Global Economic Boom & Bust Cycles

GLOBAL ECONOMIC BOOM & BUST CYCLES

THE GREAT DEPRESSION AND RECOVERY OF THE 21ST CENTURY

KHAFRA K OM-RA-SETI Edited by Darlene M. Justice

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Cover Design by Ronnie Prosser of Black Art Production Company Editing by Darlene Justice

ISBN: 978-1481042314 (paper)

First Edition Published by KMT Publications Printed in the United States of America

DISCLAIMER: No express or implied guarantees or warrantees have been made or are made by the author or publisher regarding certain incomes, earnings, profits or other financial claims. Individual results vary, in large part, due to individual's initiative, activity and capability as well as varying local market conditions and other factors. Also, this book cannot be an exhaustive and complete presentation on economic depression. While every effort has been made to make the information presented here as complete and accurate as possible, it may contain errors, omissions or information that was accurate as of its publication but subsequently has become outdated by marketplace or industry changes or conditions, new laws or regulations, or other circumstances. Neither author nor publisher accepts any liability or responsibility to any person or entity with respect to any loss or damage alleged to have been caused, directly or indirectly, by the information, ideas, opinions or other content in this book. If you do not agree to these terms, you should immediately return this book for full refund.

In no event will we be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this book. The author and publisher do not warrant the performance, effec- tiveness or applicability of any sites listed or linked to in this book. All links are for information purposes only and are not warranted for content, accuracy or any other implied or explicit purpose. Any trademarks, service marks, product names or named features are assumed to be the property of their respective owners, and are used only for reference. There is no implied endorsement if we use one of these terms. Finally, use your head. Nothing in this book is intended to replace common sense and is meant to be a source of information to the reader. There- fore, if you wish to apply ideas contained in this book, you are taking full responsibility for your actions. To my Mother, Mary Asalee Davis 1921-2007 “Markets can remain irrational longer than you can remain solvent.”

John Maynard Keynes

* * * * * CONTENTS

Tables viii Prologue ix

ECONOMIC TURMOIL Introduction 18

1. America at the Crossroads 26

2. European Sovereign Debt Crisis 104

BOOM AND BUST CYCLES

3. Roaring 20s and the Great Depression 178

4. Booming 80s and Crash of ‘87 196

5. The Japanese Connection 233

6. Roaring 90s and Crash of 2000 286

7. Mortgage Meltdown of 2008 333

FORCES OF TRANSFORMATION

8. Impact of the Information Age Revolution 400

9. China: Emergence of a New Global Superpower 452 FUTURE SHOCK

10. PEAK OIL: The Coming Oil Shock 491

11. The Economic X-Factors: Natural Disasters & Terrorism 523

Epilogue 573

About the Author 576

Glossary 578

Bibliography 596

Index 599 TABLES

Table 1: United States Government Major Debt Holders 30 Table 2: Post-World War II Recessions 34 Table 3: The European Economic Community: 12 Member 108 Nations Table 4: Pre-Crash Point Loss 208 Table 5: Post-Crash Dow Jones Volatility 210 Table 6: Junk Bond Industry Analysis 216 Table 7: World’s Ten Largest Banks 248 Table 8: Crash of 1990: Nikkei Declines 263 Table 9: Historic Share Prices of Tech Leaders 326 Table 10: GAO Audit Report - Institutions with the Largest 387 Total Transactions

viii PROLOGUE

his book supports the premise that during the period 2013- T2015, there will be a major global economic collapse, but it also envisions a recovery and new beginning if our world can avoid systemic wars and massive economic destruction. The economic thesis presented in this publication is the result of over 25 years of research, writing and thinking on this subject matter, which is culminating in this incredible era of enormous transformation. What is emerging from the historical data examined over the past century and what forms the foundation of my thesis is what I call the Grand Convergence, the confluence of a diversity of economic forces bringing about a manifestation of creative destruction and global economic reformation. My interdisciplinary research and approach seeks to arrive at the truth embedded in a number of factors that are coming together in epic proportions. These very powerful economic forces will collide to bring about collapse and massive disruptions to our modern civilization. We will witness the rise and fall of government leaders, technologies, and economic systems and models that are part of the creative destructive nature of capitalism. In 2012, our world entered a period of economic, political, technological and social trials and tribulations. And this will be an economic reformation that will not come easy. The first phase of this economic reformation was the Meltdown of 2008, which was a truly shocking event, one that made the Crash of ‘87 appear minor by comparison. The boom and bust pattern was similar: A roughly five year boom period followed by a massive meltdown and bust period, however, this was something quite different and was much more deadly and destructive in its impact on the global economy. Unlike the Crash of 2000 which brought to an end the Dot-Com Bubble Mania, this crash took us to another level and nearly brought about the collapse of financial systems throughout the entire world. The global credit system froze and was literally in a state of shock. This was clearly an epic event and drove me to revise my thinking on economic collapse and periods of recession

ix and depression. After over two decades of observing major boom and bust cycles, my gut reaction to the Meltdown of 2008, from Bear Sterns to Lehman Brothers, was to conclude that we had entered a new zone of economic extremes; that we were looking at the result of decades of over expansion of the financial system; a kind of economic financial insanity, greed gone wild. After experiencing a strong rally and mini-boom period for nearly two years (2009-2011) the stock market crashed again in August 2011, and it was that event that finally led me to the conclusion that not only is a massive Global Meltdown and Great Depression imminent, but in all likelihood, the Great Depression of the 21st Century had already begun with the Meltdown of 2008 (I believe that when historians write about this period decades from now they will come to that conclusion). From December 2007 to late 2013, over $20 trillion was deployed primarily by the U.S. Federal Reserve System (loans to major banks in the U.S. and Europe, government stimulus programs, quantitative easing programs (QE), etc.) to keep the world out of a deep economic deflationary depression. This was a massive undertaking, however, Fed Chairman Ben Bernanke and his counterparts in Europe and Asia managed to delay or postpone the global collapse into the deflationary abyss. But now a Great Reckoning is upon us and we cannot turn back or renounce the verdict. Greed to the nth power got us to this point in history, and engulfs the entire world: it was no longer a pleasure to just be a millionaire, the goal was billionaire status and the players took on enormous risks in the pursuit for enormous Warren Buffett-type wealth. Greed and financial power drove the world into an economic ditch. The year 2012 was the defining moment for the global economy, the end of an era and super-long wave cycle, and the continued transformation of the Industrial Age. After having studied and written about the Information Age Revolution (as coauthor of Black Fu- turists in the Information Age: Vision of a 21st Century Technologi- cal Renaissance) I’m convinced that the grand recovery that will take place after the depression years will be centered in the Informa- tion Age Revolution of the 21st century. This digital and tech revo-

