Our economic future

Posted Mar 8th 2008 1:15PM by Peter Cohan

A reader of my post on reverse leverage writes: "[I get the impression] that these genius wall streeters who made gadzillions last year are going to bring on a catastrophic economic crisis w/ widespread life changing (in a negative way) implications for all of us, that there could be huge layoffs, massive decline in home values etc much more than we have seen, and no way to avoid it until we have given it time for us to work through the problem, regenerate equity slowly and rebuild up, over years, our economy -- or do you not see this happening?"

My feeling is that what this reader fears could happen. It's possible that people will need to cut back on borrowing which would mean that they could not afford to buy as much. This would normally cause prices to drop low enough that their lower, inflation-adjusted incomes would eventually gain in value relative to prices. After that they could resume their prior level of consumption.

But the Fed is cutting interest rates which are driving up prices by weakening the dollar – not to mention strong demand from China and India. So you have a battle between three competing forces. If the weaker dollar and strong developing country demand overwhelm the effect of U.S. consumers with less money to spend, then you'd have a vicious cycle which would squeeze U.S. consumers. Less spending would lead to lower production, more layoffs, and lower incomes.

This is not a pretty picture. But I don't see a way around it. How about you?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Print this

Reader Comments (Page 1 of 1)

3-08-2008 @ 4:25PM

lawstud said...

Lowering the interest rate (i.e. printing more money to pay the bills) will have a bottom, devaluing the currency too much will piss off the Chinese who are mostly financing the huge American debt conflagration.

the chinese are just buying up American assets instead. Basically this ebb and flow will mean they, the Arabs, etc will own everything in America. We will rent our homes from them.

Raising the interest rate is inevitable to suck up soo much of the currency floating around. 197'0's all over again? When the US defaulting on its debt in the 1970's and took it off gold, spent too much on Vietnam without raising taxes and raised spending (guns and butter), its just a freaking total repeat with Bush spending on Iraq, not raising taxes, even freaking lowering taxes, and spending like a liberal.

The result massive inflation of the 70's. We are headed towards stagflation, inflation with widespread unemployment. When its all said and done we will have sold everything in this country to foreigners to pay for the wars we fight.

A BIG reason the government now under Bush is brushing aside recession talk is because exports are the only area of the economy growing, it started with Clinton selling military secrets and allowing certain technologies to be sold, look at Bush now selling Saudi's top of the line bombs. An outright perception recession will provoke protectionism and worsen the recession we are in.
Who the F believes 3.4% GDP growth with 0.02% inflation, its like -5% GDP last year with 12-15% Inflation, look at Arab states that tied their currency to US currency, they have 10-20% inflation last year. The government says CPI is higher and SS benefits have to go up, its a scam to lie to us so much.

The day dollars are not accepted anymore is coming.