2008 posed the largest threat to the system, and ended up in a bout of financial warfare between the US and its major competing trading partners. China and Russia, and middle-eastern countries saw the weakness within the US financial system due to excess liquidity, and tried to end the dollar standard in 2008.
The US representatives in Washington had been used to such economic strength and superiority over all trading partners from the 2 decades of dollar stability that they became blinded to the risks of bad policy. They were unaware of the dangers of creating excess dollar liquidity within the world financial system. They had allowed the major competing trading partners to create huge reserves of dollar liquidity without a thought to the consequences of such actions.
Washington began to legislate away financial system protection mechanisms, pushed the GSEâs to loan to low income Americans. The regulators turned a blind eye to US financial institutions who were hiring young mathematicians with no knowledge of financial history, or understanding of the dollar system, to create bad investment products in the name of innovation.
These were a result of overconfidence, and the lack long term thinking. There were also geopolitical problems of terrorism and the aggressive foreign policy of a neo-conservative movement within the US government. US foreign policy became authoritarian and belligerent. These careless policies had to be paid for by increasing the world dollar supply exponentially. The US national debt increased 12 trillion in about 8 years.
The massive amounts of treasuries issued would have created massive deflation, so the federal reserve had to create excess liquidity to accommodate the world economy. These very bad actions by the politicians in Washington set into motion an uncontrollable threat to the current debt/dollar based world financial system.
There was too much liquidity sloshing through the world financial system, with massive amounts of dollar reserves sitting on the balance sheets of countries who oppose the dollar standard. These countries could not stop their large reserves from building to unmanageable proportions. China had such a huge trade surplus with the US, and recycled so many dollars into US treasuries and the GSEâs that the fed had lost control of the dollar markets when it began to tighten monetary policy in 2003.
Alan Greenspan called the unresponsiveness of the treasury market a conundrum. The massive liquidity created from bad short-term policy in Washington had threatened the American way of life. The federal reserve members finally awoke to the dollar problem in 2005 when they contracted the money supply. It only slowed the US economy. They kept tightening the money supply aggressively, but the dollar markets stopped responding. The reserves of US trading partners were too large, the federal reserve lost control of its own dollar market.
These miscalculations and paradigm shifts in the dollar markets, created a huge problem that the fed had created. They had contracted too tightly in the US and slowed the US economy without affecting any other economies in the world. In 2007 they got the final wake up call, of the shift in power in the dollar system. They had materially weakened the US economy. The policy makers didnât know at that moment how out of control they were of the their dollar system.
Recognizing the mistake, the fed slashed short term interest rates aggressively in the second half of 2007 and started pumping liquidity into the system. US trading partners were overflowing with excess dollar reserves and started receiving this new excess liquidity due to their dollar pegs. They had too many dollars, but no place to recycle them within the US economy due to the weakness created by bad lending and fed policy tightening.
These trading partners sensed this weakness as large amounts of excess liquidity began flowing onto their balance sheets. They decided, they wanted to protect their hard earned wealth and stop participating in the dollar recycling.
By July of 2007, ironically, directly after the short sale uptick rule was removed by the SEC, the dollar system had become clogged. One of the last financial market protection mechanisms was removed, a symbol of Washingtonâs hubris. By January of 2008, as the US financial account contracted while the trade deficit increased, US financial institutions were on life support.
The fed was pumping liquidity, but it wasnât enough. The removal of the uptick rule had opened and even inspired massive dollar holders the ability to short US equities via naked short selling. They found a new way to recycle their dollars. They would bet against US equities and buy commodities. It was a sure thing as these massive funds of dollars kept receiving more and more liquidity.
The Federal Reserve had lost total control of the dollar system. They slashed and slashed rates, seeming to get a response from the equity markets, due to the massive short sellers from overseas being squeezed, but the credit markets did not respond. The Federal Reserve System was shooting blanks.
In January 2008, Bear Sterns had taken huge losses on its mortgage backed securities as the securitization market collapsed. The buyers in the securitization market walked away in unison and left the investment banks holding the bag, while at the same time US bank liquidity was drying up due to the clog in international dollar recycling market and the result from the preceding tight fed policy that created an inverted yield curve.
In 2008, congress passed a 152 billion stimulus that increased the limit on jumbo mortgages that the GSEâs could purchase to help stem the slide in housing prices. But it was too late. The US economy is analogous to a huge oil tanker, it takes a long time to turn it around. There were no international buyers of US mortgages. US banks even shunned the mortgage market, remembering what happened to Bear Sterns. The excess dollars created by the 152 billion was unable to help the US consumer due to dollar flight. As soon as the dollars landed in the hands of consumers, the liquidity from the last six months of fed easing was flowing into the coffers of excess dollar holders. They began buying crude oil and gold as if it were a currency, shunning each new dollar.
The massive liquidity and out of control Federal Reserve created a crude oil superspike that sucked all the stimulus money out of the US economy and increased the US trade deficit further. This was a massive tax on the US economy, and quickly put the brakes on emerging economies. GM, the largest manufacturing company in the world began to collapse, signaling to US enemies that the US was vulnerable to attack and the end of the dollar standard was at hand.
