The current USA Financial Scene as 2008 Begins
We begin 2008 with major financial disturbances at work in the USA. The share prices of domestic corporations are in down trends as are the prices of real estate. Bond prices are stable. Commodity prices have been rising up to the end of 2007. The value of the US dollar relative to other currencies has declined through most of 2007. The level of USA economic activity has stopped growing and it, aggregate real wage compensation, and the number of jobs in the USA have all begun to decline. And, if more bad news were needed, our financial institutions have announced that huge numbers of financial contracts are going into default. The only certainty is that the USA has ended the expansion phase of the short term liquidity cycle which is also referred to as the business cycle.
The short and Long of Financial Forecasting as 2008 Begins
Please go to the Interest Rates click spot in the main menu for this site. Click on interest rates. Once you see the interest rate choices to investigate, click on the 5 year interest rate choice. You will then see the history of interest rates on the 5 year maturity USA government bonds over the last 50 years. Note the decline of the 5 year bond's interest rate form 18 percent in 1980 to 2.5 per cent in February 2001 and again in February 2008.
Of all things to remember about the financial history in the USA from 1980 to 2010, that chart shows the most important one, the factor that overrides all others. The fact is that interest rates fell to one seventh the amount that existed when the period began.
As a result, the dollar cost of borrowing $7.00 in 2008 remained equal to cost of borrowing $1.00 in 1980.
As a result, USA house prices rose 7 times from 1980 to 2008.
As a result, USA bond prices rose 7 times from 1980 to 2008.
As a result, USA stock prices rose 7 times from 1980 to 2008.
As a result, Prices of production equipment rose 7 times in the USA from 1980 to 2008.
As a result, the amount of debt carried in the USA rose 7 times from 1980 to 2008.
And so forth and etcetera.
What Can We Look Forward to in the USA in the Years Beginning With 2008?
Consider the Period from the Start of 2008 to 2050 in the USA.
Let Us Start with the USA Dollar.
The Value of the USA Dollar Goes Down Relative to Foreign Currencies and Internationally Traded Commodities and Goes Up Relative to USA Domestic Assets.
Foreign Currencies and Commodities to Rise in USA Dollar Amounts from 2008 to 2050
Please note that a commodity like gold, silver, copper, wheat, oil, and etcetera, which is traded in all countries is in effect a currency. It is a value storage unit and can be traded at any time for any other commodity or currency.
An upswing in the US dollar prices of foreign currencies and internationally traded commodities began in 2003 and has continued up through February 2008. This trend should continue with some undulations due to USA short term business cycle influences until 2050.
USA Domestic Assets Like Real Estate, Labor Hour Units, US Company Stocks and Dollar Denominated Bonds to Fall in USA Dollar Measurements While the USA Dollar Itself Falls in Terms of Foreign Currencies
USA real estate to fall in term of the USA dollar
Real estate USA dollar values will fall in half by 2050 and to one quarter when measured in terns of strong foreign currencies like Swiss Franks. Also, the bigger the house, the bigger its percentage fall will be in USA dollars and strong foreign currencies. The beginning of this value decline is already severe as of March 2008. The high water mark for USA real estate prices in USA dollars was set in late 2005. As of March 2008, prices of small houses are down 10 to 25 per cent and prices for large houses are down 20 to 50 per cent.
Some history of USA dollars paid for USA houses may help to point out that history is even more startling than the above forecasts seem to be. In 1895 a 1,600 square foot 2 story row house in Sidney street on the south side of Pittsburgh, PA cost about $1,800.00and carried no mortgage. S mill worker could save up the money to buy one. These houses rented for about $6.00 per week.
In 2005 these row houses sold for $320,000.00 and carried 90% mortgages. The price increase over 100 years was 125 times in USA dollars. There were no mill workers left in Pittsburgh by 2005. The south side row house were bought by 2 wage earning families with help of huge mortgages. The next question is who is going to buy the latest owners and their bankers out?
Look at the data from Cleveland, Ohio and Detroit, Michigan and you will conclude that the answer in no one. The current owners and their banks are going to take the hit as computers and internet combine to reduce to number of office jobs just as foreign works and new production equipment took out the mill worker jobs in the 1950 to 1990 period.
Home prices are crashing in 2008 and will continue to do so as they did during the 1935 to 1965 period but even more so as interest rates in USA dollars increase due the huge foreign holdings of USA dollars in the face of large USA trade deficit balances.
Larger houses and those in remote locations may have their disposal values driven to zero by 2035. This happened in the Berkshire area of western Massachusetts and in other vacation home areas in the USA in the period from 1935 to 1965. Many large or vacation houses were donated to churches for the donation value that could be used to reduce income taxes while ending local taxes
On page 153 of a book written by Robert R. Prechter, Jr, titled "Conquer The Crash" and published in 2002 by John Wiley and Sons, Ltd a graph is presented showing the relationship of USA house prices over the years from 1785 to 1990. The source is "Real Estate and Business Cycles" by Fred E. Foldvarv 1991 Internet and the Federal Reserve.
The graph highlights period of sharp declines in real estate prices. The last sizable collapse was in 19333 to 1934 when prices fell more than half. If a 70 year long cycle is added to 1934, a long cycle repeat can be expected in 2004 to 2008. A further examination of the chart shows that house prices stayed at or below the 1934 high for 20 years. If the process repeats, a bottom could occur in 2008, at least in small houses in well located areas. Please see the real estate section of this site for more real estate analysis ideas.
USA hourly labor rates will fall in half for the vast majority if domestic employees by 2050.
USA dollar price to earning ratios for USA domestic companies will fall in half by 2050.
Interest rates both paid and charged on USA dollar based long-term debt including government issued bonds will double or more by 2050.
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