Economist Warns U.S. Faces Economic 'Danger'

Tuesday, 24 January 2006 12:00 AM EST ET

This week's edition of The Economist magazine offers an ominous warning for the U.S economy.

"Danger Time for America" - the respected global weekly magazine states, depicting a cover drawing of Federal Reserve Chairman Alan Greenspan passing a stick of dynamite labeled the "The Economy."

The Economist is not given to alarmist warnings.

But the magazine believes the U.S. economy is in for a rocky road beginning this year, and challenges economic optimists' recent sunny predictions regarding the U.S. financial picture. The Economist report mirrors the analysis that has been offered by the Financial Intelligence Report, a publication of NewsMax and MoneyNews. The FIR has been warning investors for some time of the potential economic chaos that Federal Reserve Chairman Greenspan is about to drop on the American economy. For more info Go Here Now.

The magazine targets Greenspan, who will soon retire from the Federal Reserve with most people bombarding him with glowing praise and congratulations for a job well done.

Not so fast, says The Economist.

The publication says: "The economy that Alan Greenspan is about to hand over is in a much less healthy state than is popularly assumed."

While respectfully bowing to the retiring Fed chairman, with a sly wink to "Greenspan's 'exuberant' send-off," The Economist's outlook soon turns dour, both on Greenspan and on the U.S. economy.
 
"During much of his 181/2 years in office America enjoyed rapid growth with low inflation, and he successfully steered the economy around a series of financial hazards," says the article.

"In his final days of glory, it may therefore seem churlish to question his record. However, Mr. Greenspan's departure could well mark a high point for America's economy, with a period of sluggish growth ahead. This is not so much because he is leaving, but because of what he is leaving behind: the biggest economic imbalances in American history."

While the magazine acknowledges that Greenspan "can't control huge economic uncertainties" and "is constrained by limits of what monetary policy can do," it points out that one cannot exaggerate Greenspan's influence over the economy and financial markets.

It is in the setting of monetary policy that Greenspan falls particularly short, The Economist concludes.

"The main reason why America's growth has remained strong in recent years has been a massive monetary stimulus," it says. "The Fed held real interest rates negative for several years, and even today real rates remain low."

The magazine notes that Greenspan triggered two of the greatest bubbles in history, the dotcom bubble of the 1990s and the real estate one the magazine warns is about to pop.

Greenspan's actions have created a domino effect through which American consumers could borrow against the rising, potentially artificial value of their homes to buy plush hot tubs and $5,000 barbecue pits. In this way, Americans have been able to literally consume more than they earn.

And that is leading to a consumer financial environment in which Americans have negative savings rates, a growing burden of household debt and a sizable current-account deficit. [See: Sir John Templeton warns of housing bust - Go Here Now.]

Says The Economist: "Part of America's current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future."

For the present, that means slower growth, weaker job creation and low wage growth.

Citing Morgan Stanley, The Economist points out that over the past four years total private-sector labor compensation has risen by only 12 percent in real terms, compared with an average gain of 20 percent over the previous five expansions.

The U.S. economy during the past several years has been fueled by real estate and related spending - not from an increase in labor compensation which has fueled previous economic recoveries.

"When house-price rises flatten off, and therefore the room for further equity withdrawal dries up, consumer spending will stumble," says The Economist.

"Given that consumer spending and residential construction have accounted for 90 percent of GDP growth in recent years, it is hard to see how this can occur without a sharp slowdown in the economy."

Investors who agree that the United States may be facing economic trouble ahead can prepare by reading the following reports:

109-109

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This week's edition of The Economist magazine offers an ominous warning for the U.S economy. "Danger Time for America" - the respected global weekly magazine states, depicting a cover drawing of Federal Reserve Chairman Alan Greenspan passing a stick of dynamite labeled...
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Tuesday, 24 January 2006 12:00 AM
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