Growth will slow in 2007 and OPEC will cut oil output if prices drop, how is the USA going to grow?

It amazes me how much people fail to know or take into consideration things outside of the U.S. If Hyronimus was paying attention, he'd see the yield curve has been inverted for most of 2006 and an inverted yield curve is a very accurate predictor of a coming recession (usually about 12 months after the curve inverts).

Then you've got First L saying let the dollar drop and we can export more. Okay. Answer me one question - what does the U.S. make any more? And First has failed to see other things; 1) 70% of GDP is consumer spending, meaning over 2/3rds of our economy is based on us just buying things. 2) The majority of items Americans purchase are imported. A drop in the dollar would make them more expensive thus curtailing consumer spending, thus causing GDP to fall and contracting the economy. The dollar gotten so battered lately that OPEC countries are now looking to to move away from dollar denominated oil transactions to Euros. A further drop in the dollar would cause OPEC to switch to Euro denominated sales quicker, thus prompting many countries to dump their dollar reserves which would cause the dollar to plummet which would push oil prices way up. China has $700 billion on USD reserves, so every 1 penny drop in the value of the USD means China is losing $7 billion. China has already made it very clear that they are going to diversify out of their dollar reserves. That will not bode well for the U.S. as other countries are also starting to shun the dollar. All those dollars will hit U.S. shores thus driving up inflation and most likely prompting the Fed to raise rates.

Days says that lowering rates will cause people to buy more houses and cars, etc. Problem. When the fed raises rates, there is a lag time of about 12-18 months before it affects the economy. The housing market topped in August 2005, a little over 12 months after the 1st Fed rate hike from 1%. Which means the rate hikes of 2006 won't be felt till mid to late 2007. Already the housing market is faltering, how much worse is it going to be when the recent hikes take effect. Also, days has failed to factor in something else. The housing market is what kept the economy afloat after the the stock bubble popped in 2000. Now consider this, according the the BLS (Bureau of Labor Statistics) the average American is making roughly the same amount now as they did in 1972. What that means is that although nominal wages have gone up, real wages of actually gone down. Since 70% of GDP is consumer spending, how then did Americans keep spending? It's called debt. Think about in, when credit cards first came out, only the most credit worthy people could get them. Now, if you have a pulse you can get a credit card. During the stock boom, people spent based on their unrealized paper profits. When the stock bubble burst, the fed flushed the system with liquidity and lowered rates. That caused investors that had money in stocks to take it out and invest in real estate, which caused the r.e. boom of 2000-2005. Real Estate prices rose so fast that people's equities jumped. They then used their equity as ATM's withdrawing something like $3 trillion in equity extraction of the past several years. That's what's been fueling consumer spending. But, now that the real estate bubble has popped and home prices are falling, the equity in their homes are drying up, so they won't have any left to take out any more cash. Now, because of this real estate boom, lending standards dropped and many people that couldn't get a conventional mortgage, now had the chance with ARM loans, interest only loand and Option ARM loans. This fueled a boom in the sub-prime markets, which was the fastest growing sector in the mortgage lending industry. Here's the problem - even if the U.S. lowered rates, it doesn't matter because the majority of sub-prime loans are based not on U.S. interest rates, but LIBOR (London Interbank Offered Rate) which means if the BoE (Bank of England) raises rates, the rates on these sub-prime loans will go up and the BoE just recently raised rates again. These sub-prime loans have a margin of about 5+% meaning that with LIBOR currently in the 5.3% range, a sub-prime borrower is going to pay a minimum of 10.3% when the ARM in their loans reset. This will force a lot of them into foreclosure adding more inventory to the already bloated stockpile, thus pushing down prices and values, thus further eroding equity spreads.

How can the US grow? It can't, it's worked itself into a major mess and only rebalancing can put it back on track (and that rebalancing is going to be painful).

For example, last year Congress passed a bill that required the Treasury to produce accounting reports that were based on GAAP standards, not the usual cash basis. On Dec 15th, the Treasury released it's report based on GAAP. Now, you've probably heard that the National Debt is like $8 trillion. That's based on the old cash basis report. The Dec. 15th report based on GAAP gives a truer picture of our financial position. The cash basis was only reporting current debt. If you take current debt along with long term debt and unfunded liabilites, do you know how much the U.S. is in debt? According to the Treasury report release on 12/15, total U.S. government debt is - get this - $53 trillion. That's just U.S. government. If you take into consideration all goverment debt (federal, state, local, etc.) corporate and private debt, the figures is somewhere around $80 trillion. How are we ever supposed to pay that back?

The US is in a major financial mess and the rest of the world is seeing it. That's why the Treasurer of Australia, Peter Costello, called for Asian countries to move out of dollars. That's why OPEC is moving away from completely dollar denominated oil sales to Euro's. That's why China is converting its dollar reserves to anything but dollars.

The financial storm that's going to hit the U.S. is going to make the Great Depression seem mild in comparison. If we had taken action back when, we may have avoided it, but the U.S. has passed the "fail safe" point and it's going to hit the proverbial fan soon.

You can no longer look at the U.S. in a vacuum, you must take into consideration the global economic situation in regards to the U.S. economy. Because 70% of GDP is consumer spending and because the U.S. doesn't really manufacture anything anymore, we have to import the majority of our goods. The countries that sell us these goods then take all those dollars and buy U.S. securities. Japan owns $750 billion in U.S. treasuries and $680 billion in dollar reserves, China has $700 billion in dollar reserves and $300 billion in US Treasuries. That dollar is in freefall and this in turn affects dollar denominated assets. Do you think Japan & China will continue to hold over $2 trillion in dollar denominated assets as the value of the dollar erodes? I think at some point, they'll have enough and dump their holdings to get out as much as possible before they lose more.

The U.S. is on the edge of the financial cliff. It's only a matter of time before she falls off. I am an American and I love my country, but I am a realist also, and the U.S. is headed for a massive financial collapse.