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DynamicTrends.com
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Inflation and the Doomsday Economic Downward Spiral |
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I believe I am coining a new phrase here. I call it the Doomsday Economic Downward Spiral, because it may be doomsday for our current economic system due to a downward spiral of the U.S. dollar, the stock market and the steep recession we are now entering. (Read our other financial articles to discover the root cause of this phenomenon.) The middle class is currently dealing with resetting mortgages, rising health care costs, college tuition, and sky high energy costs while depending on credit cards to stay afloat. Now, banks are resorting to sudden rate hikes and fee increases to cover their own losses in the mortgage market. Over the next five years, it is expected that about $1 trillion in adjustable rate mortgages will reset nationally, the bulk of which will occur during 2008 and 2009. Massive foreclosures over that period will generate less property tax revenues needed for support services such as fire and safety services, schools and social programs in local communities. The spiral effect of the foreclosures will affect other homes in the area in two other ways. Many homeowners will not be able to sell their overpriced homes at all and even if they can, they will get much less and in some cases, less than the mortgage balance. Homes that were purchased prior to 2001 are safe from this phenomenon, provided the homeowner resisted the temptation to borrow against the equity during that period. As the recession grows in strength and longevity and inflation spirals upward the real estate crisis will expand, the job market will tighten severely and people will spend substantially less on the goods and services that can keep the economy afloat. All in all, this scenario will mean less taxes to local economies, state economies and the Federal Government. Wages on average have not kept pace with inflation since at least 2001. An in depth analysis shows that in the Midwest, median hourly salary is about $14.81 for men and $11.81 for women. Average annual income for a working couple is about $45,786 annually and $25,177 annually for a single male. However, debt has not declined over the same period. It has actually increased. The average mortgage annually is approximately $16,824, while credit card debt stands at about $9000 and other loans, such as personal loans and loans for education equals about $2,826 per year. Monthly payments for these three items is approximately $1,870. Now add to that everyday living expenses such as food, clothing, transportation etc. and you can easily see why the real estate crisis will drive this economy over the edge. As the Federal Reserve grapples with whether they should raise or lower interest rates, you should know how exactly each action would affect the economy and your job. Raising interest rates is used to slow the economy and fight inflation by removing money from the supply chain, while lowering interest rates is designed to jumpstart the economy or re-inflate the economy by increasing the money supply. If you look at the overall economy right now, you’ll see that we need to cut interest rates in order to keep the economy from getting worse (stimulate the job market and real estate markets), but we need to increase interest rates to slow inflation. As mentioned in previous articles, this puts the Federal Reserve between the proverbial rock and hard place. The way I see it, in order to end The Doomsday Economic Downward Spiral, the Fed must increase interest rates to stem inflation before it gets out of hand and let the cards fall where they may. This will also allow the U.S. dollar to increase in value and ease the inflation being experienced around the world by those who’s currency is supported by it. If the Fed lowers the interest rates further, the dollar will continue to fall and will then be in danger of becoming worthless both here and around the world. This will lead to hyper-inflation unseen since the 1920’s and 1930’s. By Michael Scoglietti
DynamicTrends.com - Financial Forecasting
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