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Year End Predictions

By: Steve Johnson

10/7/2008 - 13 Comments

This article is part of a group writing project over at The Finance Blog Network, we are sharing our predictions for how the remainder of the year will pan out for the economy.  Then, at the beginning of next year, we will see how accurate our predictions turned out to be.

Who Will Win The Presidential Election?

I think the election will be a close one but that McCain will win in the end.  Obama may be leading today, but as the month drags on I think his lead will dwindle. 

The economic crisis is likely to grow so large that it will cause the public to pull away from anything that would add further risk to their future.  And there are just too many questions about Obama’s background and his character that make him too risky to become the next President.

The entire nation will soon realize that we cannot increase the tax on the small business sector.  In fact, we cannot increase the tax on anyone nor will the government be able to create any new programs.  No matter what they are saying today, the next president will need to cut taxes, cut spending and even cut government jobs. The next president will spend the next four year jumping from one economic crisis to the next. 

At the center of the financial crisis, is a political crisis, because the financial crisis was directly caused by a political failure as show is this youtube video.

As the media continues to uncover the cause of the financial crisis, they will expose the failure of the politicians, which will translate into an increase in public anger and lead too many in congress getting voted out of office.  In the middle of the largest financial crisis since the Great Depression, the political crisis could be just what we need to break the party gridlock and allow new party leaders to work together to find solutions to the economy.  Who knows, the new politicians might even start listening to Sen. Ron Paul.

How Will The Dow Fare?

This is of course impossible to predict, but in short - not good.  The reality is that there is about 5-6 trillion dollars of bad loans that American's cannot pay back, when you add up all the auto loans, credit card debts and mortgages.  When all of these losses are eventually taken the Dow could drop all the way to 5,500. 

The bailout will not even come close to enough money to bailout the many industries that are on the verge of collapsing like real-estate, automotive, airline, retail, furniture, homebuilders, health-care and soon to be technology along with many others.  The only thing the bailout will prevent is the market from crashing all in one day, but eventually the market will sink. 

The bailout may prop up the market for the next few months, but I think it’s too late.  The primary factor in market movements is ‘confidence’ and much of the world has already lost confidence in the market.  I think the Dow could close the year at around 8,500.

What About The Unemployment Rate?

Unemployment will continue to deteriorate for several years. By the end of the year it may reach 6.5%.  It may take quite a long time for businesses to realize just how deep of a recession we are headed into because many of them are still hoping for a short recession and don’t want to give any of their competitors an advantage by scooping up some of their best people as sometimes happens in a recession.  Because of this, they are going to try to continue to hold on to as many people as possible for as long as possible.  Although, many industries have already stalled as long as they can.

Will The Bailout Package Be Effective?

Yes, in keeping the banking industry from collapsing – No, in keeping the market from dropping.  After the bailout money has been spent, the government will have a line out the door with industry after industry wanting a bailout.  The government will have to turn them away and let many industries collapse. 

And just when you think it couldn’t get any worse, the after effects of the bailout will start to show up in higher prices as the massive increase in money supply will drive up prices.  The bailout will result in a spiking inflation off food and commodity prices with very little the government can do to reduce them.

What Will Happen To The Dollar?

In the short term the dollar could do fairly well because as confidence around the world is eroding, investors are pouring money in the US hoping that the US will remain the financial leaders of the world and therefore the safest place to store their money.  This line of thinking may hold up the value of the dollar though the end of the year.

As the reserve currency of the world, the dollar enjoys its position making up to 60% of the sovereign wealth funds of the world.  If the US didn’t continue to increase the supply of money through bailouts and other borrowing means, the dollar could stand a fighting chance to remain the leading currency of the world.  But, the government is not willing to face the pending recession and is doing everything to prevent it, even if they destroy the value of the dollar in the process.

When the massive increase in dollars from the bailouts find  their way through the global marketplace, the dollar will lose value.  One of the reasons the dollar hasn’t dropped in the last few months it because many of the major nations are also increasing their money supply just as fast as we are – just like they did in the Great Depression.  The result is that all paper currencies are losing value. 

The price of oil is also related to the dollar. Oil is traded in dollars throughout the world, so when the dollar goes up oil prices go down - as we have seen over the last few weeks.  But, as the dollar looses value, oil prices will rise. OPEC is also a major factor in oil prices, but if OPEC doesn't change the supply and the dollar looses a lot of value against foreign currencies, then oil prices will go up for American and down for other nations with stronger currencies.  

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