The summer of 2008 saw massive liquidation of US equities day after day, which began to put a drag on the world economy. The idea that the world economy had decoupled from the US economy had been disproven.
The US representatives in Washington had been used to such economic strength and superiority over all trading partners from the 2 decades of dollar stability that they became blinded to the risks of bad policy. They were unaware of the dangers of creating excess dollar liquidity within the world financial system. They had allowed the major competing trading partners to create huge reserves of dollar liquidity without a thought to the consequences of such actions.
Washington began to legislate away financial system protection mechanisms, pushed the GSEâs to loan to low income Americans. The regulators turned a blind eye to US financial institutions who were hiring young mathematicians with no knowledge of financial history, or understanding of the dollar system, to create bad investment products in the name of innovation.
These were a result of overconfidence, and the lack long term thinking. There were also geopolitical problems of terrorism and the aggressive foreign policy of a neo-conservative movement within the US government. US foreign policy became authoritarian and belligerent. These careless policies had to be paid for by increasing the world dollar supply exponentially. The US national debt increased 12 trillion in about 8 years.
The massive amounts of treasuries issued would have created massive deflation, so the federal reserve had to create excess liquidity to accommodate the world economy. These very bad actions by the politicians in Washington set into motion an uncontrollable threat to the current debt/dollar based world financial system.
There was too much liquidity sloshing through the world financial system, with massive amounts of dollar reserves sitting on the balance sheets of countries who oppose the dollar standard. These countries could not stop their large reserves from building to unmanageable proportions. China had such a huge trade surplus with the US, and recycled so many dollars into US treasuries and the GSEâs that the fed had lost control of the dollar markets when it began to tighten monetary policy in 2003.
Alan Greenspan called the unresponsiveness of the treasury market a conundrum. The massive liquidity created from bad short-term policy in Washington had threatened the American way of life. The federal reserve members finally awoke to the dollar problem in 2005 when they contracted the money supply. It only slowed the US economy. They kept tightening the money supply aggressively, but the dollar markets stopped responding. The reserves of US trading partners were too large, the federal reserve lost control of its own dollar market.
These miscalculations and paradigm shifts in the dollar markets, created a huge problem that the fed had created. They had contracted too tightly in the US and slowed the US economy without affecting any other economies in the world. In 2007 they got the final wake up call, of the shift in power in the dollar system. They had materially weakened the US economy. The policy makers didnât know at that moment how out of control they were of the their dollar system.
Recognizing the mistake, the fed slashed short term interest rates aggressively in the second half of 2007 and started pumping liquidity into the system. US trading partners were overflowing with excess dollar reserves and started receiving this new excess liquidity due to their dollar pegs. They had too many dollars, but no place to recycle them within the US economy due to the weakness created by bad lending and fed policy tightening.
These trading partners sensed this weakness as large amounts of excess liquidity began flowing onto their balance sheets. They decided, they wanted to protect their hard earned wealth and stop participating in the dollar recycling.
By July of 2007, ironically, directly after the short sale uptick rule was removed by the SEC, the dollar system had become clogged. One of the last financial market protection mechanisms was removed, a symbol of Washingtonâs hubris. By January of 2008, as the US financial account contracted while the trade deficit increased, US financial institutions were on life support.
The fed was pumping liquidity, but it wasnât enough. The removal of the uptick rule had opened and even inspired massive dollar holders the ability to short US equities via naked short selling. They found a new way to recycle their dollars. They would bet against US equities and buy commodities. It was a sure thing as these massive funds of dollars kept receiving more and more liquidity.
The Federal Reserve had lost total control of the dollar system. They slashed and slashed rates, seeming to get a response from the equity markets, due to the massive short sellers from overseas being squeezed, but the credit markets did not respond. The Federal Reserve System was shooting blanks.
In January 2008, Bear Sterns had taken huge losses on its mortgage backed securities as the securitization market collapsed. The buyers in the securitization market walked away in unison and left the investment banks holding the bag, while at the same time US bank liquidity was drying up due to the clog in international dollar recycling market and the result from the preceding tight fed policy that created an inverted yield curve.
In 2008, congress passed a 152 billion stimulus that increased the limit on jumbo mortgages that the GSEâs could purchase to help stem the slide in housing prices. But it was too late. The US economy is analogous to a huge oil tanker, it takes a long time to turn it around. There were no international buyers of US mortgages. US banks even shunned the mortgage market, remembering what happened to Bear Sterns. The excess dollars created by the 152 billion was unable to help the US consumer due to dollar flight. As soon as the dollars landed in the hands of consumers, the liquidity from the last six months of fed easing was flowing into the coffers of excess dollar holders. They began buying crude oil and gold as if it were a currency, shunning each new dollar.
The massive liquidity and out of control Federal Reserve created a crude oil superspike that sucked all the stimulus money out of the US economy and increased the US trade deficit further. This was a massive tax on the US economy, and quickly put the brakes on emerging economies. GM, the largest manufacturing company in the world began to collapse, signaling to US enemies that the US was vulnerable to attack and the end of the dollar standard was at hand.
The summer of 2008 saw massive liquidation of US equities day after day, which began to put a drag on the world economy. The idea that the world economy had decoupled from the US economy had been disproven.