What has brought us to the verge of the first consumer recession in over 25 years, and a financial condition where foreigners are fleeing the US dollar, and respectable commentators, including a major financial house, are beginning to warn of a possible systemic meltdown?
Below I have put together an easy-to-follow series of graphs to describe how we got from a booming, fiscally solvent economy that was helpful to most middle class Americans 10 years ago, to the current mess, and one final picture to sum it all up.
The text is brief, so just follow from step to step in the graphs below.
While the national debt has been increasing in recent years, the budget deficit ($162 billion in 2006) at 1.25% of GDP isn't that bad:
While annual interest on the debt is now nearing $240 billion:
But the trade deficit has exploded and is approximately $800 BILLION a year!:
The addition of 2 billion Chinese and Indians to the global economy has caused demand for commodities such as oil to increase, and possibly together with peak oil has caused a dramatic increase in oil prices:
Fortunately for Americans, foreign central banks have been buying a lot of our debt:
Thus keeping long long term interest rates (on 10 and 30 year treasury bonds) low:
Alan Greenspan lowered interest rates to 1% (essentially giving away money) for almost 3 years, until raising rates wouldn't interfere with Bush's re-election, and then started raising them.
Thus caused a monumental housing bubble:
As housing prices soared, consumers turned to Negative Amortization (i.e., you lose equity in the house for the first 5 years) and ARM mortgages with 2-5 year resets:
But then the housing bubble burst:
Leading to the fancy financial instruments Wall Street put together with these crappy mortgages and sold to the entire world to start unraveling (here's an example of one of these "collateralized debt obligation" (CDO) notes doing an imitation of a cliff-dive):
Causing panic in the financial houses as mortgage lenders such as Countrywide imploded:
Causing the Fed to lower rates to save the financial houses, er, I mean, economy:
Causing the dollar to tank:
Contributing to the continued increase in the price of oil, to over $3/gallon for gas:
Causing consumer inflation to re-ignite:
Causing consumers to pull back from purchasing:
Causing concern of further meltdowns on Wall Street, including such major financial houses as Citigroup:
The spillover of the contagion from one supposedly contained sector, to another supposedly contained sector, to another supposedly contained sector reminds me of something:
Oh. Yeah. That.
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CODA: Here is a comment I made in a diary over a year ago:
I have a theory... (22+ / 0-)
As you know, I won't call anything unless the numbers I watch say so - keeps emotion out of things.
BUT..
It still helps to keep a narrative in my head for how the numbers are likely to develop, and I am beginning to expect the following:
- The consumer sector of the economy (the 'bonddad economy') is in recession right now (or will be imminently).
- Despite that, the 1906 industrial economy (the 'kudlow economy') will continue to grow.
- The growth in the kudlow economy will continue to outweigh the nevertheless-increasing drag of a recession in the bonddad economy (daisycolorado wins her bet).
- This also means that the fed's attempt to tame inflation will fail.
- Thus, the fed will continue to have to raise rates, against its will, to preserve some value in the dollar and combat rising inflation.
- Inflation will not be brought to heel until the kudlow economy contracts (i.e., goes into recession as well).
- The consumer will be in no shape to rescue the industrial economy's collapse, as the consumer did in 2001-2.
- At some point in the next 2-4 years, we have the worst recession since and maybe including 1981-2.
- We have then reached the midpoint of the 60 year kondtrafieff interest rate cycle, and interest rates and inflation will rise in a secular manner for the next 30 years.
It's a narrative, I'm chewing on it, but the more I think about it, the more it makes sense to me.
by New Deal democrat on Fri Aug 04, 2006 at 09:16:37 AM EST
I'd say that we are approaching step number 8, and that only step number 5 has been a bit of a surprise.