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Everything is well with the US economy.
Recent economic growth figures have surprised on the upside. The housing market is experiencing a soft landing – it must be true, all the estate agents and even Alan Greenspan say it is – and Greenspan‘s heir, Ben Bernanke, has no intention of squeezing the interest rate trigger any harder than he has to.
It’s as if Goldilocks has had the bears evicted and put her feet up to enjoy another bowl of porridge in front of her newly-installed wide-screen plasma television .
And yet, if the good times are still rolling in America, then why are so many Americans falling on hard times?
The savings rate in the US was minus 1% for 2006 as a whole, and has now been negative for 21 months in a row, according to the Commerce Department.
As Ambrose Evans-Pritchard points out in The Telegraph, this is the lowest since “1933, when a quarter of the American workforce was unemployed and whole families were kept alive by charitable soup kitchens.”
So why, when America is in the midst of an apparently never-ending sweet spot, are American families in the same precarious financial position that they faced during the Depression?
The problem is that this ‘sweet spot’ has been sustained by borrowed money, largely off the back of the housing boom, which in turn was triggered by interest rates being too low for too long.
Evans-Pritchard points out that “until last year, Americans were subsidising their lifestyles to the tune of $70bn a month through withdrawal of home equity. This has since dropped to nearer $30bn a month. The shortfall has been more or less covered by the falling savings rate – so far.”
But of course, with the savings rate now negative, there’s nowhere else to go for many in the US. And that’s why sub-prime lenders – those who lend to people who mainstream lenders have rejected – are starting to feel the pinch. It’s little wonder – if you can’t get credit the usual way, even in these days of easy money, then the reality is that you’re almost certainly not credit-worthy.
The number of people reneging on their sub-prime debt hit a ten-year high of 10.1% in November. Sixteen sub-prime lenders have already gone bankrupt. HSBC’s recent woes have included problems at its US sub-prime mortgage unit.
With house prices continuing to fall – despite the protestations of the property industry – Americans will not be able to continue propping up their spending by using their homes as an infinite line of credit.
And as more ARMs, taken out when interest rates were a lot lower than they are now, jump to higher rates, more people will get into trouble.
This all adds up to lower spending; which means lower company profits; which means weaker economic growth; which means a falling dollar and rising unemployment.
And this time – unlike at the start of the Great Depression – people won’t have any savings at all to cushion them when the real hard times come.
Turning to the stock markets…
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In London, the FTSE 100 hit a new six-year high of 6,369 in intra-day trading yesterday as investors flocked to potential bid targets such as the day’s top riser Cable and Wireless. The blue-chip index gave up some of its earlier gains to end the day 28 points higher, at 6,346. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 closed 4 points weaker at 5,676, whilst the Frankfurt DAX-30 was 1 point firmer at 6,875.
On Wall Street, stocks closed slightly higher. The Dow Jones ended the day 4 points higher, at 12,666. The Nasdaq was a fraction of a point stronger at 2,471. And the broader S&P 500 closed 1 point firmer at 1,448.
In Asia, the Nikkei closed 114 points weaker, at 17,292, as the stronger Yen weighed on exporters.
Crude oil was hovering just below the $60 mark this morning, at $59.32. In London, Brent spot was over 1% higher at $58.28.
Spot gold had risen over $4 yesterday and was trading at $654.90 this morning. Silver was last trading at $13.66.
And in London this morning, shares in British Airways jumped by as much as 4.8% following a broker upgrade from Merrill Lynch. In other news, magazine publisher Emap‘s stock had fallen by up to 7.9% afer the company warned that its annual performance would come in at the bottom end of expectations due to weakness in its consumer magazine and radio divisions.
And our two recommended articles for today…
What price globalisation?
– The globalisation of the world economy has brought with it many benefits, but also two significant risks: inflation and protectionism. To find out which of these Niels C. Jensen considers to be the greatest danger, read:
What price globalisation?
The truth about US mortgage default rates
– If most sources show that mortgage deliquencies are on the up in the US, why is Freddie Mac – the corporation which enables greater access to home financing – showing that they’re falling? Because they’re doing all they can to hide the true scale of the problem. For the real picture, see:
The truth about US mortgage default rates