a Mr. U.S. Economy look like? Can’t recall,
Haven’t seen him
in nearly 20 years. As I remember, he was fit, well
muscular to the point of intimidating. If you are under 30,
you’ve never seen him. But he was there, many years
providing a good example, setting the pace, spreading the wealth,
kicking ass and taking names. Evidence of his past influence
the average Joe can be seen in old movies, movies with scenes like this.
The average North American, call him Joe, living in the era of Mr. U.S.
Economy, walks into
a bank to
get a loan to fix
up his falling apart house, rather than add another thousand square
feet to make room for the Made in China, Bose branded Home
Entertainment center. A dour looking loan officer, call him
sits behind a laminate faux walnut desk facing the nervous applicant.
Prominently displayed on the edge of Ed’s desk, a brass
nameplate on a
wood block that reads “Ed Noway, Loan
Officer.” While Joe
pours over a pile of paperwork that Joe dutifully spent until midnight
filling out with his wife the night before. They did not
afterwards. She’s not sure Joe can close the loan
not sure he wants the extra hours he’ll have to work to make
Ed finally looks up to grill Joe about his employment and credit
history, his assets, his attitude about saving. Ed wants to
if Joe is likely to pay the loan back or not. He, Ed, the
is responsible for the decision. He doesn’t want
the bank, nor he
its representative, left holding the bag if Joe punts on the
will look bad. He might even lose his
job. Ed’s ass
is on the line.
So is Joe’s.
Here we have the basis for a sound business transaction. But
those days are over. The Frankenstein Economy is here.
against the theoretical future value of his home
and the statistical probability that he’ll have the future
stream needed to pay it back. There is no Ed at the bank to know or
care whether Joe can actually pay back a loan, or if he actually uses
the money to make home repairs or buy eight tons of snow to build a ski
in his back yard to snow board in August. The connection
Joe and his newly minted debt today is a collateralized debt
part of a securitized interest in a pool of non-mortgage assets, and
Joe’s default risk is perhaps sold in a portfolio of private
subordinate pieces to a pension fund of a municipality in
Who’s the counterparty of the credit derivative that's
default risk, you ask? No you
didn’t. You don’t know what the heck
I’m talking about.
bad. Ninety nine percent of the lenders selling these loans
either. They just know the money is there to lend and
lend it or their competition will.
the past 15 years or so, the Fed replaced Mr. U.S. Economy in a
free market ideology based fit of deregulation. Mr. U.S.
whoever he was, is no more. In his place, the Frankenstein
Fed may have had had the best of intentions when making the
Frankenstein Economy, but let’s see what he’s left
behind as he’s
across the North American economic landscape.
least 1950, before Mr. U.S. Economy was put in cryogenic storage and
replaced by the Frankenstein Economy, U.S. households purchased
financial assets at an
increasingly higher rate than they took on liabilities. They
except during recessions, until 1990. Then they started to
more and more liabilities. In 1995, when the Frankenstein Economy
on the scene, a 50 year trend started to turn upside down.
acquisition of financial assets not only stopped growing but turned
negative, as the chart above from Paul
Kasriel at Northern
Large and sudden reversals in long-term trends imply future regressions
to the mean; the Frankenstein Economy has made a mess of the
folks at the Fed, of course, think the Frankenstein Economy is doing
great! Before we go into that, let’s view a few
more pictures of
monster’s gruesome trail.
Also starting in 1995 -- not by coincidence, in our view -- under the
influence of the Frankenstein Economy, North Americans developed
religious expectations about the value of their homes. While
(inflation adjusted) value of their homes declined, market value
skyrocketed. A few voices of reason were dismissed as egghead
jumbo, such as Yale professor Robert Shiller, whose research concludes
that except for two periods — the early 1940s and the late
1990s — when
adjusted for inflation, home prices in the U.S. "have been mostly flat or declining."
for the post 1995 real estate bubble shown in the chart above, again
thanks Paul Kasriel at Northern Trust, are legion. The
scarcity. Little country, the U.S.A. One of the
markets? Las Vegas. (Tip for Vegas real
buyers: land scarcity
and thus land value in the desert can be repealed as quickly as the
zoning laws that created it.)
What about a nation that has an actual shortage of land relative to
population, such as Japan. How did the housing bubble turn
Theirs, much like ours, started right after their stock market bubble
burst, but unlike ours conked out a couple years later.
Ten years of flat prices. Maybe this is the report that has given the
the confidence to issue the calming view repeatedly expressed in public
that housing prices will not “collapse” after the
U.S. boom ends but
merely “flatten out.”
Say you're 50 years old. Are the optimists saying that --
case -- a house may be
worth nominally (price adjusted for inflation) in 2016, when you are
what you paid for it in 2006? Let's hope they're right and
to the mean.
our hero, the Frankenstein Economy. Just as he's
North American's of the
inevitability of home price appreciation, he has convinced them that
they do not need to save.
He’s been highly influential on this point, as the chart
previous life shows: the U.S. savings rate from 1960 to 2000.
again, we note a distinct change in trend in the year 1995.
Of all the
features of the Frankenstein Economy, his most outstanding is his
to his brain. When he’s thinking at all, he
that the world outside the USA finds him as attractive as his previous
incarnation, Mr. U.S. Economy. Like an aging Hollywood actor
plastic surgery after another in the hope that he can keep getting the
of the 30-something action hero even though he’s pushing
expects to keep getting paid a movie star salary premium. So
ruse seems to be working. He’s taking in $2 billion
investments every day, enough to fund the country’s massive
trade deficits. But mostly it’s Asian central banks
private and institutional investors baled years ago. The
only do it to keep the U.S. consumer borrowing and their exports
until they can find a better customer.
His trade deficits are shown in the chart above selected from the
highly recommended site Grandfather
Economic Report. As you can see, Economic
started to work his magic around 1995 as North Americans began to buy a
lot more stuff from overseas than they sold. To see exactly
North Americans paid for all this, see our Chart of the Week, Purchases of U.S. Financial Assets.
crux of our investigation here at iTulip.com going forward is to
understand what led to an apparent abrupt change in many long-term
economic trends that coincided with the creation of the
Frankenstein Economy around 1995. We expect that if we
understand how, why and when these trends are likely to reverse and the
impact that will have on our readers. Actually, we believe we
already know, but learned from our previous 1998 iTulip.com experience
that you can’t just give up the answer -- no one will believe
Readers have to develop an understanding on their own.
In the end, Dr.
Frankenstein's monster does not find peace until his creator dies. The
monster then departs for the northernmost ice to die.
In the case of the
Economy, the sooner