For over a year, we have been warning that the U.S. and global economies could go into recession at any time.
It now seems that recession is likely before the end of 2007, despite the rosy predictions of many establishment economists. It may be mild, but it could well be severe. Here’s why:
2007 Real Estate Crash?
First and foremost, real estate remains tremendously overvalued in both the U.S. and many western nations.
Houses in and near major cities that were selling for just $200,000-$300,000 five years ago, continue to be offered for $700,000 to $1,000,000. When no one makes an offer, they are simply taken off the market. This is precisely what has happened to a half-dozen houses near where I live, and it is reportedly happening all over the country.
Despite some modest reductions in housing prices during the last half of 2007, the big drop in real estate prices is yet to come.
The reason why is that eventually people have to sell – because of new jobs, divorce, or they simply need the money for medical expenses, retirements, etc. Then reality catches up with self-delusion.
In 2007, an estimated two million holders of adjustable-rate and other non-conventional mortgages will have their payments massively increased – in some cases by as much as 40%. Many will default, resulting in a flood of “for sale” signs in a soft market, and thus crashing prices.
Dollar Still Plummeting
In a December 2006 cover story on “The falling dollar,” The Economist magazine explained:
“… as [the dollar] fell to a 20-month low of $1.32 against the euro, the only real surprise was that it had not slipped sooner. Indeed, there are good reasons to expect its slide to continue, dragging it below the record low of $1.36 against the euro that it hit in December 2004.”
“The recent decline was triggered by nasty news about the American economy. New figures this week suggested that the housing market’s troubles are having a wider impact on the economy. Consumer confidence and durable goods orders both fell more sharply than expected.”
“The main reason for the dollar’s strength has been the widespread belief that the American economy vastly outperformed the world’s other rich-country economies in recent years. But the figures do not support the hype. Sure, America’s GDP growth has been faster than Europe’s, but that is mostly because its population has grown more quickly too.”
What’s next?: Look for the fall of the dollar to continue in 2007, and indeed, to accelerate. That will cause the price of most things we buy to increase, making recession more likely.
The Costly War on Terror Is Expanding
As this issue was being written, President Bush announced that he had already begun to send over 20,000 additional American troops to Iraq, and was requesting $170 billion more for their deployment. Bush also stated that an additional carrier task force had been positioned to intimidate Iran.
Further, a few days earlier, the U.S. bombed “suspected terrorists” in Somalia, expanding the War on Terror to yet another country.
The War is enormously expensive and draining resources from the civilian economy. A host of federal and state domestic programs are being slashed, to pay for more bombs, missiles, troops, and tanks.
Since you can’t eat or consume military hardware, this shift in financial priorities is recessionary.
The Hidden Derivative Crisis
Derivatives are securities derived from other financial instruments, such as packages of resold home loans, credit card debt, and other secondary debt.
Derivatives have become a gigantic, global pyramid of debt built upon debt, now amounting to $345 trillion, according to Agora Research. This is many times the value of the resources (e.g., real estate) upon which they are based, and several times the value of all wealth in the world.
Derivatives are a global financial catastrophe waiting to happen, and any of dozens of events-such as a U.S. real estate crash or dollar crisis – could trigger their implosion, destroying stock markets, banks, S&Ls, and other financial institutions throughout the world.
We will discuss them in much more detail in a future issue.
The bottom line: Forget the rosy forecasts of many economists. 2007 is definitely a year to adopt a defensive financial strategy to protect your wealth, and stay ahead of both recession and continued inflation
