2006 was a year of economic extremes. Yet despite all the not-so-good, the bad, and the ugly news, through it all the American economy managed to keep chugging along. What will the future hold? A look back at 2006 highlights trends we can expect for 2007.

The most important economic story of the year? There were many to choose from: housing bubbles, dollar icebergs, the euro, gold and black gold; inflation; inverted yield curves and yen carry trades; Ford, GM and the predicted death of American manufacturing; debts and deficits … the list goes on and on.

The biggest among them, however, would have to be …

The Dollar

“Beware the falling dollar,” blared Fortune magazine. “The Dollar Dam Is Breaking,” echoed another publication. From these headlines and others, it is evident that 2006 was not a good year for the dollar, as it fell 8.2 percent against the world’s currencies.

In other words, compared to the rest of the world, on average, Americans lost over 8 percent of their wealth. Against the euro, the dollar got especially pummeled, losing 4 percent just between October and December for a total of 10.2 percent for the year.

When compared with gold, silver, copper, zinc and nickel, which finished the year up 19.8 percent, 42 percent, 44 percent, 121.5 percent and 144 pecent respectively, the dollar got pummeled even harder. The price increases in the metals markets were partly due to increased demand from China and India, two countries whose booming economies continued to zing along.

The cause of the dollar’s weakness, as revealed by former Federal Reserve Bank Chairman Alan Greenspan (who retired in January 2006), is that both private investors and foreign central banks began diversifying out of the dollar (i.e., dumping them before they become worth even less).

What Greenspan didn’t reveal was that another major reason the dollar fell is that the nation’s total money supply was rapidly inflated. In March, the Federal Reserve mysteriously decided to stop publishing its M3 money supply figure, which was essentially the only figure produced by the Fed that showed how fast money was being created.

But thanks to John Williams at Shadow Government Statistics, which has meticulously compiled the data, it is evident that the rate of money growth was accelerated from around an already high 8 percent per year to almost 11 percent.

The growth in money supply was probably a prime factor behind why the November Producer Price Index (a measure of inflation) jumped by 2 percent—the largest monthly gain in more than 30 years!

Yet, against this backdrop of a falling dollar, rising inflation, and evaporating American wealth, both the Republican administration and the Democratic Congress continued to actually call for further dollar devaluation, especially against the Chinese yuan.

Why? In an effort to save American manufacturing, save American jobs, and to reverse the flow of more goods entering than exiting the country (and, consequently, more money leaving the country than coming into the country through trade).

America’s current account trade deficit for 2006 is expected to reach a record $866 billion.

Ford and GM were among this past year’s biggest manufacturer casualties—or was it Ford and GM’s employees that were the biggest casualties? After announcing plans to cut 30,000 jobs and close up to 14 plants over the next several years in early 2006, Ford revealed that it had to put up several of its plants as collateral for its latest loan. Similarly, GM began its earlier announced 30,000 layoffs and associated factory closures. The atrophying auto industry is just one example of the decline in American industrial might over the past two decades.

New Debt Record

Although this is not something unique to 2006, America’s national debt did set another new record this past year. America has spent its way into becoming the world’s most indebted nation. As of December 29, official public debt stood at a staggering $8.68 trillion. But even this number pales into insignificance when America’s actual debt is figured.

In an article titled “U.S. ‘Could Be Going Bankrupt,’” the Telegraph noted that the real U.S. debt including Social Security and Medicare liabilities is now a practically incomprehensible $65.9 trillion—that’s over $219,000 per man, woman and child in America.

“[T]he U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds,” stated a July paper produced by the Federal Reserve Bank of St. Louis.

From Clay Johnson iii, former acting director of the president’s Office of Management Budget, we learn that it probably doesn’t matter how big the actual debt is anyway, because the government will most likely not pay it. Social Security and Medicare do “not represent a legal obligation because Congress has the authority to increase or reduce social insurance benefits at any time,” Johnson said (USA Today, Aug. 4, 2006; emphasis ours throughout).

More evidence of just how indebted America has become comes from the Wall Street Journal, which noted that “for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad” (Sept. 25, 2006).

The reason: Foreigners now own $13.6 trillion worth of U.S. assets (stocks, bonds, real estate, businesses, etc.) while Americans currently own just $11.1 trillion in foreign assets.

If a falling dollar, trade deficits, atrophied manufacturing sectors, and unpayable national debts were not big enough challenges for the U.S. economy, 2006 revealed rumblings of a Japanese threat as well.

