By Chris Hamilton, February 2015
This book uses publicly available data from the Bureau of Labor Statistics, Census, Federal Reserve, US Energy Information Agency, Congressional Budget Office, etc. to show a much different reality than what is portrayed by the government, the Federal Reserve, Wall Street economists, and the consensus viewpoint. From identical inputs, I will show stunningly different outputs than the consensus. Throughout this book, I offer graphs and correlations to help put the numbers into perspective. I do not claim to know all the answers nor claim this is an all-encompassing overview of the US or global economy. I only know what the data shows about what led to the financial crisis of 2008 and its aftermath. I also try to put the crisis into a broader context of economic and political developments from WWII ‘til present day. I also make some educated guesses about what may be taking place behind the scenes. Still, not all the pieces of data fit into a neat or tidy narrative…and that is the challenge of viewing reality and the global economy…it is shades of gray that require interpretation. I undoubtedly will be wrong with some of my conclusions but I hope this effort spurs better questions and answers.
I believe that the general public wants to understand what is happening in our economic world and why. I hope those that challenge themselves to read this will gain context on the difficulties we face, have better ability to gauge the effectiveness and durability of the programs undertaken to deal with the crisis, and also have far more questions that require answers; not just of me but also of the federal government, Wall Street economists, the Federal Reserve, and ultimately of ourselves.
- Outline Page 2
- Chapter 1 – Advanced vs. Developing Economies Page 13
- Chapter 2 – US Dollar; Bretton Woods to “Petro Dollar” Page 30
- Chapter 3 – American Economic Scoreboard Page 38
- Chapter 4 – Demographics and Immigration Page 70
- Chapter 5 – Treasury Market Page 79
- Chapter 6 – Debt Ceiling Fiasco – July 2011 Page 85
- Chapter 7 – The “Taper” Page 89
- Chapter 8 – 10k tons of Gold? Math says China could have done it! Page 97
- Chapter 9 – Oil Page 105
- Chapter 10 – Gold Page 117
- Chapter 11 – Resolutions and Solutions Page 125
- WWII claims some 50 million lives in the conflict and simultaneously produces a low birth rate during the war…this is followed by the WWII-Participant Nations’ baby boom over the subsequent decade, and then post-baby boom slowing birth rates across these nations.
- As WWII draws to a close, the victorious nations arrange a new monetary system for the post-war period; the Bretton Woods agreement. The dollar was anointed the world reserve currency and the dollar was to be backed by gold to avoid the US abusing the privilege as reserve currency.
- The US ran a balanced budget for over a decade (from the War’s end until the late ‘50’s) and US had huge economic growth, wage increases, and stable inflation. However by mid ’60’s, government debt began growing and “Great Society” programs were initiated.
- Beginning with the ’69 budget, Johnson’s “Great Society” programs were unfunded in the change to a Unified Budget process. The intent of the change was to co-mingle the Social Security and Medicare surplus’, meant to pay for future benefits, with the general federal budget receipts and outlays…all to pay for the Vietnam war without raising taxes…this was the kickoff of today’s massive unfunded liabilities and subsequent dollar proliferation.
- In 1971 Nixon closed the gold window, no longer allowing the conversion of excess creditor nation dollars to gold. This was in response to the US gold reserves having fallen nearly 60% in less than a decade (20+ k tons to 8,133.5 tons by 1971). The US gold standard (and basis of the Bretton Woods agreement) was abandoned. However, Nixon nearly simultaneously arranged the Petro dollar agreement that all Saudi and, subsequently, all OPEC oil (regardless the buying nation) must be paid for in US dollars and that all importing nations would need significant reserves of US dollars to facilitate this purchasing. The US pledged military and regime support for those OPEC “allies” that honored the petro dollar agreement. This arrangement allowed a conduit to export the massive dollar creation (US debt) globally without the potential hyperinflation in the US that would typically result from diluting a currency or the loss of the dollars purchasing power internationally.
