Don’t Panic. Stop and Think.

(FP’ed 3 AM EDT, September 26, 2007. – promoted by exmearden)

‘Let’s Stop and Think. Who do we ask when we don’t know where to go? The Map. That’s right.’ – Ancient and Wise Philosopher Dora the Explorer.

So I’ve been reading a fair bit of gloom and doom economic analysis on the web lately.  As your Friendly Neighborhood Economic Centrist Blogger (patent pending and Armando, I used it first) who thinks our economic system is so far off ‘center’ it ain’t even funny, I thought I would add my own opinions to the mix. (more)

Caveat 1: These opinions plus $1 leave you well short of a cup of coffee at Starbucks. Amazing, but true.

Caveat 2: These opinions are based off of reading many articles on the subject from various publications over the past few years. I have no definitive links to offer.

Without further ado…

Things I think Will Happen:

Our debt is too high. Our international trade imbalance is insane. Hedge funds have helped to pump up liquidity in the housing market (and therefore house prices) beyond sustainable levels. We have reached or are near reaching peak oil. The dollar is weakening. And yet employment is pretty strong. We are not (yet) in a recession. Other countries have a strong vested interest in avoiding a US recession. Other countries DO NOT want to see our economy collapse. They want to keep their access to our powerful spending habits.

All this leads me to some general conclusions about what I believe will happen:

1) The collapse in house prices will continue for a long time. Interest rate cuts will not be enough to offset the lack of liquidity that has just arrived to the mortgage markets. I expect prices to remain down for 10-15 years. Japan has just exited a very similar situation, and their down market lasted for almost 10 years. I think ours will be longer because of the extreme (historic after adjusted for inflation) highs reached before the sh!t hit the fan.

2) The dollar will continue its current downward trend. This one won’t last as long, but expect to see more sellers than buyers for a few years at least. Note: this isn’t necessarily all bad.

3) Don’t expect the stock market to do much for a few years at least. This could last as long as the housing downturn.

4) We will likely see a recession soon, but it will be relatively short lived (see below for why).

5) Fuel and energy costs will continue to rise. Well duh.

6) Our deficits will force tax increases. There is no avoiding it. Expect these to start in 2009. The only question is who will be hit. PS – Elect a Democrat and it may not be you. This is not a promise based on recent trends, however.

7) Our deficits will force spending cuts or spending freezes for many programs. The weak dollar will force politicians to act on overall spending. They will have no choice.

Deficits do matter. If you look at our total public debt, it is approaching the levels (per capita) seen by Canada and Great Britain in the Reagan years. Back then, the US kept total debt per citizen much lower than many other countries. But when it hit a certain level, other countries saw currency and economic hardships we are now starting to experience. This will lead to government having ‘no choice’ but to enact tax increases and spending freezes mentioned above.

But the weak dollar / high fuel cost / responsible government mix will lead to at least one likely benefit. US manufacturing will become more cost competitive. Business decisions made today to manufacture offshore will not look so smart a few short years from now. International shipping rates will help push the cost / benefit equation back to local manufacturing in many industries. Expect at least a mini-rebound in the manufacturing base. This will shorten any upcoming recession.

And lower housing prices will have some benefits too. People who have been left behind in the equation might have a chance to catch up, if they are lucky. Most importantly, people who keep their wits about them will see opportunities to improve their financial situation, if they are patient and smart.

Things I think Will Not Happen:

The current economic troubles are not indicative of the impending collapse of the US Economy. It is simply too big to die so quickly. As an empire, we may have reached our peak, but we are a long way away from irrelevancy. History supports this assertion. The Egyptian Empire lasted 4,000 years. We are a young (but starting to wrinkle prematurely) 231.

So I do not expect to see:

1) A mass exodus of cash to other markets will not occur. Other countries will balance their future investments, but they will not abandon the US. Why would they? We are still by far the largest consumer population on the globe.

2) Other countries will not boycott US made products or brands. Goodness knows if they haven’t started in the Bush years so far, they aren’t about to start now.

3) Other countries will not avoid feeling the pain of a US Economic slowdown. If you think you can avoid things by moving, think again. Canada in particular is likely to face at least as many problems as the US in the next decade.

As usual, keeping your head in a crisis situation is the best way to go.

OK, that’s all I got. If this information helps you think about opportunities coming your way or at least calms your nerves, then my work is done.

Of course, if I’m wrong, don’t stand in my way during the mad rush for the exits. I have my escape route all planned out.

Cheers.