The Resilient American Economy and Its Ability to Withstand Turbulence

The American economy is an amazing, complex, flexible, and powerful entity...

The scenario:

Step back to mid-2004. At that time, widespread media frenzy has developed around a highly-regarded psychic...

• She notes in lucid terms that she has seen the future three years hence...mid-2007
• She notes that oil prices are above $70 per barrel and have averaged $60-$65 a barrel for the past 2-3 years. She reports that a gallon of gasoline is now $3.00-$3.75 per gallon in most parts of the country
• She notes that many communities around the nation--particularly on both coasts and in the Southwest--are dealing with weak home sales, declining home prices, an excess of properties to sell, climbing delinquencies and foreclosures, and the highest mortgage interest rates in five years
• She notes that a number of the nation's largest Wall Street firms are dealing with a painful sub-prime mortgage lending market and rising anxiety about which Wall Street firms might follow Bear Stearns with serious valuation problems of aggressive hedge funds
• She notes that the euro, the British pound, and the Canadian dollar are each at record or multi-year highs against the dollar. She notes that gold prices have more than doubled since the summer of 2004, in part tied to anxiety about the U.S. dollar
• She notes that the Federal Reserve is about to end the recent 12-month period of a 46-year low in short-term interest rates. She announces that the Fed will tighten monetary policy 17 times between now (June 2004) and June 2006
• She notes that our ill-advised foray into Iraq has bogged down, with more and more national Republican politicians distancing themselves from a widely unpopular President. She notes that by one measure, the Congress--now under control by the Democrats--has an approval rating by the general public of 14%, the lowest ever
• She articulates a handful of other emotional issues that have risen in prominence by mid-2007, including health care, illegal immigration, global warming, and the future of entitlement spending

Given this laundry list of anxiety and negativity, the consensus view of economic forecasters and the media would no doubt be that a serious recession would soon engulf the U.S. economy, with millions of newly unemployed people, rising inflation, huge budget deficits, and little chance of escaping the economic decline. Financial market players would likely be wringing their collective hands about how this combination of challenges would ravage the stock market...

...not exactly

In fact, U.S. economic growth has been solid. The stock market has set dozens of new highs during the past nine months. The combined net worth of American households has set 17 consecutive quarterly records and now stands near $56 trillion. Budget deficits are declining, while inflation remains under control. Labor markets are extremely tight, with widespread opportunities for millions of people who want to work.

The American economy is an amazing, complex, flexible, and powerful entity...

...exactly