An unprecedentedly high degree of leverage in the financial sector and money center banks in off-and-on balance sheet leverage, using complex instruments so divorced from their underlying assets, that the banks themselves lost confidence in the very system they had created. This leverage of about 40:1, (the greed factor), in contrast to the socially optimal leverage of 10:1, caused instability in the world wide financial structure.
THE RESULT: THE GREAT RECESSION OF 08, 09,….
The downturn in the US quickly developed into a world wide collapse of World GDP from a rate of nearly 5% in June 2008 to -0.5% in winter 2009. Now the worlds economies are growing at about -1% or even less.
Earnings in world equity markets crumbled, global trade has decreased by nearly 10%,
Excess capacity is rising in almost all manufacturing sectors globally by 8 to 10%.
A severe world wide recession begins.
Unprecedented growth of Federal debt aimed only at bank bailout, over extends itself without sufficiently stimulating real underlying growth.
Unreliable numbers on the measurment of the resession, such as: u-2 unemployment vs. u-6 unemployment, GDP calculations which do not reflect the effect of the recession and economic data posting worst than expected results being revised, after the fact.
Banks have now been re-liquidified by the government bail out but refuse to lend money, prefering instead, to speculate in the equidities markets. Government bailout money created to help citizens and our tax money, is being used to speculate and drive up the equity markets, creating a false sense of recovery.
“To Big To Fail” banks tighten their strangle-hold on the treasury, this stiffles any meanifull reform of the Fed., the banking system or the regulators.
“Cash For Clunkers”, an extension of unemployment benefits and a first time buyers credit for homeowners. Thank’s for the crumbs.
Junk bonds, junk CDO’s, junk mortage paper and junk companies being absorbed into the structure of the federial government creating a potential for future federial instability and extending the recession as the government runs short of options.
No new money will be created as strong resistance builds to any new stimulus monies being created, to actually resolve underlying growth issues.
Attempts by the Fed. to withdraw money from the system will meet with resistance causing interest rate instability and interest rates will rise. By the way, interest rate are already on the rise, look at Corprate debit instruments.
The huge federal defict’s going forward will destroy any growth created as a result of the stimulus. The need to service this debt will be greater than the growth the stimulus delivered resulting in mutated, stagnate growth in a raising interest rate enviornment. GDP will falter.
The dollar will fall, gold will rise to its inflation adjusted old 1980 high of $2600/oz.. All comodities tied to the US dollar including oil, will remain subbornly high, exasorbating inflation and growth.
As protracted stagflation takes hold in 2010, American’s will realize, too late, that their standard of living , in real dollar terms has been permanitaly destroyed.
A move to remove the US dollar as the defacto world currency, and substute a ‘basket’ of currencies, will succeed.
An attempt will be made after the mid-term elections to solve these now systemic problems by ending entitlement programs. SSI benefits will be curtailed and Medi-caid and Medi-cal will be dismantalted. Welcome to the dismantling of the middle class.
I should add: China’s GDP becomes #1, we struggle to hold #2 against India, Brazil and Russia.