US Economic Normality 1945-2019
Updated 3/21/19 Please Share
#1 Rising Income
Normality ended when Carter appointee FED Chairman Volker found higher
interest rates were not enough so he lowered commercial bank
reserves. This quickly pushed the Federal Funds Rate to 20%. Banks would not loan. Two recessions followed. The first cost
reelection and the second, though severe, was over so Reagan was
#2 Increased Foreign Competition
1980's Failing Manufacturing Brings
and Less Financial
Events Causing Financial Instability Causes Great Recession
1980's U.S. and England Returned to Conservative Lax Business Regulation because increased regulation and increased welfare provisions had upset many voters. Think Great Society and lax derivative regulation which result in major increases hostile leveraged buyouts plus and over-investing in Real estate caused. They caused the Savings and Loan Crisis. Think Michael Milken Scandal, Keating Five results from poor Alan Greenspan advise.
1980's Major Investments Banks Went Public creating a need to balance client needs with equity needs. Think expansion of financial industry's share of GDP.
1980's Accounting Standards Declined as accountancy firms struggled to balance commitments to audit standards with the desire to grow their consultancy business. Think off-balance-sheet items and Arthur Anderson Scandal.
1980's Home Equity Loans Increased Current Consumption and Lowered Savings as they replaced equity building home improvement loans. Think many not prepared for retirement.
1983 Reverse Mortgages Approved for FHA loans. Think less retirement savings.
1986 Big Bang deregulates London's financial services industry, other will follow.
1999 Gramm–Leach–Bliley Act Increased Systemic Financial Risk once limited by the Glass-Steagall Great Depression Act. Initiated by Republicans it was signed by President Clinton.
Think financial industry expansion. See Five Bad Bush/Clinton Policies
2004 Uptick Short Rule of 1938 rescinded. Think stock market gambling.
2006 FASB requirement that housing assets be mark-to-market decreased financial system collateral. Action resulted from a 1991 Government Accountability Office investigation of the $160,000,000,000 savings and loan bailout. Think moral hazard.
From Financial Crisis to
Recession to Great Recession to Recovery
Understanding Balance Sheet Recessions
Saudi Arabia 2009
Great Recession Stages
resulted in extreme optimism in good times and panic in bad times. Think
derivatives, securitization, credit default swaps all managed by hedge funds.
2. Savings glut created as emerging countries lowered borrowing and increased trade surpluses after the 1997 Asian Debt Crisis made their foreign dollar dominate debt unsustainable. They expanded trade and kept personal consumption below economic growth. Less consumption and borrowing plus a trade surplus increased Dollar, Euro, and Yen reserves. Like the Petro Dollars in the 1980's this excess savings would be loaned for poor investments (housing).
Think savings from China and Russia and other re.
3. Aggregate demand stagnated as trade surplus countries didn't spend. Germany's 2005 economic renewal was saved and Japan's private sector saved much more after their 1990's credit bubble exploded. Adding to the demand shortage were companies who maintained profit by decreasing capital investment spending despite historically low interest rates. Globalization and technology also helped them maintain profit as wage increases were limited to most valuable employees. State and local governments, especially those with underfunded pension systems, also cut expenditures.
4. Increased current account deficits by wealthy nations balanced world trade. Higher demand for foreign goods was made possible by massive central bank supported low interest loans. The FED's historic monetary expansion was made possible by continued low inflation caused by expanded Flat World competition and low oil prices. Innovative financing and lax financial regulation also fostered expanded financial asset demand. Think excess OPEC savings financed the 1970's Latin American Debt Crisis leading to Savings and Loan Crisis.
5. Real Estate and Stock bubbles came as expected from low long-term real interest rates. New home buyers borrowed surplus savings and investors devoured growing unique debt securities created by an expanding finance industry promising insured difficult to understand almost guaranteed financial instruments. Leverage rose dramatically. Fraud, near fraud and data manipulation exploded as mortgage servicers, banks, and the law firms broke the law to force people out of their homes. See Chain of Title and Brief History of Financial Bubbles.
