n former Fed Chairman Paul Volcker. A year ago he warned that 'The U.S. is skating on increasingly thin ice... The circumstances seem to me as dangerous and intractable as any I can remember, and I can remember a lot.'"

Whether that thin ice breaks, cracks or holds, says Skousen, depends on seven trends that are driving the U.S. economy. "It's a medley of economic woes," he says, that include:

-- An overreacting Fed, switching from "easy money" to "tight money." The Fed has been a major source of instability in the financial system. For example, Greenspan was chairman for 19 years, and switched policies seven times! The Fed often overshot its target on both ends - raising interest rates too high in 1989, 1994, and now, and pushing them too low in 1992 and 2003.

-- Inflation and structural imbalances. The Fed's "easy money" policy caused in part the "irrational exuberance" of the tech stock market bubble in the late 1990s and the real estate bubble in this decade. When the bubble bursts, as it inevitably must, the effects aren't pretty.

-- Poor consumer/investor finances. Our government policies promote overspending and undersaving on a massive scale. The saving rate has turned negative, and household debt as a percentage of disposable income is at a dangerous level, exceeding 150%. (See chart below.) http://www.investmentu.com/bin/q/c/householddebt.bmp

-- A vulnerable financial/banking system. We live in a global laissez-faire financial system that is highly leveraged with debt financing, derivatives and fractional reserve banking. Hedge funds are not really "hedged," but highly speculative, and another collapse along the lines of Long-Term Capital Management in 1997 could be disastrous.

-- Trade deficits and out-of-balance capital flows. The trade deficit is at record levels. To make up this imbalance, foreigners must invest $2 billion a day in the U.S.

-- Overburdened federal debt levels, unfunded liabilities and rising interest rates. The Senate just raised the national debt ceiling to $9 trillion, representing 70% of GDP. Interest expense is now the third-largest category of the federal budget, only exceeded by defense

spending and domestic welfare expenditures. Imagine the impact as interest rates start climbing again.

-- The rising cost of war/natural disasters. Last year, we faced a large jump in the deficit as a result of the rising costs of the war in Iraq and the expenses related to the Gulf hurricanes.

"It's easy to get carried away with disaster scenarios," says Skousen. "Don't ignore the fact that the stock market is currently at a four-year high. The single indicator I use to monitor global instability is the price of gold. If it spikes upward, we're in trouble."

Dr. Mark Skousen is an economist who has taught finance and economics at Columbia Business School, Barnard College at Columbia University, and Rollins College in Winter Park, FL. He recently was nominated Chairman of Investment U, and editor of the organization's free educational financial e-letter with more than 275,000 subscribers. For more information about our editors, or to set up an interview, please contact Juan Munoz at 410.223.2693 or jmunoz@investmentu.com, or visit http://www.investmentu.com.

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