x lution is going to be the perfect solution for the next economic recovery (and that too will come with a price) but we will first have to go through a significant period of financial and economic purgatory. As the research in this field continues to evolve, new ways of examining this exciting economic phenomenon will expand our understanding of what we are dealing with. Since the field of economics is not a science, but an art, economic data and events tend to bring about conflicting levels of interpretation. For instance, in the Meltdown of 2008 the world was presented with enormous economic and financial devastation on par with the Great Depression of the 1930s. Many mainstream economists and government leaders avoided using the word depression to describe this monstrous economic contraction, and that is understandable from a political point of view. The recession (labeled the Great Recession) was considered a typical “garden-variety recession,” and it was declared over in June of 2009. It was expected at that point that the U.S. economy would be in a full recovery mode. However, my analysis confirm that by late 2013, the global economy was still struggling to avoid the second phase of this great economic decline. Perhaps it is no coincidence that we have entered this period of turmoil with the Information Age Revolution in full motion, hum- ming seamlessly in the background. The world will have the means to eventually overcome the destructive forces of this global depression, but the big question is, will our leaders pursue the right course of action or will they decide to continue to go to war over oil, other rapidly diminishing resources and the destructive practice of building and operating nuclear fission reactors? Scarcity of natural resources is going to be a key factor in driving many nations to the brink of economic insanity; and they will make bad decisions in the pursuit of governmental and regional survival. At this moment in history, this world civilization has very serious issues to contend with: global warming, population explosion versus food production and water shortages, massive unemployment versus the technology revolution in robotics and automation, and diminishing resources

xi versus the rapid growth of emerging economic powers in the so- called developing world economies. This is clearly an era full of enormous challenges. THE OBAMA ERA Although the central theme of this book is to examine the power and massive influence of Boom and Bust Cycles on a global scale, a parallel mission is to also examine elements, technologies and systems that will give rise to a new era during our next recovery phase. My economic philosophy proclaims that our civilization has arrived at the end of the Age of Oil, and that governments, corporations and institutions should (in 2012) be actively engaged in a transition period of withdrawal from this depleting and environmentally destructive resource. This publication also advocates phasing out the use of nuclear-fission power as a source of energy in modern civilization. Both of these energy vectors are products of the Industrial Age that witnessed massive use and development in the 20th century. The clean energy and green revolution is the wave of the future and that, from an energy perspective, is the paradigm shift we must make in the 21st century. And this is not some future program we must get started on in 2030; this needs to happen here and now! There must be a political will and resolve to implement the transition period; however, there has been a dismal failure by many American presidential administrations to get this process off the ground. By some estimates it will take one to two decades to make a comfortable transition into the full use of renewable energy resources. The Meltdown of 2008 and the coming of Barack Obama heralded the birth of a new era and a president who understands and appreciates the grand significance of the Information Age Revolu- tion and the mission of clean energy: The birth of the Obama era in support of renewable energy followed the decline and collapse of the Bush era and the Age of Oil. He understands the reality of global warming and that this civilization must now begin to break its addiction to oil. He was swept into office to begin a new era in the American economic journey; a dynamic era of change with substance

xii and commitment to bold new economic, technological and social initiatives. When President Obama took office in January 2009, his administration had to hit the ground running with a new economic agenda and the beginning phase of an energy efficient future, for the Ameri- can economy was rapidly descending into a deep abyss of economic chaos: the first phase of the Great Depression of the 21st Century. Against very powerful entrenched forces of the Industrial Age, Re- publican opposition in Congress and a very powerful entrenched banking system in Washington, President Obama tried to begin the process of moving America into a new era free from the overwhelming dominance of oil. He has the vision and conviction to get this job done, but the massive support he needs from various powerful entities in the United States points to a mission impossible. As a nation, America has not taken bold steps (like Germany) towards making a full commitment to a nuclear-free and clean energy future. This nation is deeply divided over that mission! However, the crisis in early 2009 presented the new Obama Ad- ministration with an opportunity to do something big, something that would not have been possible under normal circumstances. Presi- dent Obama and his administration put together a recovery plan with an initial value at $787 billion (an amount that by 2012 was increased to $840 billion). On Feb. 13, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 in response to the devastation and ferocity of the 2008 economic meltdown. Within a week the bill was signed into law by President Obama, and thus began what some observers have called the New Deal of the 21st Century. Franklin Delano Roosevelt’s (FDR) New Deal of the 1930s Great Depression is the prime example of the implementation of comprehensive recovery legislation during a massive economic downturn. Much of the New Deal legislation of that era is still with us: FDIC, unemployment insurance, social security and other key safety-net programs. Author, Michael Grunwald, refers to the Recovery Act of 2009 as The New New Deal, which is the title of his new book published in 2012.

xiii Grunwald’s detailed behind-the-scene analysis of the Recovery Act is an informative and highly readable account of the significance of this legislation. His investigative reporting provides a focused account of Obama’s vision and the major players that were brought together to implement that important piece of New Deal legislation. With GDP contracting at an annual rate of nearly 9 percent and 800,000 jobs being wiped out monthly, the initial mission of the Recovery Act was to “create new jobs and save existing ones.” In addition, there was an urgency to generate economic activity and “invest in long-term growth.” The immediate concern was to focus the stimulus on millions of working families and businesses by providing them with relief in tax cuts and benefits. Long-term unemployment benefits and entitlement programs were funded in order to keep individuals and families functioning and stable during the Great Recession. According to the Council of Economic Advisors (CEA), by the second quarter of 2011, the Recovery Act had “…raised employment relative to what it otherwise would have been by between 2.2 and 4.2 million” people. It clearly stopped the economic bleeding and rapid decline, however the situation was still anemic. The long-term reach of the Recovery Act of 2009 turned out to be what Grunwald describes as the “biggest and most transforma- tive energy bill in U.S. history.” The bill managed to include a substantial down payment on a clean energy and technology future for the American economy. Funding was made available for wind and solar energy, electric car production, advanced biofuels and refiner- ies, energy efficient battery production, construction of a smarter grid and many other clean energy resources, research and jobs. Obama made use of this crisis to invest in a modern energy efficient society, preparing itself for the next stage in the Information Age Revolu- tion. Here was a president attempting to implement a nationwide clean technology revolution that many futurists and progressive thinkers (including myself) dream about, however it was not fully appre- ciated or harnessed as a springboard for the beginning of a massive clean energy conversion and revolution (similar to what’s happen-

