US Economy -- Year 2005 and Beyond

November 5, 2004

“Economic Forecast for the US Economy for the Year 2005 and Beyond.”

By: Ricardo C. Amaral

If you have been reading most of my articles, then you know that I am very pessimistic about the direction that the US economy is taking.

In my opinion we are heading for a worldwide depression, probably even worse than the depression of the 1930's. The US economy is heading south and it is picking up speed.

The Bush administration's policies are a sure bet for a new economic depression. I have no doubts about that. We have a very weak economic team running economic policy in the United States today.

Here are my predictions for the year 2005 and beyond for the US economy:

1) The US dollar should decline further during the year 2005 at least to the range of:

US$ 1.50 - US$ 1.60 equal 1 Euro.

2) Gold should increase in price from the current $440 price to around to $ 500.

3) The stock market should decline in the next 3 to 4 years in the range from 30 to 50 percent from current levels. (There are many reasons for that decline to become reality.)

Market closings for November 5, 2004:

Dow Jones - 10,388

Nasdaq - 2,039

S&P 500 - 1,166

Market will trade in the following range in the next 3 to 4 years:

Dow Jones from 7,300 to 5,200

Nasdaq from 1,400 to 1,000

S&P 500 from 800 to 600

4) The real estate bubble will burst in the near future when interest rates starts rising to higher levels. Housing should lose in value from 25 to 40 percent depending where the real estate is located. (The actual price of real estate will decline in real terms, since inflation is very low)

5) To stabilize the US dollar decline, the US Federal Reserve will need to raise the Fed Funds rate to a level between 4 and 5 percent by the end of 2005. As the US Federal Reserve increases the Fed Funds rate at this fast rate, the US economy growth rate will decline accordingly; in turn helping the implosion process of the US economy.

6) Outsourcing American jobs to foreign lands will help the implosion process of the American economy. It is open season on American jobs, and millions of American jobs are leaving the US for cheaper labor places. Americans want equality, in terms of wages, equality is at the 50 cents per hour without company benefits. In the future, Americans will get what they are wishing for.

7) Companies of every size will transfer the responsibility of their pension plans to the US government. Most of the people now receiving pensions from these companies will receive a very large cut on their pension benefits when the pension responsibility is transferred to the US government: Pension Benefit Guaranty Corporation's (PBGC)

These large cuts in pension income will result in a reduction in spending by pensioners, and in another important negative trend to affect the US economy in the coming years. (We are talking about millions of retired people here in the US.)

It is pathetic to see a country such as the United States to decline economically so fast. But gross government mismanagement will do it every time.

Without taking in consideration the US government’s usual published misinformation, the real rate of unemployment in the United States should be in the range of 13 to 15 percent, not the fictitious number published every month by the Labor Department of around 5.6 percent. The unemployment rate will increase drastically in coming months and years, as the US economy continues to deteriorate on its race to the bottom.

After reading one of my articles someone asked me: "Are you able to suggest financial refuge for those of us who are small landowners and investors?"

All I can say is that the risks are too high here in the US today. I would not invest any money in the stock market. The housing bubble is ready to burst. The only place that makes sense to park your money is in U.S. Government securities - "TIPS"

Below is brief information about these US government securities. Better safe than sorry.

Cash is king when the S… hits the fan. If you have cash on hand, after a major market decline, then you can pick up the pieces for a fraction of its previous price.

Copyright © 2004 All rights reserved.

By: Ricardo C. Amaral

Author / Economist

brazilamaral@yahoo.com

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U.S. Government Securities - "TIPS" (Treasury Inflation-Protected Securities):

Background

The first issuance of TIPS was in February 1997. Now there are seven years of TIPS history, and the TIPS market, as of 11/30/03, has more than $176 billion, or 4.9%, of the total $3.6 trillion outstanding marketable Treasury debt held by the public. The U.S. Treasury department, under both Democratic and Republican leadership, has assured investors that they are an integral part of the government's debt management strategy. The current Administration's stated policy is to keep the TIPS program in place without a review for change for at least another five years, and has increased the new-issuance frequency from three to four times

How They Work

Currently, 10-year TIPS yield 1.96%. That is 2.29% less than the 4.25% that one will get with a 10-year U.S. Treasury note (the cash bond). The principal is adjusted to inflation and semi-annual interest payments are based on the inflation-adjusted principal at the same time interest is paid. As long as inflation remains greater than 2.3% - the difference between the regular Treasury's 4.25% yield and the 1.96% TIPS yield - TIPS are a bet. Like all U.S. Government securities, TIPS are guaranteed to return 100% of original par value even if deflation caused the principal value to fall below 100 as the Treasury will make up the difference when the principal is repaid at maturity.

Safety

Like all U.S. government securities, TIPS are guaranteed to return 100% of the par amount at maturity, even in deflation.

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