Ordinarily, the plunging oil prices experienced during the last three months would be welcomed as beneficial for the economy — lowering transportation costs and stimulating consumer spending. But these are not normal times, and the sharp 45% drop in oil prices can trigger a larger financial market crisis and a recessionary contraction. Prolonged deficit spending and the Federal Reserves easy-money policies of debt monetization and zero interest rates have largely absorbed and papered over the debt crisis that brought the U.S. economy to its knees in 2008. Consider that when the subprime debt crisis unfolded in 2008, total U.S. Treasury debt, including IOUs to Health and Human Services and Social Security, stood at about $10 trillion. Today, just six years later, it exceeds $18 trillion (more than U.S. GDP), with the Feds balance sheet having grown by 425% — all in Treasury and mortgage debt. In the years following the 2008 financial crisis, when the European debt crisis was headline news, U.S. sovereign debt grew at a rate considerably higher than that of other European countries, with the exception of Greece. In 2011, before the S&Ps downgrade of U.S. government debt from AAA to AA+, Moodys reported the U.S. debt-to-tax-revenue ratio at over 400% — more than twice that of Germany, France, the U.K., and Canada. Today, only Japan (A1/AA-) and Greece (Caa1/B-) have higher debt-to-revenue ratios than the U.S. Middle Class Left Out We now sit atop the largest debt bubble in history, which has fueled rising asset prices — most visible in extended stock prices — and which provides the appearance of a healthy economy. The Feds easy-money policies have made the 2% richest richer on paper, but the bigger reality is that the vastly larger middle class has been almost entirely left behind. Fifty million Americans remain below the poverty line, and the number of food stamp recipients have increased 38% in the last six years. The debt, real estate and stock market collapse of 2008 started from a relatively small class of subprime mortgage bonds going bad. Today, the triggers for financial market trouble in the U.S. could be a hiccup in a Treasury bond auction, trouble in the settlements of derivatives contracts held by major banks or default on leveraged finance loans or high-yield junk bonds that have facilitated the shale oil explosion — the very sector that has been the main engine of economic growth in recent years. Read More At Investors Business Daily: news.investors/ibd-editorials-viewpoint/012015-735327-fed-needs-to-tools-for-next-financial-crisis.htm#ixzz3PPQPkByo Follow us: @IBDinvestors on Twitter | InvestorsBusinessDaily on Facebook
Posted on: Tue, 20 Jan 2015 23:55:46 +0000
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