xiv ing in Germany) in America. It’s extremely important to begin this process on a grand scale during the bust cycle while lower interest rates and cheap money is readily available. In education, healthcare and national infrastructure projects, the Recovery Act again made a substantial down payment on the future of the American society. The Obama era set the stage for economic rebirth with the added mission of what’s to come next in the technology revolution of the 21st century. Nations that do not seize the opportunity to make this transition now, may find themselves at a distinct disadvantage at some point in the not-too-distant future. Politi- cal leaders who understand this and have the courage to act on their convictions and beliefs, are the kind of individuals that deserve our support. In January 2009, the Obama Administration was presented with a grand opportunity for structural and dynamic change, and that opportunity was not wasted. That’s the kind of leader we need in this era of enormous uncertainties and major technological and scientific challenges. Did the Obama era (in the first four years) correct all of the massive problems generated by the Meltdown of 2008: the simple answer is no! However, let us not forget that the deeply embedded economic and financial sins of the past three decades could not be rectified in four short years. And as this publication will bring to light in reference to job creation, the American worker (in 2013 and beyond) is fully exposed to the internationalization of wage competition, robotic factories and workers, the Internet revolution and other factors that point to the birth of a new era similar to the magnitude of when the Industrial Age emerged as the game changer in the 18th century. We are in the midst of a paradigm shift of profound significance, and many global leaders do not really understand the full implications of this massive era of change! With the re-election of President Obama in November 2012, the stage was set for the full implementation of his economic, scientific, technological, social and financial policies. The Obama era was given the opportunity to continue its mission for the 21st century, and that was the most intelligent decision that the American people could

xv have made in the 2012 historic election. President Obama has the same (if not greater) mission as FDR had during the 1930s Great Depression. In his second term he will need to strengthen his administration with a cohesive team of dedicated reformers and implement economic policies that will focus on de-leveraging by the Ameri- can people, the reality of balance sheet recessions and stronger economic and financial reforms. In addition, his next four years should be about the full implementation of a dynamic new green technology future. That’s the vision I share with this president of what will need to come after the massive fallout of the bust cycle. The important thing is to implement the correct economic policies that will benefit the vast majority of Americans, and that process will result in a much stronger recovery. We are living in the time of an incredible technological revolution, and this will be the salvation of our world after the period of financial and economic purgatory. There has to be this period of cleansing, and it will most likely be more painful in Western societies, where the source of the boom and bust, credit expansion and irrational exuberance was initiated. The transition and transformation periods must take place, but it will not be a seamless/sterile process. That is why we must strive to see the truth in these matters as quickly as possible and not be driven by sheer emotion, ideology, politics or religion, trade wars and currency wars. Something major is about to happen and it will take an enlightened worldview to save our planet and continue the march of civilization. And again, this is not an alarmist ranting, but a call to enlightened minds on our planet to prepare for a coming period of enormous change, transition and transformation.

NOTES 1) Grunwald, Michael, The New New Deal: The Hidden Story of Change in the Obama Era, Simon & Schuster, New York, 2012.

xvi ECONOMIC TURMOIL INTRODUCTION

or centuries manias and panics, boom and bust cycles and Fbubble formations have been major events in our global economic and financial system(s). One of the most extreme examples is the time of Tulip mania, the Dutch mania for tulips that dramatically peaked over a two month period in 1636 to 1637. During that brief time, some individual tulip bulbs traded as high as the price of a house! When the collapse finally came, it was swift and brutal, wiping out the fortunes of those who were left holding the severely devalued assets (tulips). Some historians described this extraordinary bubble as a period of mass insanity and greed. Other examples of extreme manias and periods of financial collapse include The Panic of 1907, German hyperinflation and the Weimar Republic in 1923, Crash of 1929 and the Great Depression, Crash of 1990 in Japan, Dot-Com Collapse of 2000, hyperinflation in Zimbabwe in 2005 and the U.S. Meltdown of 2008. What happened during the boom and bust cycles of 1995-2000 was explosive and full of surprises, and its abrupt ending made and shattered many fortunes and fabulous dreams of enormous wealth. During that period of unbridled optimism, many traditional attitudes regarding investment analysis were temporarily suspended in favor of New Economy beliefs and mantras. In fact, during that time, the new Internet Economy was born! By some estimates, that boom period was “bigger than any bubble the world had ever seen.” With the start of the bust cycle in April of 2000, Washington and the Federal Reserve System (The Fed) were left to clean up the mess while “Big Money Financiers” (the major architects of financial boom and bust eras) moved on to target a new area of economic growth. With the lowering of short-term and long-term interest rates by the Fed, the real estate markets of 2002-2007 began to take shape and grow into the next bubble. Billions of dollars were lost in the Dot- Com crash, with much of the disaster and collapse occurring within the technology and Internet sectors. The survivors (Amazon.com,

