Summary of the Global Economic Crisis I put together this document for friends and family. I decided to post it in here for anyone interested in this type of info.
Overview
Global system is a debt based system. Global productivity insufficient to pay down debt. System requires ever increasing debt to stay afloat.
Global debt was $140 trillion in 2008 (last collapse). Global debt is now $200 trillion – 43% increase. No end in sight.
The $60 trillion increase in debt has produced very little productivity growth.
The new debt, and also money printing, reflated the bubbles, temporarily.
No solid foundation.
Severe deflationary pressures will lead to more rounds of money printing in the US, eventually.
All regions in the world, including the 4 largest markets (US, China, Japan and Euro Zone), are feeling deflationary pressures.
Increased devaluation of currencies will eventually lead to high inflation and potentially hyperinflation in some instances (where the currency of the country is completely wiped out, similar to 2008 Zimbabwe, 1923 Germany, 1946 Hungary, 1994 Yugoslavia).
Lead Up to 2008 Crash
*low interest rate environment
*technology/internet bubble burst in 1999/2000
*9/11 terrorist attack in 2001
*US Fed moved the Fed Funds Rate from 6.5% in 1999 to 1.0% until 2003
*a massive housing bubble was created
2007 Subprime Crash
*the Fed tried cooling the housing bubble by increasing interest rate from 1.0% in 2003 to 5.5% in 2006
*the subprime market crashed - people with poor credit
*subprime borrowers couldn`t handle an adjustable rate environment much beyond 1%
*it took a year before the contagion spread from subprime to the prime market
2008 Crash
*prime market collapsed in 2008
*the global system is entirely dependent on new debt and rolling over existing debt
*the collapse resulted in banks no longer trusting other banks, thus interbank lending froze up completely
*prolonged freezing of interbank lending would have resulted in many banks and many corporations wiped out
Reflating the Bubbles (after 2008 crash)
*the US Fed printed (countless) trillions of dollars for bail out purposes
*the Chinese increased their debt by $20 trillion (includes both private and public sectors)
*Japan is still printing $58 billion per month – has been a complete failure, as Japan is about to enter into a triple dip recession
*Euro Zone is still printing $67 billion per month – has been a complete failure, with only a 1% growth rate (and still huge debts and unemployment) to show for the efforts
US Bailout
*the Fed restarted interbank lending by injecting cash into the banks
*the Fed stepped in to buy up toxic mortgage-backed securities (there were no buyers prior to the Fed ) – 7 yrs since the collapse and the Fed still holds $4 trillion of these on its books (the plan was to sell them back into the market after 1 year, but the system clearly cannot handle it, even today).
*the Fed stepped in to buy up treasury bonds (due to lack of buyers) otherwise the bond market would have collapsed
*the Fed sent trillions of US dollars to many countries around the world, as currencies all over the world was being severally devalued by the artificially strong US dollar
Further Steps by US
*the Fed lowered the 5.5% Fed Funds Rate to essentially zero % – they have been stuck at zero for 7 years, as the economy hasn`t healed
*typically, they go to as low as 1% (never zero) and they only leave low for a maximum of 6 mths (not 7 years)
*it is believed that US $9 trillion went into other countries worldwide (especially the emerging markets, like Brazil) and created massive bubbles (including housing and oil bubbles in Canada)
Steps by China
*China became the commodities consumption engine of the world by spending the $20 trillion of new debt
*the Chinese debt artificially reflated the bubbles, especially in emerging markets
*the Chinese created dozens of new cities, which consumed about 50% of the world`s raw materials
*the initiative was flawed and these cities now sit idle with no people – they are now known as ``ghost cities``
*over the past year the Chinese gov`t initiated a new plan, which involved getting their people to invest in the Chinese stock market in order to prop up the failing Chinese companies (with huge debt)
*this initiative was flawed also, as it created a massive bubble and has since collapsed
Possible Triggers for the Next Collapse
1) The US Fed is trying to increase the Fed Funds Rate from essentially zero. The system cannot handle it – increased rates could strain the system immediately or could take 6 mths or 1 year (uncharted waters for the world).
2) China has already shown signs of severe strain from talks of the US interest rate hike. In addition, imports, exports, manufacturing, everything have fallen off a cliff. China is the biggest trading partner with something like 24 countries. China typically sells a lot of manufactured goods the US. If China`s manufacturing and exports are severely down then it is likely partly a reflection of US consumption.
3) US has a shortfall of $1 trillion each year (revenues vs expenses). As a result, US debt increases by $1 trillion each year (debt was about $9T in 2008). This includes $300 billion on interest payments on debt. The US debt total will be $19 trillion by end of this year. If long-term interest goes from 2% to 5% then US interest payment on its debt will go to $950 billion per year. US cannot reduce its debt without severely devaluing its currency through money printing. It cannot default on its debt either – some of it is owned by grounds such as state and local pension plans.
4) The Chinese own $1.4 trillion of the US treasury bond debt. The Chinese sold $100 billion over the past 2 weeks. The Chinese could continue to sell. Other countries could join in. All of this selling could put upward pressure on long-term interest rate. Insufficient buyers can result in decreased bond values. This, in turn, can increase long-term interest rates. This could trigger a collapse in the bond market – the largest market in the world.
5) It is estimated that $500 billion of high yield bonds (junk bonds) were issued to shale oil companies. Oil from shale rocks is expensive to produce. The oil price has been depressed all year. Bond defaults could begin, if the oil price does not increase soon.
6) The banks could begin feeling pain from conventional oil hedges. The Banks have been paying out $80 – 100 per barrel to the oil producers (under hedged contracts) but have only been able to sell the oil for about $50 for 2015. This could begin putting strain on the banks carrying the hedges. For example, Exxon Mobil, worlds largest oil company, is estimated to have 80% of its production hedged with banks at higher oil prices.
7) There are over $1 quadrillion worth of derivatives in the world – most are with big US banks and most are interest rate sensitive. Derivatives are bets. There is a winner and there is loser. If the loser cannot pay up then both sides become losers and the contagion that follows could be extensive. Default on even less than 1% of the derivatives could bring down the system.
8)The recent bailout brings Greece`s debt to around $425 billion. They do not generate sufficient productivity to reduce the debt, never mind eliminating it. This will blow up at some point. The Euro Zone cannot forgive the Greek debt as most of the other key countries in Euro Zone also have huge debt, little productivity and high unemployment.
9) The Ukraine situation is starting to heat up again. This could eventually become a military war between super powers, if all sides are not careful.
10) Oil is still sold heavily in US dollars. The Saudi`s could one day start accepting all currencies for their oil, as oppose to US dollars exclusively. This would be key in starting the global reset. Saudi`s appear to be more uncomfortable with the US with each passing day.