I found your presentation of recent economic history a la Frank Biancheri to be enlightening and to make perfect sense, in retrospect.
After 2000 the US embarked on a monetary and fiscal policy expansion with little parallel in history: interest rates were brought down to the floor, the monetary mass grew in excess of 10% annually, an expansionary budget stimulated demand for goods and services, many of them imported from countries that accumulated US bonds and other forms of fiat currency. From 2002 to 2007 reserve currency held by central banks grew in excess of 20% annually. In parallel, lax financial regulations and reserve requirements helped creating a pile of invisible debt (out of balance sheets) on that expanding demand and monetary mass, according to some amounting today to more than the world's annual GDP. Did this incredible expansion ended because oil production plateaued? That's an interpretation, although other views are possible. Oil prices entered the rising phase in 2004, in 2005 were raw materials and 2006 food: no matter what the underlying reason, the supply side stopped following the demand expansion. When Ben Bernanke became chairman of the US Federal Reserve and tried to change course by raising interest rates, so that at least some strain would come to the monetary expansion, it was already too late: the US economy couldn't expand anymore in order to generate the wealth promised by all the debt issued in previous years.
Did this incredible expansion ended because oil production plateaued? That's an interpretation, although other views are possible. Oil prices entered the rising phase in 2004, in 2005 were raw materials and 2006 food: no matter what the underlying reason, the supply side stopped following the demand expansion. When Ben Bernanke became chairman of the US Federal Reserve and tried to change course by raising interest rates, so that at least some strain would come to the monetary expansion, it was already too late: the US economy couldn't expand anymore in order to generate the wealth promised by all the debt issued in previous years.
I suspect that the reserve currency created under the latter years of the Greenspan FED constitute much of the "counterfeit currency" of which Jerome has spoken. The rest would have been created as part of the >$1 Quadrillion derivatives market that has grown like Topsy on steroids over the last ten years.
This diary is an excellent compliment to the insights contained in the Michael Hudson piece from which I so extensively quoted in my current Does US Face G20 Mutiny? diary. Hudson shows how the existing scheme with the dollar as the de facto international reserve currency has been used by the US to force countries such as China and Russia to finance their own encirclement by US military bases!
I have nothing but well wishes for those foreign leaders who want to create a new reserve currency. So doing would promote a better climate for world recovery even if the US does not participate. If and when the US does find the will to save the economy from the elites, it will be easier if such a regime is in place. I do not know how bad it will have to get for the US to break the grip of Wall Street financial interests over domestic policy, but I think it will eventually happen unless those interests voluntarily reform themselves, as the current policies all but guarantee an economic death spiral.
Very valuable diary! As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
I've been following this particular issue for more than six years and I've read many articles like the one Michael Hudson pens. What I think is important to realise is that this system didn't evolve simply out of the US' evil.
These systems always emerged out of necessity: in 1944 the US was the world's largest oil producer and held the world's largest gold reserves. When the petro-dollar became the de facto world reserve currency the US was the only military power available to face the USSR and to guarantee the oil flows from the Middle East to the free world. Everyone this side of the iron curtain benefited.
Unfortunately, as the USSR dissolved, the US developed Reaganomics, Bushanomics and Greenspolicy, taking full advantage of their issuer status. It was a way of masking the declining power of the US as an energy producer. We had recently a post on TheOilDrum were Richard Wolff claims that this last phase of the US economic system allowed for rising profits while wages stood still.
The US wage curve describes a path almost equal to energy per capita. Vencit omnia veritas.
I do not know how bad it will have to get for the US to break the grip of Wall Street financial interests over domestic policy, but I think it will eventually happen unless those interests voluntarily reform themselves, as the current policies all but guarantee an economic death spiral.
Criminals voluntarily reforming themselves, outside of prison and without a pitchfork at their bellies? Not betting on that one. In the end, might makes right. Nothing has changed since the caveman.
