2008: Darkening Clouds
By Dom Armentano
Rockwell" -- -- Presidential
election years usually are not recessionary but next year will
be an exception. Several economic factors are colliding in an
almost perfect storm to markedly slow the general economy and
the stock market.
The most important signal flashing recession is, of course, the
sub-prime mortgage fiasco. After years of monetary inflation on
the part of the Federal Reserve, individuals and families with
poor credit were suckered into low-down-payment/low-interest
adjustable mortgages that simply cannot be maintained or repaid
under current conditions. Their incentive is to sell the
property quickly before their equity evaporates and/or the
financial institution repossesses it. Yet the massive oversupply
of homes and condos for sale has pushed prices down at a record
clip and made additional foreclosures even more likely. Next
year, unfortunately, will be the Year of the Auction.
The financial institutions have also been punished…well sort of.
Various institutions including hedge funds that hold these
poorly performing debt obligations have been forced (by
accounting rules) to "write down" the value of these assets,
take huge paper losses in the bargain, and pull in their
financial horns. Thus, any near-term recovery in housing must
now fight a record supply availability, falling prices, higher
insurance costs and restricted credit…a near-term impossibility
in my view.
Moreover, the slowdown in residential and commercial
construction will send secondary ripple effects throughout the
economy. Laid-off construction workers don't spend money.
Construction and home furnishing suppliers sell less output and
make fewer investments. Even local governments will be pinched
by declining property-tax assessments and fewer developer fees.
Things are likely to get worse before they get any better.
The second major factor indicating a near-term recession is the
sky-high price of crude oil and refined product. Pushed upward
by world-wide speculative Mid-East war fears and increases in
demand (especially from China), increasing energy prices act as
an inflationary "tax" on domestic production and consumption
throughout the market economy. Higher costs of production will
lower profits; higher prices will reduce some consumption. The
only good news here is that any substantial economic slowdown in
2008 will eventually moderate the price of oil and other
commodity prices as well.
The third factor in the current recession scenario – and the
real wild card – is the continuing decline in the value of the
dollar in international money markets caused by our Iraq blunder
and the Federal Reserve–generated oversupply of dollars. Some
economists would argue that a devalued dollar is good for U.S.
exports, and thus positive for the economy as a whole. I
disagree for three reasons.
First, the bulk of crude oil purchases takes place in dollars; a
falling dollar translates into still higher crude oil prices.
Second, the U. S. dollar is the major reserve currency of the
international monetary system and dollar-paying investments
(such as U.S. Treasury bills and bonds) are held in massive
amounts by foreign banks and governments. Dollar devaluation
makes these investments less attractive and any disinvestment in
these areas would sharply drive bond prices down and increase
The third reason why dollar devaluation makes recession more
likely is that it effectively prevents the Federal Reserve from
pushing U.S. interest rates much lower. Any additional Fed
easing (inflation) would be seen as a signal of even further
future dollar devaluation and even higher dollar prices for oil.
Unfortunately, we will not be able to "inflate" our way out of
this recession this time. We will simply have to take our lumps
and let market forces liquidate the bulk of the malinvestments
caused by the unprecedented Greenspan money bubble. This
liquidation process will not be pretty but it is necessary to
restore a sustainable economic recovery in the years ahead.
Dom Armentano is Professor Emeritus
at the University of Hartford (CT) and the author of
Antitrust and Monopoly
(Independent Institute, 1998) and
Antitrust: The Case for Repeal
(Mises Institute, 1999). He has published articles, op/eds and
reviews in The New York
Times, Wall Street Journal, London Financial Times, Financial
Post, Hartford Courant, National Review, Antitrust Bulletin
and many other journals.
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