18 Introduction 19

Cisco, Microsoft, Apple, Yahoo, AOL, ASK, Priceline and others) went on to live another day and prosper in the emerging New Internet Economy and other areas of the Information Age Revolution. Thus, hundreds of billions of dollars that survived the Dot-Com collapse, in addition to billions more from new sources and global investors (sovereign funds, hedge funds, banks and various institutional and wealthy investors) would go into fueling what would become the most massive boom and bust cycle in world history: the global mortgage, credit and finance bubble of the 21st century. So we witnessed a near back to back performance of bubble formations in the space of 12 years. We are living in an era of the formation of the most massive global financial bubble in all of recorded history. The Meltdown of 2008 ( and its aftershocks) was the initial bursting of this bubble and the first phase of the Great Depression of the 21st century. As this bust cycle continues to unfold in the wake of the 2008 collapse, the sovereign debt crisis that has a strangle hold on most of the developed world, has evolved into the epicenter of a massive credit and money supply expansion bubble that threatens to derail the entire global economic system. Governments and their central bankers are conducting a titanic battle to prevent contagion and collapse into deflation and global depression. As astounding as the 2008 meltdown was, with the serial collapse of some of the most powerful corporations in the world (at that time) it represented only the tip of the iceberg in this epic calamity. The sovereign debt crisis in Europe is a constant reminder of why this bust cycle may linger on for many years without resolution and a robust recovery. Greece and Spain are microcosms of the much larger global crisis, and the world must learn by observing the failed austerity policies that are not working in their ongoing Great De- pression years. As authors Carmen M. Reinhart and Kenneth S. Rogoff reminds us, This Time Is Different! We have reached a major turning point in this bust cycle where an accurate assessment and appropriate reforms are critical; inappropriate policies and short-term remedies will only produce greater 20 Global Economic Boom & Bust Cycles failure. And there must be a total recognition by global leaders and lawmakers that unrestrained and unbridled free enterprise systems will not work in this economic bust cycle. The longer our leaders delay in implementing the full measure of economic and depression-era reforms, the more difficult it becomes to stop what is now inevitable: Global Economic Turmoil and Collapse! At some point in this bust cycle, additional stimulus programs, massive money printing, bailouts and corporate welfare will not reverse what we will witness in the second decade of the 21st century. And it now appears that 2012 was the pivotal turning point in this unfolding drama! For- tunately, for the entire world, there is still time to prepare for the finale, but no one knows the hour or the Day of Reckoning. This book is not a thesis on remedies and reforms, but is more of a lengthy narrative seeking to uncover the enormity and realities of the downward bust cycle moving steadily towards a finale in the second decade of the 21st century. This narrative suggest that we may possibly be confronted with a future meltdown greater than the Meltdown of 2008! The primary mission of this book is to provide, in layman’s terms: (1) a unique and passionate understanding of the amazing boom and bust cycles of our times, and to understand the full scope of what kind of bust cycle we are dealing with in this current era (2) to present a theory of a Grand Convergence of major economic forces that will bring about massive change and revision throughout the global economy (3) to chronicle the emergence of the Great De- pression of the second decade of the 21st century that began with the Meltdown of 2008 and (4) to declare that we have reached the end of the Age of Oil and that the entire world should begin a global transition period away from this depleting energy resource. In 2013, we are witnessing the greatest bubble and credit expansion in modern economic history, and when this entire system finally implodes, it will bring into existence some harsh economic and financial realities. Given the fact that we are also in the midst of one of the greatest technological revolutions in the history of the world, I sense that there is an urgency to come to a much greater Introduction 21 understanding of both the cause of this great calamity and the main source of the inevitable recovery that will take place sometime before 2022. Major paradigm shifts in the industry sectors of energy, communications, travel, infrastructure, medicine and other fields are scheduled to transform our world in ways that we have only imagined in Hollywood. As these events unfold, global markets are going to react, and in many cases, irrationally to stalled economic performance in the West, natural disasters, terrorists attacks and wars, the possible emergence of trade wars, barrier-breaking technologies and more. If this book were a major motion picture, the Grand Conver- gence might be viewed as the main protagonist, and boom and bust cycles, peak oil, economic, financial, technological and political events would be the main plots and subplots of our drama. Part One, “Economic Turmoil,” examines the foundation and framework of the current economic crisis. Review and analysis of the epicenter of the global economy brings into focus the major factors of decline. In Chapter One, we look at the American Debt Crisis (both public and private) and the slow but steady decline and revision of this superpower nation. We examine the issues of America’s domestic decline and political gridlock in Washington versus its financial commitments to maintain an international presence and empire. This is unsustainable and will ultimately lead to economic collapse, which is what has ultimately happened to other nations in the past. In Chapter Two, the focus is the European Sovereign Debt Cri- sis and the fate of the euro. The European Union (EU) has reached a critical impasse that will either be resolved in total political and economic union, or collapse into economic disunion and political chaos. Both the EU and America are at the crossroads and the fate of the global economy hangs in the balance on what happens next in these superpower entities. Part Two, “Boom and Bust Cycles,” provides a detailed analysis of five Boom and Bust Cycles and the global impact of these periods of manias and panics. Each historic period provides a unique set of 22 Global Economic Boom & Bust Cycles conditions, instruments, economic, political and social factors that came together to generate the bubble period and, within a specific time frame, would ultimately create the conditions for the bust cycle. Despite the differences of each era, there are some fundamental factors at work that are similar in all boom and bust cycles: the cycle of greed and fear, interest rates, and easy money policies by the Fed, to name a few. In Chapter Three, we examine the fabled era of the boom and bust cycles of the Roaring 20s and the Great Depression of the 1930s. In Chapter Four, our attention will focus on the boom and bust of the Booming 80s and the Crash of ‘87. In Chapter Five, we examine the rise and fall of the Japanese bubble economy and its so-called Great Recession. We take a close hard look at the rise of the Japanese juggernaut and the role it occupied in international finance during the Booming 80s. Here, we also pay close attention to the rise and collapse of Japan’s bubble markets in stocks and real estate, and the deep economic slump it endured throughout the decade of the 1990s and the early years of the 21st century. Understanding what happened in Japan is a very important study analysis and will help us to better understand the aftershocks and fallout of the coming global crisis. Chapter Six examines the birth of the commercialization of the Internet and the Dot-Com era. The Roaring 90s was one of the 20th Century’s greatest bubbles, and this boom and bust era heralded a major turning point in the Information Age Revolution prior to the birth of the 21st century. In Chapter Seven, we take a hard look at the mortgage bubble and the Meltdown of 2008; a climatic period that penetrated deep into the financial sectors and economic fabric of the American and global economic system. This was the greatest credit bubble in modern financial history and we examine how this bubble was created and what ultimately triggered its collapse. We also explore the premise that this meltdown was probably the first phase of the Great Depres- sion of the 21st century. Introduction 23

Part Three, “Forces of Transformation,” presents a historical analysis of the key forces that are destined to initiate a dramatic transformation of our current global civilization: Information Age technologies and the emergence of China are destined to transform the global landscape in the new era. The collective force of these enormous factors will bring about a simultaneous shock and revision of global economic development. The transition period (2012-?) will be determined by how quickly world leaders respond to the challenge of reorganizing world trade, commerce and development within the context of the Information Age Revolution. Chapter Eight provides key observations on the developments and excitement of the information age and the enormous possibilities of new technologies that have been developed and nurtured over a period of decades. Many of these new technologies are ready or near ready for prime time. We will study the challenges involved in new technologies, some of which, are wiping out jobs while building whole new economic models. We have entered a period of enormous change that is sweeping the entire globe. For example, revolutionary developments are changing our financial markets at an extraordinary pace, bringing about transparent stock market, bond and currency systems. In Chapter Nine, we examine the emergence of China and the Asian Century. The exponential growth and global impact of this nation is examined in detail. The coming of China and its elevation to superpower status (as well as the emergence of other BRICS nations) has resulted in the establishment of a new multipolar world order for the new millennium. This new paradigm is destined to have a major impact on the world and reconfigure the geopolitical landscape. Part Four, “Future Shock,” provides some visionary assumptions regarding technological innovations, paradigm shifts and economic X-factor analysis of natural disasters and terrorists attacks in the 21st century. In Chapter Ten, we take a long hard look at oil and alternative energy resources. A case will be made to announce the end of the Age of Oil and the formal adoption of a New Energy 24 Global Economic Boom & Bust Cycles