6. Poor Crisis Management by politicians as their economic advisors believed market capitalism would prevent serious recessions. The Great Moderation solidified this view. Possibility of new financial instrument contagion were not understood. When panic started, political, intellectual and bureaucratic leaders resisted quick action in areas that required cooperation. A US depression was avoided by FED, Treasury and Congressional efforts that were slowed by austerity. Iceland, Ireland, Greece, Spain and Portugal experienced economic depression.
See The Great Recession.
See Bubbles Credit and Their Consequences to see FED analysis of trying to slow down a bubble.
New Normal # 4
History of U.S.
Financial Bailouts and
Bailout History The $700 billion 2008 financial-sector rescue plan is the latest of many bailouts that go back to the Panic of 1792 when the federal government bailed out states over-burdened by their Revolutionary War Debt. Thereafter private banks and investment bankers took over financial bailouts until the Panic of 1907 when the economy was so big that even J.P. Morgan needed U.S. Treasury help. This led to the 1913 Federal Reserve System designed to be the lender of last resort.
Recently the 1987
and Loan Crisis bailout cost about $160 billion.
Other recent government private sector bailouts have included: 1970
Executive Life Insurance Company by states assessing other insurers
Long-Term Capital Management bailout by commercial and investment
Great Recession Cost Was High
New Normality #5 Poverty Rate Stuck
at 15.5%. After "...correcting the
2013 poverty rate for noncash food and housing
benefits, refundable tax
credits, and the upward bias in
the CPI-U ..."the rate drops from 14.5% to
War on Poverty-Was It Lost
Others believe it should be raised as
it doesn't account for geographic and demographics differences.
Poverty Rates How Flawed Measure Drives Policy
Data 2 Think many use true but not
necessarily appropriate data to foster their POLITICAL beliefs.
Example: With our obesity problem how could anyone have believed that many went to bed hungry during the
Great Recession. Calculation ignored food stamps and subsidized
Twenty-first century war expenditures helped profit recover after a dot-com bubble recession, then crash with The Great Recession and then grow to new heights. US Companies have competed very well in a flat world using technology, outsourcing to Asia, Mexico...and by keeping wage increases low. Source Total compensation has done better although Obama Care gave companies an opportunity to again lower compensation. Source More Data 1 Data 2 Think Rust Belt then NAFTA and soon TPP? See How Democratic Failed Workers 11 min Short Term vs. Long Term Returns 52 min
Editor's Note: Competition for US Investment dollars meant business located in US had to compete with developing countries whose R was greater than R from US located companies. Just as said competition lower US worker wages except the return on investment overseas avoided taxes and to some extent measuring of R.
New Normality #7 Wellbeing Growth
1. Society's continued stability has resulted in tremendous economic growth which is the key determinate of well-being. Public safety net, child safety, and adjusted poverty rate have all improved dramatically since the Gilded Age. Think economic continued economic distress in Russia, Europe, Japan and China.
2) Scientific achievements have continuously added to citizen well-being. Think cured diseases, smart phones, streaming audio-video, Gillette Stadium ... See Health Problems Solved.
3) Personal Income increased continuously if not always rapidly because nature and nurture improved the personal characteristics needed to enhance wellbeing. Think Russia, China, and Europe's really slow recovery from the Great Recession. Source Is The Country In Trouble, Will Stagnate Income Hurt Our Children and Recent Decades Ranked By Problems. see Crisis of Capitalism 11:10 video is an interesting Marxian view i.e. Bernie Sanders Return to page 1 Send thoughts to firstname.lastname@example.org
Automation Will Continue, What Will Displaced Workers Do?
Should We Encourage Apple to Assemble Onshore? How?
I. Development of
summarized from Francis Fukuyama: Democracy's Failure to Perform
D. U.S. Failures
at State Building
II. Three main forces are blowing up global politics
Summary from author/editor Walter Antoniotti email@example.com
A Trio of independent disruptions
Social Cultural Apprehensions
contributed to these disruptions.
Disruption modification related to Trump, and
Brexit, power immigrants
A New Normal is in the Making?'America First' has won, by Robert Kagan at NYT.
Saving liberal democracy from the extremes, by the FT's Martin Wolf