Frankenstein Economy

[EJ]

What happened in 1995 that brought about major changes in U.S. economic trends, especially foreign trade, foreign borrowing, household borrowing and household saving?

[jeffolie]

In 1995 the housing bust ended, the economy was reflated, and with the collapse of the Soviet socialist model, global output soared, interest rates stayed low and Wall Street had its best performance of the 20th century.

Troubled 2000s: Under Bush, a slowing economy and terrorist attacks caused M3 growth to fall sharply. The technology-laden Nasdaq crashed over a three-year period, and interest rates fell to their lowest levels in 40 years. The new housing bubble expanded.

Is there a particular answer you were looking for?

[BobtheCanuck]

Assuming there is a single answer, which is unlikely, the CRA deruglation of the banking industry might at least have been a factor.

But the whole concept of the Fed which most people assume is a government agency but I understand is actually controlled by what in this country would be considered special interests , probably set the stange long before this.

Unfortunately, I don't find the article very funny. It is truly a real horror story, and there will be real blood. I've been dumping my US stocks in favour of Canadian ones, as I have watched our dollar appreciate from 1.5/1US$ to 1.15/1 US$ over three years.

Your stockholders seem to continue to cheer (and get behind and push) as you outsource every manufacturing job you can to cheap labour locations, even when labour (sorry labor south of the border) is typically less than 7-10% of the actual cost. Maybe the fact the stockholders are increasingly from countries that don't really care if the US ultimately goes down the toilet is a factor here as well. But you have to have all that oil, right?

A quote:
According to the US Defense Energy Support Center Fact Book 2004, in Fiscal Year 2004, the US military fuel consumption increased to 144 million barrels. This is about 40 million barrels more than the average peacetime military usage.

By the way, 144 million barrels makes 395 000 barrels per day, almost as much as daily energy consumption of Greece.

The US military is the biggest purchaser of oil in the world..

Wonder where the countries of the Middle East get the bucks to buy P&O of the recent Port control scare?

It is a complicated world out there. Less time with the BOSE and prime time, and more time understanding the rest of the world is a necessary part of your future, ... and ours.

BobtheCanuck

[BobtheCanuck]

Sorry. Should have given reference for my quoted material. Here it is.

http://www.energybulletin.net/13199.html

BobtheCanuck

[JC Ernharth]

What happened in 1995 that brought about major changes in U.S. economic trends, especially foreign trade, foreign borrowing, household borrowing and household saving?

I believe the trend was started much earlier and is tied largely to the M3 numbers, although a bit differently than explained in another response above, and even then, M3 is only part of the picture.

First, take a look at the M3 numbers going back to 1980...



Then consider the fed funds rate:



M3 doubled in the 80s, and in combination with the higher early rates, you saw consumer price inflation slow, but the venting of money supply turned to financial assets. In the late 80s, rates were raised again, slowing things down a bit... In the early 90s m3 stabilized... but in 95, it was cranked up again -- hello stock bubble.

The emergence from the 1990 recession was unusual in that folks didn't do their usual saving -- which deepens recessions since it crimps consumption. Instead, they picked up spending pretty quickly. By the late 90s folks wages were not doing great, but they were supplementing their incomes largely from the stock bubble -- everyone was going to be rich in stocks -- (a speculative mentality that carries to today). That lasted until the Fed picked up rates and pricked the stock bubble.

That rising rate trend in the late 90s kicked us into recession, although M3 hardly took a breather in its rapid increase (m3 had doubled since 1997). The new $$ vented liquidity away from stocks and into real estate with the massive rate drops 2001-04, aided by the new phenom of the trade deficit dollars being recycled back into the U.S. debt -- depressing rates (the Greenspan rate conundrum).

Again, in the '01 recession, folks didn’t bother to save -- instead they borrowed -- and primarily from home equity. Greenspan estimated 2004 it was $670 billion, and 2005 is said to be about the same. Meanwhile, wages are still stagnated, and consumers more dependent on lower priced goods from Wal-Mart, although just the same, many don't think you need to save any more and are fine converting home equity into big screen TVs and $120 month cable bills.

But M3 only explains part of the problem to answer your question. The U.S. as a whole is no longer the beacon of efficient business it once was – very costly with regulation, tax complexity, legal environment, tax load, etc, and so forth. Plus, the luxury of being the last manufacturer standing after WWII got to our heads way too much. GM is a great example of a fat, bloated, and completely unrealistic business model even before China came on line. With China out there, there is no competition.

I could go on, but your question is literally the subject of two hour ++ seminars and 500 page books.

Stay Vigilant!

[jeffolie]

"The yen carry trade has reportedly been a fairly widespread strategy since the yen started its declining trend in the spring of 1995. Investors could borrow cheaply in the Japanese money market and invest the proceeds in a wide array of assets ranging from US Treasuries to high-yielding emerging market securities. In fact, in 1996 and early 1997 high interest rates in East Asian money markets and stable dollar exchange rates attracted much of these funds. This strategy paid off as long as the yen did not appreciate and other East Asian currencies remained firmly pegged to the US dollar."

In fact, from April 1995 to July 1998 the Japanese currency went from 80 to 147 yen per US dollar. A period of 3.25 years and a loss of 66% purchasing power. From August 1990 to September 1995 the Bank of Japan had lowered the Official Discount Rate from 6% to 0.5%. The US 3-month TBill rates were between 5% and 6% and longer duration bonds over 7%. Thus was born the "Yen Carry Trade."

[ctonious]

Of course, I was distressed when the product came and realized it had been made in China. For the record, the headphones say on them: "Engineered in USA, Assembled in China." But where were they manufactured? Is "engineering" or "assembling" the same as "manufacturing"? Jane Burns

I live here in Shanghai, as a transplanted expat doing classic rock gigs for expats, teaching business communications to Chinese tech professionals, and watching the whole economic shock and awe fireworks from this part of the world.

Back when I was a staff Systems Engineer at IBM in the Silicon Valley - we had all the sophisticated high-tech industry vertically integrated in that one area. Piece by piece the titans of industry outsourced the whole kit and caboodle. They're all over here now. I've taught at software development companies outsourcing to Indian companies who are outsourcing to the West. I've taught at huge industrial infrastructure firms like ABB, at cutting-edge pharmaceutical and telecom development firms, and am now currently teaching at a Sunnyvale-headquartered firm that shall be unnamed - but is a competitor to Qualcomm. They do R&D here as well as local infrastructural development. Bottom line: The world has changed - a veritable economic pole shift. I'm old enough to remember when "Made in Japan" meant crap. Now - it's the same outdated mantra when it comes to China.

I'm as patriotic as the next guy, but I don't believe our industries are coming back - not in my working lifetime. I ain't too happy about it either, but I'm trying to deal with it on the micro level.

[bart]

The Japanese 3 month Gensaki interest rate basically hit zero.

[bobola]

The Mexican Peso was devalued by 70% in 1995

Bob

[EJ]

The Mexican Peso was devalued by 70% in 1995

Bob

Is that a correction to...

hhttp://www.itulip.com/faceofinflation.htm