Revolution to power the world of the future. Regardless of how much oil is left in the ground, the world should begin a “Transition Pe- riod” phasing out the use of oil, especially in the area of personal automobile transportation. Chapter Eleven examines terrorism and natural disasters. This book refers to these unknown events as Economic X-factors, events that happen unexpectedly and are unpredictable. The financial impact of unknown events and catastrophes will continue to play a significant role in the global economy as we move forward in the new millennium. The emergence of Hurricane Sandy prior to the 2012 elections was a deadly reminder of the significance of climate change and extreme weather patterns in this day and time. This civilization cannot afford to ignore the dramatic increase in the power and ferocity of natural disasters. The probability is very high that we will witness much greater catastrophes. In the Epilogue, I summarize the book’s journey and bring into focus the key issues that are critical to understanding our current crisis and what technological, political and economic solutions the world needs to consider as we move forward in the 21st century. As a civilization and global economic system, we have traveled beyond the point where we can painlessly return to a place of safety: Eco- nomic and financial purgatory is unavoidable. What we may now experience in the West, which will provide the contagion that will affect the entire world, is a grand collapse of an entire global economic system and the complete immersion into the second phase of the Great Depression of the 21st century. As governments and their central bankers struggle to avoid a major collapse in the global system, there is a strong probability that we will witness more frequent boom and bust cycles during the interim periods. This means that even during a long downward bear market, periods of boom and bust will continue to occur, just as they did during the Great Depression of the 1930s. These events may begin to happen in much shorter time frames. The announcement by Fed Chairman Ben Bernanke (at the Sep- tember 2012 FOMC meeting) to purchase $40 billion per month in Introduction 25 mortgage-backed securities (from banks) until the unemployment crisis in America had improved and the real estate market was in a stable recovery stage, was a clear indication that the country was experiencing an anemic recovery and that the Fed needed to pull out a monetary bazooka and blast out a new quantitative easing program (QE3). By December 2012, this new QE3 initiative became a $85 billion per month program, purchasing $40 billion in mortgage- backed securities and $45 billion in treasury bonds. QE3 was clearly aggressive, open-ended and would continue until there was "sustained improvement in labor market conditions." Other international central bankers were also implementing new QE programs in an effort to stabilize their economic systems. All of this was unprecedented, with the entire world economy in unchartered waters addicted to QE solutions and money printing. The Fed sent a very strong message to the markets; that the situation in America was so dire and weak, that it was necessary to initiate an unlimited QE program (some observers began calling it QE forever). However, with this next move, the global economy ventured deeper into unfamiliar territory, and no one knows what the end result will be. By late 2013, the Fed began to signal that it was time to start tapering the QE3 operation by late 2013 or early to mid 2014. Enormous wealth will be made and lost during the coming volatile periods, so it will be important to know what’s happening when this process is in full motion. Global Economic Boom & Bust Cycles is about coming to grips with this phenomenon; it's about markets, people, power, politicians, central banks, Wall Street, attitudes and beliefs and about building a strategic plan for survival and success in the 21st century. We will have to live through the enormous challenges of what may become, the mother of all economic depressions: The Great Depression of the 21st century. But this story does not simply end with a global economic collapse; as with all boom and bust cycles, there will be a recovery and that will usher in a new era of prosperity. However, the world will have to go through a period of economic purgatory (an unknown number of years) before the time of renewal. CHAPTER ONE AMERICA AT THE CROSSROADS

“Today, I can report that as promised…After nine years, America’s war in Iraq will be over. Over the next two months our troops in Iraq - tens of thousands of them - will pack up their gear and board convoys for the journey home.” President Barack Obama “The era of global supremacy by a major power…is over…The world is now much more diversified. There is now the new East in Asia. There is now a globally, politically awakened population…If we want to compete in it, we have to revitalize ourselves.” Zbigniew Brzezinski

he 20th Century was the American century, with TAmerican ideals, cultural influences, life styles, and its economic and military prowess encircling the globe. America is known as the land of opportunity, the beacon light of freedom and Demo- cratic principles, the place where millions of people all over the world dream of setting up a home. But the glory period may be fading, as past historical periods have taught us: America is at the Crossroads! In the 20th Century America emerged victorious from three major global wars: World War I, World II, and the Cold War of the Bi-polar era. As the number one superpower on the planet, the military of the U.S. is now deployed in roughly 150 countries around the world. Nearly $1 trillion a year is required to maintain this global presence and system of power, and that has become unsustainable. Since 911, the cost of the wars in Afghanistan and Iraq, and the counter-insur- gency in Pakistan, came to a total of $4 trillion and 225,000 dead, both civilian and soldiers. The requirements of being the number one superpower in the world are immense, and as past historical periods have revealed, it has a way of driving a nation to a point of economic collapse. America is not immune to history’s epic cycles. The rise and fall of nations is a historical reality that cannot be ignored. Ameri-

