Lincoln * Institute

Col. Frank Ryan<br />USMC (Ret.)

Col. Frank Ryan
USMC (Ret.)

President
F.X. Ryan & Associates

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Rebuilding America

Economic Warning Signs

by Frank Ryan
 

The Occupy Democrats have been quick to point out on social media all of the alleged economic accomplishments under President Obama.

Unfortunately, the assessment of President Obama's economic successes is flawed and economically unsound.

A far more severe economic downturn faces America today because of Obama's policies. The next downtown will completely overwhelm the dotcom or real estate bubbles.

There are a series of "warning metrics", a perfect storm of economic indicators, which will serve as an economic barometer of events yet to come. Should the warnings be ignored economic disaster is a distinct probability.

One indicator is interest rates and the trend of rates. Janet Yellen, Chairperson of the Federal Reserve, has indicated that rate hikes are likely this fall due to the improving economy.

Should the Federal Reserve not be able to raise interest rates in October, that inaction will confirm that the economy is not recovering as expected and send shock waves through Wall Street.

Should the Federal Reserve raise interest rates in the fall that too will be a warning because of the immediate impact of increasing interest rates on the federal deficit and federal debt.

Furthermore, if the Federal Reserve raises rates and economic activity declines as a result, the Federal Reserve will again be facing specter of the ghost of 1937 and the European Central Bank ghost of 2011 in which rate increases immediately triggered major negative economic consequences. A "ghost of 2015" will serve as a warning of deflation ahead.

Another warning indicator is oil prices which have declined precipitously since 2014. Should oil prices remain below $70 per barrel level problems for the economy will ensue.

The vast majority of job creation in the United States since 2008 has occurred in the oil-producing states. The last time oil prices decline so precipitously was immediately prior to the housing bubble bursting in 2008.

As with every major industry, extreme volatility in markets and prices has potential catastrophic consequences on an economy. The effect of such low oil prices in our economy is profound.

Commodity prices, particularly for metals, pose another major hurdle for the economy in that falling commodity prices impact employment in mining and manufacturing.

While falling commodity prices may seem to help consumers, the deflationary effects of lower commodity prices increases the likelihood of mine shutdowns and increased unemployment.

The next warning sign is Greece. Should the Greeks actually implement the austerity demands of the European Central Bank, an additional debt crisis can be temporarily avoided. The restructuring of the Greek economy, however, will take decades and austerity measures over that period of time are difficult to enforce. If Greeks reject the austerity measures over time the future of the European Union is at stake and a major deflationary spiral may ensue.

Germany is in a position to dictate terms to Greece. If the European Union eventually caves in to Greece, it is very possible that Germany will exit the European Union with disastrous results for Europe.

The default in Puerto Rico has already occurred which is an economic red light. Unfortunately, this red light is but one of many warning indicators to come.

The next major warning indicator is the city of Chicago. Chicago is not likely to be able to survive without the benefit of bankruptcy. It would be reasonable to expect the city's bankruptcy in 2015 or early 2016.

Any attempted federal bailout of Chicago would be a warning indicator since it would serve as a precedent for other municipal defaults and eventual bailouts for which the United States is unable to sustain such a cascading municipal default crisis.

Additionally, if the Chinese are successful in establishing a major alternative to the US dollar as a world currency, this would be a major economic warning indicator. The Chinese have indicated that they want the Renminbi, their official currency, to replace the dollar as a world currency. The recent devaluation of the Chinese currency has China again calling for a world currency as its devaluation helps to stabilize the Chinese economy.

The significantly lower unemployment rates published by the Bureau of Labor Statistics would seem to indicate that the economy is close to full employment. Unfortunately, as close as it appears that we are to full employment, wage inflation has not begun to surface in most areas of the country. Full employment statistics without pay raise pressure is indicative generally of lower labor force participation rates, higher employee productivity and a deflationary environment with real disposable income either stagnant or declining.

Finally the last economic indicator to be tremendously concerned about is the velocity of money. The velocity of money is at the lowest rate since the Great Depression with the result that virtually all of the Federal Reserve expansionary policy has been for naught. There is a growing body of evidence that indicates that the Federal Reserve's expansionary policies have fueled a stock market explosion rather than economic activity.

Should the velocity of money not reverse itself and begin to expand the probability of deflation in the United States expands exponentially.

So before President Obama or the Occupy Democrats shout out for joy about the economy, they should hope that the economy does not implode before Obama leaves office.

Just as President Clinton left George Bush with the dotcom bubble, and George Bush left Barack Obama with the real estate bubble, Obama will leave the next president with the second Great Depression.

Should all of these warning indicators above turn red, our lives as we know it will changed forever.

Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at FRYAN1951@aol.com and twitter at @fryan1951.