American Proscenium

The Perfect Storm

The best-seller The Perfect Storm tells a true story of a ship caught in a vortex created by a continental low-pressure system, a tropical hurricane, and an arctic cold front off the shores of Newfoundland.  This complex disaster comes to mind when trying to describe the nature of the crisis that nearly closed down the routine clearance and credit functions of the U.S. financial sector, precipitating an avalanche of stock and commodity prices.

Three overbearing global financial forces have collided to produce this ongoing global financial crisis.  The first force was the great credit binge, which has grown exponentially since World War II.  The current total of outstanding U.S. credit is 350 percent of GDP (Gross Domestic Product, the nation’s output).  Between 2000 and 2008, dollar-denominated credit has grown relentlessly at nine percent per year, well in excess of GDP.  This growth of credit is not sustainable as a substitute for saving for investment.

The second force is the devaluation of the dollar—that is, the decline of the foreign exchange value of the U.S. dollar.  Since 2000, the United States has hemorrhaged more than five trillion dollars abroad in manufacturing trade deficits.  This accumulation of trade debt far exceeds the $2 trillion of federal debt accumulated over this period; even if we add to the federal debt the $2.25 trillion stimulus and bailout plans, the...

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