- ‘80’s and ‘90’s were all about credit, “financialization”, and leverage premised on unsustainable consumer and government debt, masking slowing US wage growth…and then the tech bubble, the housing bubble, and now the government debt bubble. US manufacturing employment collapsed despite the US maintaining its place as a major manufacturer and then the “FIRE” (finance, insurance, real estate) economy tanks in ’08-’09. Since, lower quality service sector job creation (primarily part-time and w/out benefits) replace higher quality full time jobs that are lost.
- The following four indented points on banking and derivatives are important but in no way fully formed or inclusive. These are outside my expertise and beyond my scope…so I will mention them here but will not focus on these in my work as others have far better detailed these topics.
- A series of federal banking deregulations from 1980 forward give banks like S&L’s (Savings and Loans) many of the same capabilities of commercial banks but without the same regulations. The late ‘80’s S&L crisis had resulted from among other things, a loophole in the Glass-Steagall act, which allowed “insolvent zombie” S&L’s to offer higher depositor yields paid for by S&L’s investing in riskier, higher yielding loans. The ultimate Resolution Trust Corporation shut down over 700 banks at a cost of $160 billion by 1995.
- But by 1999, Congress repealed Glass-Steagall, the 1933 act meant to separate banks (with FDIC insurance) from riskier brokerage houses (without FDIC insurance). This change allowed commercial banks to operate brokerage houses, putting depositor monies at risk as banks were not satisfied with typical “banking earnings”. The “too big to fail” reality and the “heads big banks win, tails taxpayers lose” business model was fully formed.
- The Big 5 US banks (BofA, Citi, JP Morgan, Goldman, Wells) utilizing VaR (value at risk) models to tie up the least amount of capital / deposits for reserves, allow the greatest possible leverage to maximize their riskier wins, and hedge themselves with derivatives like those offered by AIG so they were “well capitalized” in any negative event. As of Q3 2014, there is $239 trillion in notional derivatives in the US and 80% of that is focused in interest rate sensitive products. 95% of this derivative activities in the US is done by the big 5 banks. Globally, as of June 2014 according to the BIS, there are nearly $700 trillion in notional derivatives contracts with a gross market value of $17.5 trillion…and 80%+ is interest rate swaps and options (i.e., if rates rise, who will have the reserves to pay off all these hedges???).
- Many of these derivatives were insurance
like products…but so long as they weren’t called “insurance”, they were sold
without the oversight of insurance regulators or the collateral
regulations for potential losses.
Often two institutions pledged with one another that if the other
lost a million or a billion or whatever, the cross institution would bail
them out. And vice versa. But without a central clearing house or
regulator to confirm the cross parties did indeed have the resources to
pay the claims…well liars poker was in full flight. Leverage to the “nth” degree allowed
unbelievable profits but unbelievable risks. The $185 billion bailouts to AIG, $45
billion (each) to Bank of America and Citi-Group and $25 billion to JP
Morgan seemed to imply they were not well capitalized or well hedged. I believe great risk still looms here
with false reassurances that everyone is hedged…but my best guess is the
hedges are no better now than in ’08.
However, global total debt to GDP (government, consumer, financial, corporate) continues to ramp…up from 246% in 2000, 269% in 2007, to 286% at years end 2014. Globally, debt continues growing faster than the economic activity it spurs. But, it should be noted that debt growth in advanced economies is coming almost exclusively via government debt…while developing nation’s debt is rising but primarily via consumer, corporate, and financial debt. China alone has quadrupled its total debt from 2007 to present ($7 trillion to $28 trillion primarily via corporate, financial, and household debt and over 50% of all this is funding real estate loans…that’s how you do a bubble!). Net-net, deleveraging simply isn’t happening as the $57 trillion rise (40% increase from $142 trillion to $199 trillion) in total global debt since ’07 or 230% since ’00 ($87 trillion to $199 trillion) should make eminently clear.