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11 of the Most Important Economic Events of the Last 11 Years

Discussion in 'Biashara, Uchumi na Ujasiriamali' started by Shy, Nov 22, 2008.

  1. Shy

    Shy JF-Expert Member

    Nov 22, 2008
    Joined: Nov 2, 2006
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    The following will remain the top post for the next few days. It is an update of “10 of the Most Important Economic Events of the Last 10 Years: Collapsing the Economy in the Buildup to World War III ”, which in turn was an update of “7 of the Most Important Economic Events of the Last 7 Years: Collapsing the Economy in the Buildup to World War III.”

    For those who have been following this series, minor updates were made to events 1 through 10 and the Implications section, and event 11, the Short selling ban, was added. I also reformatted the piece and have supplied permalinks for ease of reference.

    1) Year 1999: Introduction of the euro to world financial markets
    In 1999 the euro was introduced as an accounting currency (travelers' checks, electronic transfers, banking, etc.) and then launched as physical coins and banknotes on 1 January 2002. The euro replaced the former European Currency Unit (ECU) at a ratio of 1:1. However its value quickly began to drop, reaching a low of 0.8252 relative to the US dollar on 26 October 2000. This proved to be a solid support level for the next two years, and in 2002 the euro began its appreciation reaching a high of 1.60 on 23 April 2008 relative to the US dollar.

    click to enlarge source

    Aside from consolidating power for the new European Union, the euro added liquidity and flexibility to the financial markets, which in time has made the euro a very attractive and safe investment as a major global reserve currency. Two of the main reasons why the euro was introduced are:

    A new power had to be created to fill the vacuum left behind by the collapse of the Soviet Union. The challenge to US hegemony could not be done on a military level. Therefore it had to be done on an economic level. The euro was created to challenge the US dollar as the preferred reserve currency. Since its inception, it has gained market share while the US dollar has lost market share. According to third quarter reports for 2007, US reserve currency market share is 64.6% and the euro is at 25.8%. Less the 1998 levels of Swiss and French francs, and German marks, this means that the euro has gained 9.3% of the global reserve currency market in less then 9 years, and this trend is accelerating, even though the European Union seems to be quite concerned about the rapid rise of the euro.
    It was predicted that the United States would not be able to survive the collapse of the Soviet Union since its existence was fatally connected with that of the former Russian Empire. As a result the euro was created to provide a safe haven for the transfer of wealth. As of the beginning of 2007, within five short years, euro notes in circulation have exceeded the value of circulating US dollar notes. Considering that the US dollar, at its most recent low, was devalued by approximately 50% since reaching a high relative to the euro in 2000 (euro gaining approximately 100%), we can only assume that the transfer of wealth has been going smoothly and that this trend will continue, especially since Banks have been shifting funds out of the US and into Europe in response to US government policy that a weaker dollar is good for American exports. (More on the euro and the US dollar below).

    2) Year 2000: Collapse of the Dot-com bubble
    The dot-com bubble, which had its climax on 10 March 2000 with the NASDAQ peaking at 5132.52, was a period during which “stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields.” Aside from being a stock market bubble, numerous other reasons caused the correction that occurred in the value of shares across-the-board in the technology sector. Three of these were:

    During the peak of the NASDAQ bubble, margin debt was at an all time high. Investors and speculators were borrowing against their holdings to be able to purchase additional stocks. When the correction occurred, the value of their securities dropped, which meant that they were required to deposit funds or securities into margin accounts to maintain margin requirements set by their brokers. This in turn created a chain reaction. To cover margin calls, stocks were sold, reducing their value since there were more sellers than buyers, which in turn reduced the value of securities in margin accounts, which in turn resulted in additional margin calls which caused more selling. This was one of the main reasons for the rapid decline in stocks in the year 2000.

    In 2007, this was one of the main fears of what was happening to the markets. Last year, the amount of margin debt hit a record $285.6 billion in January on the New York Stock Exchange “raising concerns on Wall Street about what might happen if a major correction occurs.” Those concerns raised in 2007 have proven to have been valid. Bank writedowns from subprime mortgages resulted in margin calls, which at the beginning of 2008 were predicted to cost mortgage lenders $325 billion due to ‘systemic margin call’. Of course now, towards the end of 2008, we have come to realize that that was an extremely low estimate.