26 America at the Crossroads 27 cans are now witnessing growing poverty, homelessness, crime, and urban and educational decline. These are clear signs of a nation ne- glecting its domestic problems in favor of a grand design for international power and prestige. As the economic decline deepens, Ameri- can cities and states are going broke. School closings, shutdowns of essential services along with increases in taxes are common in many cities throughout the nation. In the early 1990s recession, 37 million Americans were without health insurance, by 2011 that number had climbed to nearly 50 million people, and nearly 50 million people are living in poverty. In November, 2011, the Census Bureau reported that 49.1 million Americans were living in poverty, close to 16 percent of all Americans. And according to another report released by the Census Bureau in November, there are now 51 million Americans who are part of a new category of “near poor” people. This group earns paychecks, owns homes and cars, pays taxes, but are barely making it, scraping by on very tight budgets. Thus, in America, the land of opportunity, one in three Americans (100 million people) is living in poverty or in the zone just above poverty. Without the safety net programs of social security, food stamps, Med- icaid and Medicare, as well as welfare, the situation would be a lot worse. Policies or programs that cut too deep and too fast will quickly throw this nation into turmoil. That is the critical message these numbers present. American workers are now totally exposed to the globalization of wage competition and within the last 20 years this issue has been exacerbated by the corporate strategy of outsourcing jobs to developing nations in order to save on labor costs. These are the realities that have been building and expanding over many decades, and the culmination of this issue will now contribute to a steady erosion in our economic and financial systems. Can a new vision work for America if millions of her citizens are technologically and economically left behind in the race for the new multi-polar world order of the 21st century? Can America continue to maintain its international global military presence in 150 countries at the expense of its crumbling infrastructures and overall domestic decline; draining criti- 28 Global Economic Boom & Bust Cycles cal resources from its economically depressed population? We continue to borrow vast amounts of money in order to maintain the yearly payments we make to foreign countries to accommodate the global empire. Ultimately, America will be forced to retreat from its role as the world’s number one superpower, unable to sustain its financial and economic obligations. Bottom line, we will continue to make these payments until we enter into a period of collapse, just like the Soviet Union did a little over 20 years ago. America has begun to generate statistics worse than some Third World nations. Unless America implements a concentrated effort to invest in the future of all of its people, it will lose its world class leadership role and all Americans will lose their standard of living. In fact, the United States and Europe are two economic systems that are in structural decline; an economic reality that is more permanent in nature, evidenced by a loss of various industries and jobs, emergence of dynamic technological change, and new global job market realities. These new realities represent a paradigm shift in global economic affairs. In September 1991, a Washington-based research group, the Non- partisan Tax Foundation, announced that total overall U.S. debt had soared to $10.6 trillion. This figure included total governmental, consumer and corporate borrowing that largely occurred during the Booming 1980s. According to the report, total debt in 1980 was $3.9 trillion, which meant that in the space of one decade Americans had borrowed an enormous amount of money to help finance our world class lifestyle and to maintain our No.1 status. By 2011, the overall Federal Debt alone had climbed to $14.3 trillion. Since the collapse of 2008, for three years straight the federal deficit exceeded $1 trillion: The Congressional Budget Office projects $1.4 trillion for 2011; $1.29 trillion in 2010; and $1.4 trillion in 2009. On average (since September 28, 2007) the national debt is increasing $3.90 billion per day. The U.S. is borrowing 40 cents of every dollar it spends. As we entered 2012, the national debt was over $15 trillion, rising $75 million every hour of each day! America at the Crossroads 29

According to the Treasury Bulletin for March 2011, $2.5 trillion of the $7.8 trillion outstanding marketable debt will come due and need to be paid off. Given this number, the weekly borrowing amount is $60 billion or $240 billion per month. And with the obligations for Social Security, Medicare, and other federal programs rising rapidly, a collision course is expected at some time in the future because all of this is unsustainable: extraordinary borrowing every week, rising federal program payments combined with an anemic economy with a steady drop in tax revenue is a combination of factors that will have dire consequences. If the United States were a large corporation, it would need to file for bankruptcy. How did the U.S. arrive at this point of a massive debt crisis? The historical record is clear, starting in 2001 the U.S. went from a record surplus position to a massive debtor nation in less than a decade. The tax revenue base was severely eroded and is cited as the main reason for this descent into debtor economic hell. Several rounds of tax cuts, two wars (Afghanistan and Iraq) and two recessions have pushed this nation over the edge. Instead of keeping the surplus as a base for maintaining a balanced budget, George W. Bush, when he took office in 2001 immediately pushed for tax cuts, and Congress approved a $1.35 trillion dollar tax cut package. A second package of $350 billion followed in 2003. Analysts estimate that the tax legislation enacted under President Bush wiped out nearly $6.3 trillion of anticipated revenue. In addition, an analysis presented by the nonprofit Pew Fiscal Analysis Initiative tells us that Bush-era policies generated more than $7 trillion in debt and is the main source of the huge yearly deficit numbers. Thus far, the same report estimates that Obama-era policies has accounted for $1.7 trillion in new debt. This, then, is the legacy of the past decade that has literally sentenced the United States with an undetermined number of years to debt repay- ments, de-leveraging and fiscal austerity. Table 1 presents a list of the major public and private holders of U.S. Government Debt. As will be discussed in a later chapter, the first two years of the Obama Administration was centered on crisis management and focused on preventing the onset of another Great Depression. Obama 30 Global Economic Boom & Bust Cycles now needs to pivot and focus his administration on massive reform policies and “New Deal” type structural initiatives, and he should consider forming a new cabinet that has a complete understanding of what needs to be done in this type of economic crisis. He needs to

United States Government Major Debt Holders (As of February 2012)

Major Debt Holders Gross Amount

(1) Federal Reserve and Intra- $6.328 trillion governmental Holdings (2) China $1.132 trillion (3) Other Investors/Savings Bonds $1.107 trillion (corporations, brokers and dealers, GSEs, estates, bank personal trusts, savings bonds, etc.) (4) Japan $1.038 trillion (5) Pension Funds $842.2 billion (6) Mutual Funds $653.5 billion (7) State and Local Governments $484.4 billion (8) The United Kingdom $429.4 billion (9) Depository Institutions (commercial $284.5 billion banks, savings banks and credit unions) (10) Insurance Companies (property, $250.1 billion casualty and life insurance companies)

