CHESSNOID

The US economy has already begun to tighten its belt around the credit markets. We have a subprime mortgage meltdown on the horizon. The federal reserve has stepped in by lowering the current interest rates, but it doesn’t address the real problems on the horizon. Next year we have a ton of adjustable rate interest only mortgages converting to current market rates fully amortized mortgages. I think some economists and analysts are giving everyone a false sense of security by saying we have resolved the issue and put it behind us. We do hear housing foreclosure bust stories now on TV everyday, but it is just beginning. Great in depth analysis of the US housing situation can be found at Dr. Housing Bubble which has been accurate with most of his assessments.

When the federal reserve adjusted the rates to help cope with our internal economic problems caused by our housing crisis, they inadvertently set off in motion a domino effect of other country’s currencies. We have good economic relationships with these countries right now, but as their economies are affected by the U.S.’s actions, they may not be able to help support our deficit spending. If the US federal reserve actually cuts the rates again, then other countries will not have incentive to keep buying dollars because they would be losing money in the transaction. According to CNNMoney:

Weakness in the dollar means prices of imported goods, particularly oil, will go up, raising the risk of inflation. American consumers will be paying more soon, with the looming threat of paying even more later on.

“The inflation risk from higher import prices will be the dominant initial effect,” said

Howard Chernick, an economics professor at Hunter College in New York. “The most immediate effect is imports denominated in dollars — mainly oil. We already saw a spike in oil prices. So a bit down the line, that’s 10 to 15 cents more per gallon of gas at the pump.” A weaker dollar can help narrow the U.S. trade deficit by making America’s exports more affordable abroad.Yet it could also make funding those imbalances more difficult. The U.S. has to attract billions of dollars a day from foreign investors, and a weakening currency makes dollar-based assets less attractive because of the consequences it can have on their long-term value.

In the next 6-12 months, the largest number of US subprime mortgages reset to become fully amortized which will increase the total foreclosures to an all time record high. The federal reserve will have to make a decision to soften the blow by lowering the rates again. In doing so, will they have to punish and hurt other countries globally?

According to Forbes:

US housing prices and sales are showing no signs of stabilizing and credit markets continue to be stressed as banks move to reduce risk.

‘Accordingly, there ought to be a higher probability today that a rise in the cost of capital and falling credit provisioning will do damage to the broader economy,’ he said.

UBS research suggests that recent financial shocks, if they continue for much longer, would probably have broader and deeper implications for the macro-economy.

5 years ago, the federal reserve had lowered interest rates to their lowest levels in 50 years which help drive up the market boom to impossible numbers and basically made thousands of homeowners to real estate millionaires. This is turn lead to real estate speculation that many housing panic bloggers describe as a ponzi scheme coming to an end.   Now, we see many paper millionaires about to lose their houses.  Truly, our economic outlook doesn’t look good as our ship sales into the subprime iceberg 6-12 months out on the horizon. Globally, it is even more difficult to assess how other countries will be affected since we don’t know if the federal reserve will continue to try to manipulate the natural flow of the business cycle.