these same concerns still exist today, I thought I would look back and republish this article, along with its longer companion piece, which was originally published just two days later.
Right now, it appears as if the U.S. is in the middle of an economic "perfect storm." The nation is grappling with an eroding dollar, high budget and trade deficits, a mortgage crunch that is resulting in a spreading credit crisis, record oil prices, a weak job market and the continued, massive costs of two simultaneous wars.
It appears that we may be in big trouble.
The U.S. currency is in a free fall and people who survey such things say there is no end in sight. Many believe it will take years for the greenback to recover its former value and prestige.
The dollar fell to a 12-year low against the Japanese yen on Thursday, dropping below 100 yen for the first time since November 1995. Meanwhile, the euro rose to all time high and is currently trading above $1.55.
The dollar has steadily eroded in value against the euro and other currencies since 2002 as U.S. budget and trade deficits have ballooned. But fears of an American recession and credit crisis have sent the dollar to stunning lows amid predictions that the slump will continue for quite some time.
While the dollar has fluctuated for many years, what's different this time is the existence of the Euro. While foreign funds and governments used to buy up U.S. Treasury notes, bonds, and other securities — which had the effect of propping up the dollar — the Euro and other currencies are now seen as safe alternatives and they are paying higher yields.
Simply put, this means better returns on investments can be found elsewhere.
"You have the U.S. still holding this trade deficit, but now you have the possibility of a U.S.-led recession, and you have a weakening currency. So it's a very dark outlook for the dollar," said Gareth Sylvester, senior currency strategist with the British firm HIFX Inc.
"People just don't want to be holding U.S. dollars and U.S.-based equities," he added. "If you are an investor with a million dollars to invest, you look for the highest yield — you're looking at South Africa, Australia, New Zealand."
Meanwhile, oil prices set a new record high on Thursday at $111 per barrel. In fact, crude has set records in 12 of the last 13 trading sessions. Analysts blame the spike on weakness in the dollar. Interest rate cuts further weaken the dollar and have helped fuel oil's rise. Another rate reduction is expected next Tuesday at the Federal Reserve's regularly scheduled monetary policy meeting.
"This cocktail's been whipped up by the Federal Reserve," said James Cordier, founder of OptionSellers.com, a Tampa, Fla., trading firm.
Analysts expect the price of oil to maintain its upward track. "There's really no end in sight to this," added Cordier.
Gas prices are following crude, reaching a record national average of $3.27 a gallon. And gas prices are expected to rise much higher this spring; estimates range from about $3.50 a gallon in the Energy Department's latest forecast to $3.75 or even $4.00 a gallon according to some analysts.
Higher pump prices result in higher costs for food and other consumer goods.
Despite the weak dollar, the U.S. trade deficit still increased 0.6 percent in January, reaching $58.2 billion. Though exports increased 1.6 percent to the highest level ever, the U.S. still buys more from other nations than it sells abroad.
So much for the supposed benefit of a weak dollar.
Perhaps the most troubling news is that the wars in Iraq and Afghanistan are now costing U.S. taxpayers $12 billion per month, according to the nonpartisan Congressional Research Service.
A Nobel Economist just issued a report indicating that the total cost of the war could exceed $2 trillion. That figure is more than four times what the war was expected to cost through 2006, according to congressional budget data. The White House predicted in 2002 that the war would cost between $100 billion and $200 billion.
Add all of these factors together and it's a frightening mix -- a witches brew of economic trouble that may haunt the U.S. for years to come. These imperfect realities are coalescing into what seems to be a "perfect storm."