I get it…people are disillusioned. Disillusioned to the point they think a socialist may be the answer to an improved life. The “Bern” is in…The “Donald” is on a roll…HRC, who knows? Capitalism and free markets are what built our country into greatness. It is now viewed as evil and associated with huge, global conglomerates that are greedy and bad for the individual. Today, I would like to propose Capitalism is the answer and not the problem.
First, I want to share my perspective on how we arrived to this point. The two key measures that I focus on (there are many more like the status of the US dollar, but I believe these to be central) are:
- The Federal Reserve zero interest rate policy for the last eight years.
- The US debt load and the interest owed on it.
We all remember the “great recession” that occurred in 2008 and 2009. In overly simple terms, it was the result of three Federal Reserve induced bubbles. The first being Y2K and NASDAQ 5000. Huge amounts of money was printed to prep for what was viewed as a potential disaster with computers worldwide. The internet craze was on fire and lots of that money led to the NASDAQ bubble. Y2K came and went and the NASDAQ collapsed over the next two years, down by over 80%. That led to a recession. What did the Federal Reserve do? Would it surprise you that they printed a load of new money? That money directly guided us into the next bubble: Residential real estate. Ahh, the days of zero percent down, “liar” loans; home flippers; and of course low-interest rates.
Guess what? If a person has no equity in a house and that house’s value drops, what happens? They leave the keys on the counter and leave. Lots and lots of people left keys on counters. And lots and lots of banks, big and small, were technically insolvent…not just here, but all over the world. You see…even the banks overseas invested in those mortgages and in a hugely leveraged way. Some mortgage packages were levered 10, 20, 30 times.
The US entered a severe, fear filled recession. Markets collapsed (not just the stock market, the bond market collapsed, the housing market imploded, the banking system was on life support). Enter the Federal Reserve (again) with interest rates lowered many times until they hit zero:
And zero they have been ever since until they were recently raised ¼ of a percent. What’s wrong with zero rates? Everything in which a free market/capitalistic system functions. Savers are punished…the earn nothing on their savings, in fact saving is a bad thing. What do large corporations do when rates are close to zero? They borrow and borrow BIG. The S&P 500 companies have borrowed BIG over the last five years and used that money to buy back shares and raise dividends. However, research and development and capital spending have remained stagnant…that’s not a good thing, growth comes from the last two activities and not the first two.
Who else has borrowed BIG? The US government…and they (we) are the biggest of all. In the years since our current president took office, the Federal debt has increased from 9.0 trillion to 18.2 trillion at the end of 2015. It’s now over 19T. We spend more than we take in every year…the gap is debt.
The “official” statistics suggest our economy is growing. It is, but barely and entirely on the back of new debt:
Seems to me that 9 trillion would have produced more growth? The 2016 1st quarter GDP has come in at an ANNUAL growth rate of 0.25%. The real median annual income in the United States has fallen from $57,795 in 2008 to $55,218 today. There are now twice as many Americans on food stamps than before the financial crisis.
Why is no one talking about this? Isn’t this a problem? In short, yes…it’s a massive problem, but the symptoms have not been expressed yet. It’s like the years of plaque build-up are not seen or noticed until the heart attack occurs.
At current interest rates (1/4%) we pay $48 billion in interest. What happens if/when rates go back to “normal”…say the 5% we had a few years back in 2007? We would owe a WHOOPING 950 BILLION! In 2015 Federal revenue was $3.1 trillion…by my calculation, that would consume 31% of all our revenues.
Houston, I believe we have a problem…a big one.
That’s if for today…next I will bring this full circle to capitalism and this election’s highly charged emotion.