from Lew

Presidential election years usually are not recessionary but next year
will be an exception. Several economic factors are colliding in an
almost perfect storm to markedly slow the general economy and the stock

The most important signal flashing recession is, of course, the
sub-prime mortgage fiasco. After years of monetary inflation on the part
of the Federal Reserve, individuals and families with poor credit were
suckered into low-down-payment/low-interest adjustable mortgages that
simply cannot be maintained or repaid under current conditions. Their
incentive is to sell the property quickly before their equity evaporates
and/or the financial institution repossesses it. Yet the massive
oversupply of homes and condos for sale has pushed prices down at a
record clip and made additional foreclosures even more likely. Next
year, unfortunately, will be the Year of the Auction. Back to 1929
Assetts 5c on the $

The financial institutions have also been punished…well sort of. Various
institutions including hedge funds that hold these poorly performing
debt obligations have been forced (by accounting rules) to "write down"
the value of these assets, take huge paper losses in the bargain, and
pull in their financial horns. Thus, any near-term recovery in housing
must now fight a record supply availability, falling prices, higher
insurance costs and restricted credit…a near-term impossibility in my

Moreover, the slowdown in residential and commercial construction will
send secondary ripple effects throughout the economy. Laid-off
construction workers don't spend money. Construction and home furnishing
suppliers sell less output and make fewer investments. Even local
governments will be pinched by declining property-tax assessments and
fewer developer fees. Things are likely to get worse before they get any

The second major factor indicating a near-term recession is the sky-high
price of crude oil and refined product. Pushed upward by world-wide
speculative Mid-East war fears and increases in demand (especially from
China), increasing energy prices act as an inflationary "tax" on
domestic production and consumption throughout the market economy.
Higher costs of production will lower profits; higher prices will reduce
some consumption. The only good news here is that any substantial
economic slowdown in 2008 will eventually moderate the price of oil and
other commodity prices as well.

The third factor in the current recession scenario – and the real wild
card – is the continuing decline in the value of the dollar in
international money markets caused by our Iraq blunder and the Federal
Reserve–generated oversupply of dollars. Some economists would argue
that a devalued dollar is good for U.S. exports, and thus positive for
the economy as a whole. I disagree for three reasons.

First, the bulk of crude oil purchases takes place in dollars; a falling
dollar translates into still higher crude oil prices. Second, the U. S.
dollar is the major reserve currency of the international monetary
system and dollar-paying investments (such as U.S. Treasury bills and
bonds) are held in massive amounts by foreign banks and governments.
Dollar devaluation makes these investments less attractive and any
disinvestment in these areas would sharply drive bond prices down and
increase interest rates.

The third reason why dollar devaluation makes recession more Be real
This Fiasco has been Planned for many years as are ALL the Financial
"Crashes" likely is that it effectively prevents the Federal Reserve
from pushing U.S. interest rates much lower. Any additional Fed easing
(inflation) would be seen as a signal of even further future dollar
devaluation and even higher dollar prices for oil. Unfortunately, we
will not be able to "inflate" our way out of this recession this time.
We will simply have to take our lumps and let market forces liquidate
the bulk of the malinvestments caused by the unprecedented Greenspan
money bubble. This liquidation process will not be pretty but it is
necessary to restore a sustainable economic recovery in the years ahead.