First He Predicted The .com Bubble Burst, Now . . .
This sure gets my attention: “Yale economist and housing expert Robert Shiller warned that ‘the collapse of home prices might turn out to be the most severe since the Great Depression.’ Shiller was the economist who predicted the bursting of the dot-com bubble earlier this decade.”
Plenty of troubling signs on U.S. horizon
By David Crane
The consensus among economic forecasters seems to be that we are headed for a soft landing from the current turmoil in financial markets –- a bit of a slowdown but nothing too serious.
This is the tone, for example, in the latest global forecast from the Economist Intelligence Unit.
But don’t bet on it.
One troubling sign –- the risk of a recession in the United States. In an appearance before the Joint Economic Committee of the U.S. Congress a few days ago, Yale economist and housing expert Robert Shiller warned that “the collapse of home prices might turn out to be the most severe since the Great Depression.” Shiller was the economist who predicted the bursting of the dot-com bubble earlier this decade.
Such a decline would have a spillover effect across the economy through what economists call the wealth effect. It has been estimated that $4 trillion (U.S.) in household wealth would be lost if U.S. house prices fell 20 per cent.
Americans would feel much poorer and this would affect a broader range of consumer spending, from autos and appliances to travel and electronics. Shiller has warned that “we could see much more than the 15 per cent real drop in national home price indices that we saw the last time.” That was between 1989 and 1996.
Another troubling sign –- continued weakness of the U.S. dollar. Indeed, it may be that the recent cut in interest rates by the U.S. Federal Reserve is designed to lower the value of the U.S. dollar and boost U.S. exports while lowering imports. This would protect some American jobs at the expense of other countries, including Canada.
The Canadian dollar is now within reach of the U.S. dollar, the Japanese currency has strengthened, and this past week the euro rose above 1.40 to the U.S. dollar for the first time.
Another bad sign for the U.S. dollar is Saudi Arabia’s plan to break its peg to the U.S. dollar. The Saudis reportedly have $800 billion (U.S.) in their Future Generation Fund and the Gulf Co-operation Council countries altogether have an estimated $3.5 trillion under management.
There are concerns that the cut in U.S. interest rates will discourage foreign investors from continuing to invest in U.S. dollar securities and drive the dollar down further.
In an International Monetary Fund seminar earlier this month, Nouriel Roubini of New York University warned that a U.S. recession was inevitable.
“I expect that this financial turmoil is going to persist and it will be a vicious circle where the real economy gets worse and the financial markets get tighter and vice versa, the tightening of financial conditions leads to a slower economy,” he warned.
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