econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 04 November 2015

The End Of The World Has Already Begun

by Bill Bonner, Daily Reckoning

Nothing much to report from the stock market last week. Investors are regaining their calm.

A couple of months ago, it looked as though the end of the world had begun.

We are talking, of course, about the world in which credit, stocks, and central bank reputations only go up.

But after a big fright in August, investors recovered their relaxed madness. They concluded that there was nothing to worry about.

They may be right. You never know. But our guess is that the end of the world has already begun... and they just can't face it.

Disappearing Growth

Since the end of World War II, credit has been expanding in the U.S.

At first, it was a healthy expansion. Young, middle-class families took out mortgages and ran up bills on "charge cards," such as Diners Club and American Express.

Then, in the late 1950s, came the first credit cards. This was accompanied by large increases in consumer credit.

Until the 1970s, all was well, because wages were rising, too. And with so much new technology coming online, people believed their wages could only increase.

Debt was no problem - neither for the nation nor for households. We would "grow our way out of it."

But a strange - and as yet not fully understood - new trend began in the 1970s. After accounting for inflation, incomes for most Americans dramatically tapered off.

The economy was slowing, too, after taking the effects of inflation into account.

At first, this was thought to be temporary - a fluke, perhaps caused by the 1973 oil crisis. But the trend toward lower economic growth continued. Decade after decade, the trend in GDP growth was down. In most parts of the U.S., GDP per person peaked in the 1970s or 1980s.

Remarkably, the average American working man earns less today than he did a half century ago (again, accounting for changes in consumer price inflation).

That is not the same as saying that a person with a good job earns less today than he did in the 1960s. According to Census Bureau figures, the average inflation-adjusted wage for Americans in the top 5% of earners is up by more than 75% since 1967. Women earn a lot more, too.

But good jobs have become scarce. The labor participation rates - the number of people who have jobs or are looking for jobs as a percentage of the people who are of working age - is at its lowest level since 1977.

102015-Labor-Force-Participation

Debt Goes Sour

But although economic growth and most people's incomes slipped, debt (the flip side of credit) kept growing.

This was Stage II - the unhealthy phase of the credit expansion. No longer backed by broad-based wage increases, debt was expanding beyond the capacity of the economy - and borrowers - to repay it.

Now we were asking for trouble.

You may be wondering how this was possible. Why would lenders extend credit to people who couldn't pay back?

The answer: The fix was in.

In 1971, President Nixon dramatically transformed the global monetary system. Under the previous Bretton Woods system, the dollar was backed by gold. And the major global currencies traded at fixed rates to the dollar... and by extension to gold.

This meant a nation couldn't get too far into debt... especially when it came to its trading partners.

Trade surplus nations - which amassed dollars in return for net exports to the U.S. - could ask to redeem their dollars in gold. This caused gold to leave the overspending nation and flow to the creditor nation.

That's how the U.S. got so much gold in the first place. France and Britain spent more than they could afford on World War I. The U.S. sold them food, weapons, and fuel... and demanded gold in repayment.

But by the 1960s, the shoe was on the other foot.


What is the Income Play Rich Investors Love? (Hint: It's Tax-Free)


The U.S. started spending money on both "guns and butter" - a Great Society at home and a war in Vietnam.

Much of the spending to fund the war in Vietnam ended up as dollars in the hands of Vietnamese branches of French banks. And when, in 1965, president Charles de Gaulle sent the French navy across the Atlantic to pick up $150 million worth of gold in exchange for dollars, it was greeted like a long-lost relative at the reading of the will.

Finally, with gold being airlifted from Fort Knox to meet foreign demands for payment, rather than honor Washington's promise to convert dollars to gold, Nixon panicked and defaulted.

Henceforth, anyone holding dollars was on his own...

"Tall Paul" Takes Over

It all would have gone bad very fast. By April 1980, the annual rate of consumer price inflation was running at almost 15%.

Gold soared as high as $800 an ounce. It looked as though Nixon's new fiat money system would go off the rails soon - as all previous experiments with paper money had.

Instead, in 1979, President Carter appointed Paul Volcker as Fed chairman. Volcker stepped in front of the runaway train and commanded it to halt. And it did...

By January 1981, "Tall Paul" jacked up the federal funds rate - the key lending rate in the economy - not to 2%... or 4%... or even 8%. He set it at 19% - and placed the train squarely on the tracks again.

We remember the howls of discontent. Volcker was "stifling the economy," said the politicians. He was "killing jobs," said the newspapers. He was causing "the worst downturn since the Great Depression," said the economists.

But Volcker didn't budge. And when Ronald Reagan entered the White House in 1981, he backed Volcker.

Volcker announced his intention to squeeze inflation out of the system soon after he became Fed chairman.

Bonds - which do well when inflation is low - should have rallied. Investors should have raced to lock in roughly 10% yield available on the 10-year Treasury note.

Instead, bonds price fell... and bond yields rose.

Then, as now, people were not aware - or were not willing to believe - that a major change had occurred. It wasn't until 1982 that the bond market turned; finally, investors realized that it was a new world.

Volcker saved the system. Bond yields - and interest rates - have been coming down ever since.

Too bad he didn't save a better system.

Not many men can resist the appeal of free money. Americans proved they were no better at it than others.

Falling interest rates and the paper dollar gave them a way to impoverish themselves - by spending money they hadn't earned.

They took the opportunity offered to them. They borrowed and spent... and drove the entire world forward at a furious pace.

But now that stage is over.

More to come...

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Opinion


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Joan Robinson’s Critique of Marginal Utility Theory
The Truth About Trade Agreements - and Why We Need Them
News Blog
Apple's App Store Set For 5 Million Apps By 2020
How Can The UK Government Meet Its Legal Air Pollution Targets?
Most Gun Deaths In The United States Have A Tragic Motive
What We Read Today 08 December 2016
Five Mysterious Space Diseases That Could Kill Astronauts Before They Get To Mars
03 December 2016 Initial Unemployment Claims Rolling Average Insignificantly Worsens
November 2016 CBO Monthly Budget Review: Down by 3 Percent in the First Two Months of Fiscal Year 2017
Putting Grassroots Terrorism In The Proper Perspective
Crude Oil Prices: "Random"? Hardly. The More Emotional The Market, The More Predictable It Is.
Infographic Of The Day: Job-Hopping
Early Headlines: Asia Stocks Up, Oil Firms, Russia's Big Oil Deal, Trump Will Stay In Business, Trump Menaces Drug Cos, Banks Rig Silver, Italy's 360B NPL, Iraq Has Oil Cut Problem, China Trade Improves And More
Goals Come With A Hefty Price Tag At The Emirates
Facebook Strongest On Home Ground
Investing Blog
Investing.com Technical Summary 08 December 2016
Trumpsternomics And Economic Growth
Opinion Blog
The Global Financial Mess Is Due To Political Failure
Italy Confronts The European Elite
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
08Dec2016 Market Close: Wall Street Closes Higher, But Not Without Pause For Indicators That Spell CAUTION In Capital Letters
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved