Things might have worked out somewhat differently for the US if they had not, quite wisely, persuaded the Saudis to agree that all trade in Oil was henceforth only be traded in US Dollars. In return the US agreed to provide military and other industrial support to the Kingdom. This meant that the US$ effectively became a Petro-currency and that arrangement has served the USA extremely well over the last 50 years and helped entrench the US$ in the role of the global reserve currency – an advantage which the French once referred to as “an exorbitant privilege”.
That situation remains essentially true to this day, and the vast majority of global trade is still conducted by reference to the US$. However, breaking the peg with Gold allowed the US to follow less prudent monetary and fiscal policies than might otherwise have been the case. The temptation to “print & spend” might just be considered acceptable if the policy was conducted in a cautious manner. Regrettably, over the last 50 years, the word cautious could in no way be applied to the monetary or fiscal policies of most major economies. Quite the reverse in fact.
Early into this “fiat experiment” the authorities showed a modicum of restraint as Debt, GDP and Stock Market values grew roughly in line, (as might reasonably be expected). But once US interest rates peaked in the early ‘80’s (at close to 19%) and then started to move lower, so Debt and Equity Market valuation levels started to rise faster than GDP, gradually at first but then more rapidly. The brakes were really released from the mid 90’s helping to initially fuel the Dot Com bubble, and since then both the Sub-Prime bubble and the latest “bubble in everything” – which we are now seeing unwind.
From January 1972 to January 2000 US GDP rose by approximately 150%, or by 3.3% annualised, whereas over the same period, freed from any sense of monetary restraint or responsibility, total US Debt rose by around 1,100% or close to 10% annualised and the Dow rose by around 1,160%, or 9.49% annualised… strongly outstripping GDP growth.
In a healthy economy one would reasonably expect the performance of Debt and Equity markets to be somewhat closely correlated to GDP growth. Any strong outperformance of debt and/or equity markets, in excess of GDP, would strongly suggest that the realised growth in GDP had been largely reliant on taking growth from the future, and that is exactly the situation the US now finds itself in.
To compound the problem, demographics do not play well in terms of addressing these imbalances, nor do the very extremely high levels of debt now burdening US society. And let’s not forget the debt, exorbitant as it is, does not reflect unfunded liabilities, which are calculated to be close to the same size as those reflected, namely around $31 Trillion US dollars….and rising.
So called “light touch” regulation enacted by many western governments, added to the extreme monetary measures taken by central banks in 2000 and 2001, to help fight the deflationary surge resulting from the Dot Com bust directly helped fuel the next bubble in subprime property which blew up so spectacularly in 2008, creating an existential threat to the global financial system. For some inexplicable reason central banks, presumably recognising that too much debt had almost done for the global financial system between 2001 and 2008, decided that more debt was what was actually needed to cure the previous problem(s) created by… you’ve guessed it… too much debt. The difference post-Global Financial Crisis (GFC) is that risk was moved off bank balance sheets and effectively moved on to the balance sheets of pensioners and other savers, who are now the ones seeing their pensions depleted by the fall in equity and bond prices this year.