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Even though sales of existing homes rose for the first time in 6 months, today’s reports on house prices and consumer confidence tell us that the US economy is still in trouble. According to S&P CaseShiller, house prices dropped over 10 percent, the largest decline on record. With the values of homes quickly slipping, it is hardly surprising to see consumer confidence drop to a 5 year low.
The weakness of the housing market spells trouble for the US dollar because housing is the backbone of the US the economy. The Federal Reserve will be forced to reconsider their plans to slow monetary easing.
As one of the lowest paid central bank Governors (if not THE lowest paid), Bernanke’s job is at stake. He can be dismissed by the sitting US President for practically any reason. Therefore he will do all that he can to avert a serious recession in the US economy in fear of backlash from US politicians.
If the US housing market weakens at a time when the slide in the dollar begins to moderate, the US economy could find itself in even more trouble. Over the past 6 quarters, exports have on average contributed nearly 1% to annualized economic growth whereas housing has subtracted slightly more than 1% during the same period. Therefore if the housing market continues to deteriorate and the dollar simply stays at current levels, GDP growth could quickly deteriorate.
That is why the path to a stronger dollar must be through a weaker one.