The Yen Carry Trade

In March, the Bank of Japan announced it would end its “easy money” policy and begin raising interest rates. Rising Japanese interest rates could have been a blow to the dollar because they would have hampered what is called the yen carry trade, which is simply borrowing yen at low interest rates and using them to buy higher-yielding U.S. bonds, or Treasuries. The yen carry trade has the effect of supporting the dollar’s value. If it were to stop, a major source of U.S. bond purchases would dry up.

The bright spot for the dollar is that this unwinding of the yen carry trade has not yet materialized. Weaker-than-expected economic growth in Japan forced its central bank to halt any interest rate increases. As long as Japan business wallows, the dollar will probably continue to benefit from the carry trade.

Then there was …

The Inverted Yield Curve Mystery

An inverted yield curve occurs when, all things being equal, the yield of long-term bonds falls beneath that of short-term bonds. This is a strange occurrence: Normally investors expect to receive more interest for the additional risk taken when holding long-term bonds.

Although the yield curve first inverted in December 2005, since August 2006, long-term U.S. interest rates have consistently stayed below short-term ones—resulting in a sustained yield curve inversion. The importance of an inverted yield curve, according to a study by the U.S. Federal Reserve Bank, is that an inverted yield curve is the only truly reliable predictor of recessions. In case anyone is interested, the yield curve has missed only two predictions over the past 50 years, and each time that it has been right, recession has followed four to six quarters later. We will let you do the math.

So what would drive bond investors to conclude the economy is going to face a recession?

A Popping Housing Bubble?

2006 leads us to believe that a deflating housing bubble could be one of the big stories of 2007.

Home prices posted a record drop in October, according to Chris Isidore, cnnMoney.com senior writer. Not only did that mark the third straight month for home prices to fall, it set a record to boot. The previous record drop in median home values was in November 1990 at 2.1 percent. This past October whacked that record out of the ball park with a year-over-year drop of 3.5 percent. In November, when home prices fell again, it became “the first time on record that sales prices compared to a year ago have fallen for four straight months” (abc News, Dec. 28, 2006).

Based on these figures, nationwide home prices look like they may have finally ended their long, hard run up. During 2006, rising interest rates and reduced affordability took their toll on home prices, as the many adjustable-rate mortgages that were taken out over the past several years began resetting—forcing their owners to put up “For Sale” signs. Both mortgage payments and foreclosure rates have also been rising across America and look set to increase in 2007.

Some estimates suggest that as many as 30 percent of all jobs created since 2001 have been associated with the housing industry. If housing slows, so will consumer spending and the economy.

A Year of Consuming

In June 2005, the personal savings rate turned negative for the first time since the Great Depression. Since then (19 months), America’s personal savings rate has been negative (meaning that nationally, people are spending more than they earn).

In the season of gift-giving and holiday debt hangover, almost one quarter of people won’t pay off their holiday debt until March or later, according to a Consumer Reports poll. It takes one fourth of each year to pay off just Christmas debt, never mind the fact that the average household is already saddled with $9,000 in credit card debt.

A falling dollar, trade deficits, atrophied manufacturing sectors, un-payable national debts, inverted yield curves, housing bubbles, and over-spending consumers probably doesn’t sound very positive. Yet some economists evidently don’t feel that these issues are a threat, or so they would have you believe.

“Wells Fargo Economists Optimistic About 2007 U.S. Economic Growth,” reads one recent headline. “[F]ears are overblown and the U.S. economy will reveal incredible resilience in 2007,” the article says. Maybe they will be right. The stock market did hit an all-time non-inflation-adjusted high in 2006. But just because the stock market went up does not mean that all is well in the economy, or that it will go up again in 2007.

So maybe the economy will continue to muddle through in 2007. But we at the Trumpet don’t want our readers to have just a muddle-through year. We want you to have a great, direction-filled, purposeful year.

There are ways you can help ensure a happy, hope-filled year and future. Put God, then your family, first. Then work hard and smarter, keep abreast of the news, live within your means, eliminate debt, make sure all your financial eggs are not in the stock market, and don’t forget to give God thanks for the blessings you do have.

The Trumpet may often warn about negative events or trends developing in America, but it is because we don’t want readers to have to face the future prophesied days of reckoning. God will protect you and your family, but it involves living by His way of life. To learn how to live God’s way of life, please request copies of The Incredible Human Potential and The Seven Laws of Success.