Sunday, November 25, 2007

U. S. Economy: Trying to Guess What Happens Next

I have been posting for a time now about the economic upheaval that is rapidly overtaking this country. Surprisingly, many people do not yet seem to understand what is happening. Where it will all lead is hard to say, although, I continue to believe that there are some rough - perhaps very rough - times ahead. Best to plan for the worse and hope for the best. This New York Times story ( looks at some of the issues. Here are some story highlights:

How bad could things get? Pretty bad, say many economists. Not so bad that your grandfather’s prescriptions for enduring the Great Depression need dusting off, but nasty enough to force many Americans to get reacquainted with living within their means. That could make life uncomfortable. It may also be an unavoidable step toward purging the United States and the global economy of a major source of instability — an unhealthy dependence on the willingness of American consumers to keep buying even as debt mounts. Concerns that Americans must eventually grow thrifty, leaving factories from Guangzhou to Guatemala City scrambling for buyers, now sows unease around the world.
Some see signs of a worst-case scenario — a severe recession that would feature a plummeting stock market, a lower dollar and the loss of many jobs. That would make for an unpleasant year or two for Americans from most walks of life. It would probably drag down the world economy, as Americans put off purchases of everything from computers made in China to Italian-produced sports cars.

Americans have been buying staggering quantities of goods from overseas using money lent by foreigners. Foreign exporters have been relying on American consumers to keep them in business. For years, this dynamic has made for increasingly lopsided terms of trade: Last year, American imports outstripped exports by $764 billion, with foreigners stepping in to cover the difference.

Cheap credit has fostered another development that was crucial in creating the current state of things: It unleashed a wave of mortgages with exotically lenient terms, such as interest-only payments and no money down. That allowed buyers to take on more expensive homes than they could have otherwise afforded. As home values rose much the way dot-com stocks had a decade earlier, banks offered loans and no-fuss refinancing that allowed homeowners to turn increased value into money. From 2004 to 2006, Americans took more than $800 billion a year out of their homes, according to most estimates. With prices now plummeting and banks savaged by mortgage losses, this artery of credit is drying up. The American consumer, a crucial engine of growth for the global economy, may finally be tapped out.

So, for better or worse, Americans and countries whose prosperity is tied to Americans’ spending are apparently headed into uncharted territory: We are about to find out what happens when the easy money runs out.

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