Six charts tell the story of financialization and the diminishing returns of credit.
Today I present a story in six charts. Entire books could be written about the complex interactions of money, oil and credit, but let's try to keep the story as simple as possible.
Here is the monetary base of the U.S. Notice the big ramp-up as the Federal Reserve responded to the global financial crisis with a flood of liquidity/expansion of base money supply.
Meanwhile, oil exports have topped out. Oil exporters are using more of their oil domestically, leaving less to export. This raises the specter of an imbalance of demand-supply, i.e. insufficient supply to meet demand. In that case, prices rise.
Bank credit has skyrocketed. Plenty of credit sloshing around the system. This curve looks exponential, i.e. unsustainable.
But ample credit doesn't necessarily lead to growth (as measured by gross domestic product). Here we see the diminishing returns of credit: credit soared from 1990 to 2008, while GDP growth drifted lower.
Bank assets have risen exponentially along with credit.
Bank assets have risen along with credit: this reflects the financialization of the U.S. economy. But a funny thing happens when oil supply tops out and base money expansion drives oil higher when priced in U.S. dollars: when the cost of oil rises, the economy stalls out.
Expanding base money pushes the price of oil up to stall speed, while expanding credit has a diminishing effect on the real economy. It does however handsomely boost bank assets.
http://www.zerohedge.com/news/2012-10-03/guest-post-six-charts-money-oil-and-credit
3 of these charts look like the same thing (BASENS) - am I looking at this wrong? I have always thought that the price of oil drives our economy. Our national security and financial stability depend on finding a viable alternative to petroleum based fuels. Setting the rules for a fair and decent marketplace that limits bankster powers is necessary for allowing more people to share the dream of financial security. We continue to pay for bankster mistakes at the expense of everyone except the banksters.
ReplyDeleteInteresting to me that all these particular trends seem to start with Reagan, and yet, he is still worshiped with North Korea like reverence. Without a doubt, I am in major agreement with many points of contention against the FED. As I've said way too many times, I had a front row seat working in the bond market through the period when Greenspan created what has now become basically unfixable damage to our economy and our financial system. My gripe, however, is that FED haters have a view that is so narrow and so severe, that they more or less give a free pass to the political sphere.
ReplyDeleteThere is a fix to this, and it's called regulation. Most FED vigilantes though seem to believe we can simply end the FED, or make it subservient to congress - the same congress by the way that repealed Glass/Steagall, created NAFTA and allowed the banksters to to completely cut the balls off of Dodd/Frank before it ever got implemented. There is a big disconnect there.
My problem with posts like this, and many posts at sites like zerohedge, is that they intellectually dishonest. Of course the cost of something like oil is going to be affected by liquidity. That's not rocket science. Over that same period though, China and the rest of the world has been growing. The US may have lost manufacturing, but the rest of the world has gained it. What these guys want you to endlessly focus on is the FED. When you ask deeper questions like, "What philosophy was Alan Greenspan following when he did what he did?", you are directed to look at multiple charts with sharp red lines going parabolic.
There is a powerful case to be made in favor of reigning in the FED. But, when you harbor duplicitous agendas and use dishonest arguments to do so, you will not get the result you want.