    From 1999 to early 2000, the Federal Reserve had increased interest rates six times, increasing the Fed Funds Rate from 4.75% to 6.5%, an increase of over 35%. This meant the end of cheap money for investors, venture capitalists, and technology companies whose lifespan was measured by their burn rate. In essence, the Federal Reserve brought an end to Greenspan`s irrational exuberance, or more accurately stated, the end to expansion of wealth. A self-induced prophecy, many have argued.

    During the boom, companies were able to bypass banks and raise capital through private venture capitalists. This meant that banks, which in the past were able to acquire shares in companies seeking startup money, were no longer getting in at rock bottom prices. Many individuals during this period created wealth by investing in multiple high-tech companies. Even if 1 out of 10 proved to be a success, those who had invested were easily made independently wealthy. This went against established banking and investment practices and forced the Federal Reserve, a centralized private bank that sets the monetary policy for the United States, to increase interest rates until an adjustment in the markets occurred.

    The belief is that interest rates were increased rapidly to induce a crash, consolidating assets, and increasing the powers of the elite in our centralized governments.

    Standard & Poor's composite price-earnings ratio (real prices divided by the 120-month average of trailing real earnings) was at 46 even after the March correction in 2000. Until the NASDAQ boom, “the highest it had ever been (the data go back to 1871) was 33, in September 1929 -- the month before the crash.” The dividend yield on the Standard & Poor's index stood at 1.1%, the lowest ever. “The previous low was 2.6% in January 1973, just before the 1973-74 crash.” Margin debt had also increased 87% in the previous year, hitting $265.2 billion. In 2000, all of this was a very good indication that at some point a correction would have to come.

    As stated above, margin debt in 2007 was higher than that of 2000, which could explain what we are witnessing now in the markets, and why the 2008 market crash is forcing people to postpone their retirement by almost 6 years.

    click to enlarge source

    The Dot-com bubble crash wiped out approximately $5 trillion in market value of technology companies from March 2000 to October 2002 in paper wealth on the NASDAQ alone. The peak was $6.7 trillion in March 2000 and the trough was $1.6 trillion in October 2002. “It was the largest stock market collapse in the history of industrial capitalism.” However, exit rates of dot com firms were “comparable with or perhaps lower than exit rates of entrants in other industries in their formative years. Five year survival rates of Dot Com firms approach 50%,” a testament to their strength and importance.

    One of the main consequences of the crash was that it slowed the exponential dissemination of information that was taking place though the Internet. “The bursting of the dot-com bubble marked the beginning of a relatively mild yet rather lengthy early 2000s recession in the developed world.”

    3) Year 2000: Iraq dumps the US dollar and switches to the euro
    The following article, “The Real Reasons for the Upcoming War With Iraq”, which was written before the U.S. invasion of Iraq, lays forth an argument that the war in Iraq was not just about oil but about the currency in which oil is traded. It is mandatory reading for anyone who wants to understand the basic concepts of American foreign policy, economics, and its military operations around the world. This article states that the principle reason why the United States invaded Iraq was because Saddam Hussein in the year 2000 went ahead with his plans to stop using the U.S. dollar in its oil business and started using the euro.

    Iraq switching from the U.S. Petro-dollar to the euro meant that countries would no longer be obligated to buy oil in U.S. dollars, so they would no longer have to maintain their U.S. dollar reserves.

    Since reaching a double top in the year 2000/01, the US dollar devalued relative to the euro by as much as 50% by April 2008.

    click to enlarge source

    Even though Iraq’s dumping of the US currency is no longer an issue since the United States is now occupying Iraq, many countries continue to sell the dollar, converting their reserves to other currencies. Some of these countries are: Iran, Sweden, Cuba, U.A.E., China, Russia, India, Indonesia, North Korea, Venezuela, Brazil, Argentina, Syria, and many more.

    4) Year 2005: Rewriting the U.S. Bankruptcy Law
    After years of lobbying, the “dream bill for credit card and financial service companies” finally came into effect in the United States. Three years ago the financial institutions that were preparing for the coming crash were able to lobby Congress to pass the ‘Bankruptcy Bill.’ This law that took effect in 2005 created what is now widely referred to as Debt Slavery and is “the biggest rewrite of U.S. bankruptcy law in a quarter century”.

    The Bill was conveniently introduced at a time when US household debt was at an all time high.

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