Table 1

Source: Adapted from data presented by the Department of the Treasury/Federal Reserve Board and CNBC. come to the full realization that he is a depression-era president. The sooner he does that, the better president he'll become during his second term. And it is probably a good idea for President Obama to America at the Crossroads 31 strongly consider appointing a new Secretary of Treasury who is not a Wall Street insider and is a dedicated reformer. In the case of the Federal Reserve System (The Fed) and Ben Bernanke, the Fed Chairman needs to concentrate his vast resources on bailing out the American people. As a scholar on the Great De- pression of the 1930s, he should clearly reposition his stance in favor of policies designed to encourage the banks to do debt forgiveness and loan modifications. Although he cannot or will not admit it in public, he also needs to come to the full realization that he is a depression-era Federal Reserve Chairman. THE GREAT RECESSION As will be presented in my analysis, the Great Recession of 2007- 2009 was actually the first phase of the Great Depression of the 21st century. This recession changed the dynamics of the American Dream; something was ripped out of the fabric of our system like a stolen organ from our collective economic body. We now have nearly 15 million American people unemployed; 26 million when you count those who have given up looking for work. Unemployment for young Americans in their 20s is nearly 24 percent (a 1930s Great Depres- sion unemployment rate) with many unable to find any meaningful employment and unable to leave the home of their parents. Many of our younger generations are also saddled with enormous student loan debt, which is considered another bubble crisis in the making. We tend to associate a great depression era with soup lines, massive unemployment (20 to 25 percent) a banking system collapse and economic blight. However, this time around the main features of the Great Depression of the 20th Century are not present in this current phase of the collapse due to the safety net programs we have in place: unemployment insurance, FDIC, social security, public assistance, Medicare and Medicaid, etc. And it is extremely important to understand this! Without these safety-net features, we would already have chaos in the streets and massive crime. The gap between the rich and poor has exploded: Income for the wealthiest 1 percent of Americans (since 1979) expanded 275 32 Global Economic Boom & Bust Cycles percent. During that same period, the income for the poorest 20 percent grew by 18 percent. The disparity is the worse since 1929. In addition, the off-shoring of jobs, automation, the Internet and robotics have taken their toll. Lakshman Achuthan, managing director of Economic Cycle Re- search Institute, has these predictions for us: “It’s virtually certain that the next recession will come before the job market has healed from the last recession.” He believes that there will be at least three recessions over the next ten years, stating that, “We’ve entered an era where the United States will see more frequent recessions than anyone is used to.” This was a conclusion I came to several years ago in my book Bubble Markets and Boom & Bust Cycles; more frequent boom and bust cycles resulting in periodic episodes of recession during an era of structural decline. Low demand will plague the U.S. economy for some time to come due to the high level of private debt. Consumers are focused on paying down debt loads (de-leveraging) fearful of losing jobs and are very uncertain about the future. People have basically lost confidence in a stable future and are assuming a very conservative posture on spending. This is the start of a trend that will deepen in 2012 and beyond. Moving forward into 2012, we can expect the following: (1) federal budget cuts mandated by the debt-ceiling crisis will shrink federal spending at a very critical time (2) fiscal and monetary stimulus has just about run its full course and will run into strong headwinds in a deeply divided Congress (3) the unemployment rate will continue on a course of deep uncertainty and (4) without intervention, the housing crisis will continue on a path of slow recovery. Global uncertainty will continue to plague us and supply and demand forces will shift downwards as more countries are hit with austerity measures. Stock, commodity and bond markets will fall. Table 2 illustrates American recessions since World War II. STATES AND CITIES GOING BROKE A deepening economic crisis will witness many American cities America at the Crossroads 33 and counties going broke. These municipalities will face very difficult times with shrinking tax bases, excessive liabilities, high labor costs, fallout from bad investments and massive unemployment: this is driving many local governments to cut critical services and/or consider filing for bankruptcy. By May 2010, many American cities were on the brink of bankruptcy.1 As the downturn deepens, many cities and counties in hard hit locations will be forced to raise taxes, sell assets, sell real estate and renegotiate bond payments. These governments are backed up against the wall with few options. Cities and states are laying off tens of thousands of people each month, and for those who are still working, their wages aren’t keeping pace with inflation. According to the center on Budget and Policy Priorities, 42 state governments and the District of Columbia are faced with a combined budget shortfall of more than $100 billion. Much of this shortfall stems from the collapse of the housing market and subsequent demand for more critical services for people who have fallen on hard times. This again demonstrates an urgent need for a massive resolution to the housing crisis, as well as the strategic importance of the federal government instituting a “Depression Era” (or something similar to a Marshall Plan) plan to regenerate the American economic system.2 Our domestic crisis should take precedence over the international design of maintaining a global empire. History has demonstrated the dire economic consequences of maintaining an economic empire over and over again: Those who do not learn from the lessons of history are doomed to repeat it! America should be about the business of forging a domestic policy to save its crumbling cities and states instead of wasting valuable resources on useless wars and global controlling mechanisms. It’s worth repeating; the Soviet Union did this a little over 20 years ago and witnessed a massive global collapse of its empire. Some high profile observers contend that this could never happen to America, and I say that they are dead wrong! Vallejo, CA (population of roughly 120,000 people) filed for bankruptcy in 2008, and after years of austerity, emerged from its 34 Global Economic Boom & Bust Cycles

POST - WORLD WAR II RECESSIONS

Recession Duration Period

Nov. 1948 to Oct. 12 months Truman/Post 1949 World War II

July 1953 to May 10 months Eisenhower Era 1954 Post Korean War

August 1957 to 9 months Eisenhower Era 1958 global downturn

April 1960 to 11 months Pre-Vietnam high un- Feb. 1961 employ. & inflation

Dec. 1969 to 12 months Vietnam Era high in- Nov. 1970 flation/fiscal policy

Nov. 1973 to 17 months Oil Crisis (OPEC) Feb. 1975

Jan. 1980 to July 7 months Double Dip Recession 1980 Oil Crisis, inflation

July 1981 to Nov. 17 months Double Dip Recession 1982 Oil Crisis, inflation

July 1990 to 9 months S&L & Banking March 1991 system Crisis

March 2001 to 8 months Dot-Com bust period Nov. 2001 energy crisis, terrorists

Dec. 2007 to 18 months Global financial melt- June 2009 down, mortgage crisis, high oil prices Table 2

