The Dow topped out on October 11th, 2007 at 14,280. By March 6th, 2009 it was sitting at 6,460 or with a 55% loss. But here is what’s interesting. The imbalances we are witnessing today are exponentially greater than what we saw in 2007-2009. Consider the following……
2007 Imbalances:
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U.S. government debt (as narrowly defined) stood about $8 trillion.
- The Federal Reserve’s balance sheet was under $800 billion.
- 10-year Treasuries yielded approximating 4.5%, giving the Fed had some leeway to cut interest rates if necessary to fight a crisis or business downturn.
- The subprime-mortgage bubble peaked at about $1.3 trillion.
- Aggregate government debt was under $10 trillion.
- The derivatives market’s notional value was $182 trillion.
- A homeless man named Johnny Moon was reportedly able to get some $600,000 of mortgages to speculate in the U.S. housing market.
As bad as all of that was, consider Today’s Imbalances:
- U.S. government debt totals about $19 trillion, or some $11 trillion more than it was in 2008.
- The Fed’s balance sheet is approaching $5 trillion vs. $800 billion in 2008.
- Short-term interest rates are 0.25% compared to 4.5% back in the day. With interest rates at near-record lows, there’s little opportunity for the Fed to further expand its balance sheet.
- The derivatives market is currently larger than $500 trillion vs. $182 trillion in 2008.
- Central-bank capital has dropped to 0.8% of assets from 4.5%.
- The size of the subprime bubble was $1.3 trillion, but the size of sovereign borrowing is $7 trillion today.
- Our government has to borrow money to simply pay interest, and monetary policy is hamstrung by near-zero interest rates.
- There are no more homeless people getting mortgages to buy homes, but there’s a Danish sex therapist whose bank is paying her interest (instead of the other way around) on a loan that’s financing her matchmaking Web site.
Not a big deal???
I would certainly disagree. The imbalances above will have to be addressed one way or another. They will not simply go away. We do not live in a magical world where the FED geniuses have created a perpetual money machine.
If anything, it is highly probable, especially if you consider today’s general overvaluation levels, that the imbalances above will be addressed in a violent fashion. And I would say sooner rather than later.
