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The belief by international investors that the U.S. financial markets, as strong as they are, could never fail, emboldened them to buy US Dollars and any financial instruments that were backed by US Dollars, expecting that the dollar was as good as gold, and that we would always back our currency. But because the US Dollar is no longer backed by gold, there is nothing to back it up with?
Prediction number 1 The world will no longer accept US Dollars as payment in exchange for their oil or other exports. Dumping the US Dollar will accelerate early in 2008, as in the case of China who has already said that they would prefer any currency to the US Dollar.
Prediction number 2 The economy will experience hyperinflation worse than of the Great Depression of the 1930’s and at the same time enter a period of severe stagflation worse than the mid 1970’s.
Prediction number 3 Shortly after the Fed reduces rates to 0-1% in an attempt to reverse the hyperinflation caused by the devaluation and collapse of the Dollar, they will be forced to raise interest rates substantially.
Prediction number 4 The banking industry may be unable to recover from the crisis that began in mid 2007, as Fed requirements will demand substantially larger cash reserves which will effectively reduce the amount of money available for loans to consumers and businesses. In addition, credit card and consumer loan losses will add increased pressure to banks as they are compounded with the write downs on mortgage and real estate loans. Home prices will continue to plummet. I shutter to guess that prices will fall between 25-50% of their peak value in mid 2006.
Prediction number 5 The stock market may fall to pre 2003 levels due to the extreme fundamentals occurring in the rest of the financial markets. The only thing that will keep going up, will be prices and taxes.
Prediction number 6 The holders of the national debt will call in the loans and the Treasury department will have no choice but to print more fiat money, to pay them with.
Prediction number 7 Bank failures will exceed that of 1980’s Saving and Loan scandal, due to borrowers inability to repay mortgage and credit card debt. Even Ben Bernanke thinks “the final cost of the mortgage market meltdown might ultimately reach the level of losses from the savings and loan debacle of the late 1980s“.
By Michael Scoglietti
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