A 3rd wave of foreclosures in the US heralds more bad news for the world economy?

A recent article on MSN Money (link here) by Michael Brush discusses the coming 3rd wave of foreclosures – namely housing distress and foreclosures from prime lenders. These are people who have never come under the banner of  sub-prime mortgagee’s. These loans are thought of as your traditional house mortgage starting with a significant deposit and home owner equity. Economists have been discussing for some time the possibility that these prime borrowers would ultimately come under distress just as sub-prime borrowers have. It would seem that that is now happening.

So what does this mean to the world economy? We are seeing signs that growth in China and India are returning somewhat to previous levels, or so it would seem. The questions remains is that is this growth being driven by underlying demand or the build up of depleted inventory. Once inventory levels return to normal for these companies, growth of any kind will be driven by demand. 

As the US represents almost a quarter of world GDP (reference wikipedia), continued and extended weakness in the US economy, leading to significantly reduced demand, must continue to push down growth rates in all economies, including China and India. Short term stimulus packages driving short term domestic demand will only last so long in these economies.

Further we have the prospect now of interest rate increases in the US. 30 year fixed rate mortgages in the US  are now at 5.45%, up from around 5% in April. This is primarily being driven by concern over the US Bond Market where yeilds have been increasing over the past few months on concern of the US Federal Reserve’s ability to continue purchasing bonds.

There is no doubt the rate of decline in almost all of the benchmarks for the economy is slowing. No doubt they will soon bottom. The question will be however how long until we see real growth again. A turn around to seeing actual growth in employment numbers for example. We then have the specter of interest rate rises being driven by the huge borrowings of governments around the world, immediately stunting any possible growth as it tries to emerge.

So where will this leave us? Some econmists believe that the world ecomony, or at least many of the developed economies, may end up with a Japanese still ‘lost decade’ – long periods of no or very limited growth. Personally I am starting to lean towards a 70’s style era of boom and bust. I can see many economies having an inflation lead boom followed by a series of busts, with quite wild cyclical variations.

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