Obviously from the last post, I have been busy so I haven't had much time to much in depth research as of late into the economy but my forecasts are still going to be bleak for the US economy. I haven't been doing much research as of late so I'll be talking off the hip today, it's late and I should be in bed.
What I will be watching for in the US is their debt and interest levels for the foreseeable future because that will be effecting the value of the US dollar, tax rates and bank interest rates. Interest rates in the US was at about 5% before the whole housing crash, which brought down the interest rate at 0.25%.
Using a future value of money model with the internal rate of return set at the FED interest rate we can calculate for the present value of a security that provides a perpetual return. The present value is multiplied by the annuity by a constant, dependent on the interest rate. I have no time to write the formula here but for those in the know, you know where to look or how to do the calculation.
At 0.25% the factor is 401 and at the FED rate of 5% at 2007 the factor drops down to 21. This model obviously breaks down for very small values of interest rates because the multiplier starts to become huge. As interest rates drop we should expect stock prices to rise. This was exactly what happened as the FED started cutting interest rates. What they were really doing was masking the real drop in equity prices by lowering the FED rates, thus pushing up stock prices. With the FED rates at 0.25%, they have nowhere to go when it comes to rate cuts and the only direction that the interest rates is up. Unless the US decided to pull a Sweden and go for negative interest rates. This scenario is unlikely.
The multiplier curve for the present value of cash as a function of interest rate is very steep at interest rates rise from a very small interest rate. The US economy is still very weak as it is right now and raising interest rates will cause equity and commodity prices to fall considerably. While interest rates are low, however, money will be pumped into the financial system leading to inflation. The drop in the USD is already is a direct result of this. As long as the FED rates continue to be this low and the US continues to pump out debt, expect further devaluation of the USD.
The only thing that will stop value erosion of the USD is if the US economy becomes productive, producing a financial surplus to pay off their debt and with significant enough profits such that the FED can raise rated without killing the economy. I don't think this will be happening for a while.
We've already seeing speculation on a interest rate hike because the USD is getting hammered. If a rate hike does happen, it will probably be done to stave off fears of inflation in the sort term by temporarily driving down prices of say gold and oil, but I believe that the economy is still going down; I think it's just rumor mongering to temporarily stop the drop in USD and rises in gold. The economy will continue to drop until the full extent of bad investments have been realized. In other words, until when the parties that made the bad investments have taken their losses. Unfortunately, these losses are being mitigated from the private sector to the public by bailouts to banks and other large institutions.
Recovery will happen if these institutions become profitable using public money and paying off their debts. If that doesn't happen then these institutions will likely to continue on a "life support system," until someone pulls the plug on them. It's a matter of accepting the losses or trying to pretend that nothing happened and climbing out of a hole with a weight around your neck.
For US economy to improve, we need to see debt numbers to stabilize and see good investments in the economy. Right now, I don't see it. People don't have money to invest and they have too much debt. The people that can probably make the biggest difference are the ones that don't have debt, either people that are too young to have debt or the very rich with no debt. People without debt are the ones with power.
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