Sources: Adapted from data presented by U.S. Bureau of Economic Analysis and the National Bureau of Economic Research. America at the Crossroads 35 crisis in late 2011. For the entire state of California, projections are for annual $20 billion deficits for the next five years. The cumulative budget deficit for the state of New York was expected to reach $50 billion in the year 2012. And it’s reported that Illinois is on the brink of economic calamity and has (in 2011) started paying vendors with IOUs; the state is also pushing for massive tax hikes to balance the books. In 2010, Colorado Springs, in an attempt to address a $28 million budget deficit, turned off a third of its street lights. Other Ameri- can cities began doing the same in order to cut expenses. Some local governments even decided to break up roads that no longer could be maintained, returning them to plain gravel. In March 2010, the remaining industrial cities and mill towns in America were at the edge of a cliff in regards to their economic futures. Textile mills in the Carolinas, steel in the Midwest, paper in New England, and aluminum in West Virginia are locations vulnerable to globalization and internationalization of labor costs. When the central employer leaves a small town (population of less than 15,000 people) the result is near economic collapse for the local economy. In October 2011, 9,000 homes and lots (a total area the size of New York’s Central Park) were on the auction block in Detroit, Michi- gan: minimum bid $500.00. Total vacant land in Detroit now occu- pies an area of the size of Boston. In early March 2012, Detroit, Michigan Mayor Dave Bing, introduced a novel program to sell vacant lots in the city of Detroit for $200. Bing stated that the initiative was designed to “reduce blight in our neighborhoods.” The initial focus of the program was 500 homeowners who had vacant lots ad- jacent to their own property. Letters were mailed to these owners with attached applications and stating the $200 offer. Upon acceptance of the offer, the homeowner simply had to send in the completed application and $200, and the deed was mailed back to the owner. It was that simple. An added incentive was that the homeowner would receive a $200 gift card to a locally-owned lumber yard in order to purchase wood to build a fence for their new lot. It 36 Global Economic Boom & Bust Cycles was a great deal for the homeowner and the city was able to place another piece of property back on the property tax rolls. The car manufacturing base of Detroit and other cities in the state of Michigan has been decimated, leaving in its wake economic collapse and blight. Unable to pay a $4 million electric bill, High- land Park, Michigan elected officials voted to turn off 1,000 streetlights and also removed them - poles, bulbs, everything. By removing the lights entirely, observers stated that this appeared to be a permanent policy. Here the city is $58 million in debt, has dozens of burned-out or vacant houses and buildings and is experiencing a major decline in population. This was a severe measure undertaken by a community that could no longer meet the demands to pay its municipal bills. Other towns have closed libraries, cut back on trash collection, and instituted cuts in education. In early November 2011, Commissioners for Jefferson County, the most populous county in Alabama, voted to declare an estimated $5 billion bankruptcy after negotiations with creditors had failed. This went on record as the largest municipal bankruptcy in U.S. history.3 Jefferson County had been trying to avoid bankruptcy since 2008; struggling in a maze of debt obligations, lagging economy, court rulings and public corruption. Jefferson County is home to 660,000 residents and Alabama’s largest city, Birmingham. Observ- ers did not view this as systemic to the municipal bond market, but rather a situation of gross mismanagement of a municipal water and sewer project. However, the systemic risk of investing in municipal bonds will emerge as more of these “mismanagement” municipal situations move to the surface. In addition, in order to prevent default on municipal debt and ward off collapse of the government, some small municipalities began utilizing a procedure to either merge with or acquire other municipal governments. As the crisis deepens, it is very likely that many smaller townships will elect to follow this process. In the end, there is strength in numbers, and in unity. Austerity programs are being implemented all over the world. The people that are suffering the most are the poor, hungry and un- America at the Crossroads 37 employed. Many American cities and states are flat out broke or soon will be broke and unable to pay their bills. Experts are predicting a surge in municipal bankruptcy filings in future periods, particularly as the real estate market worsens. This is another clear reason why an across the board real estate solution in America is mandatory if the nation is to carve a path towards recovery. According to the Center on Budget and Policy Priorities, these governmental bodies have eliminated a half million jobs since August 2008. Expecta- tions are that an additional 450,000 jobs will be eliminated by the end of 2012. This crisis will accelerate in 2012 and beyond: America is at the Crossroads. ECONOMIC COLLAPSE: PART ONE The United States entered a severe recession in December 2007 and this recession was officially over (according to the Business Cycle Dating Committee) by June 2009 (18 months later). The meltdown of 2008 shook the foundation of the global economy and came close to cascading into the greatest financial crisis since the Great Depression of the 1930s. Recent movies and documentaries on the financial crisis such as Too Big To Fail, Wall Street: Money Never Sleeps, Inside Job, and Meltdown have all showcased the greed, profligacy, incompetency and arrogance of Wall Street, Washington politicians and American banking institutions. What stopped the total collapse was the extraordinary response by the Fed, the Bush and Obama Administrations, and Congress to create and deploy massive bailout and stimulus programs. Troubled Asset Relief Program (TARP), trillions of dollars of hidden loans to global financial institutions by the Fed, Quantitative Easing One (QE1) and Quantitative Easing Two (QE2) were employed to save the world from total economic and financial devastation at that critical juncture in history. QE1 saw the Fed buy $1.7 trillion in assets from banks, mainly mortgage-backed securities. The QE2 operation witnessed the central bank purchasing $600 billion of Treasury bonds. Thus, the Federal Reserve purchased $2.3 trillion of debt during both of these operations. 38 Global Economic Boom & Bust Cycles

Not only were countless billions of dollars loaned and deployed to banks, corporations and financial institutions in America, but also to financial and banking institutions in other nations. It was a global response to prevent contagion and total global economic disaster. The American economy was placed on life support for 2 ½ to 3 years and this was called a recovery and a bull market. However, there was an anemic recovery and there was no bull market (in the traditional sense); it was a stock market rally on steroids, courtesy of Federal Reserve Chairman, Ben Bernanke and the Fed. A genuine bull market has the ability to generate real sustainable economic progress. This did not happen during that period. What we experienced (mainly) was monetary inflation and this does not create real sustainable economic growth and employment. The only reason the U.S. did not enter a depression in 2008 is due to trillions of dollars of bailouts and stimulus programs. Quanti- tative Easing Two (QE2) was started in November 2010 and ended in June 2011. It provided stimulus to the economy but mostly by creating the atmosphere for a stock market rally and helped to lift gas and oil prices in early 2011. The procedure is to print money in order to buy debt; however, this has the cumulative effect of devalu- ing the currency. The purchases were intended to keep interest rates low, encourage spending and borrowing and give a boost to the stock market. The Fed was intensely focused on fighting the threat of deflation, a prolonged period of falling prices. For the first quarter of 2011, the Gross Domestic Product (GDP) grew a feeble 0.4% (the original estimate was 1.9%). The second quarter estimate was 1.8%; however, that was revised to 1.3%. These numbers indicate that the American consumer is pulling back. There was broad-based softness in consumer spending (the national average for a gallon of gas peaked in May 2011 at $3.98) with rising prices for many of the basic essentials and energy. BANK BAILOUTS: TOO BIG TO FAIL The banks were bailed out (given corporate loans and welfare) in 2008-2009 and they, in turn, did very little for the American ho- America at the Crossroads 39 meowner by way of refinancing, loan modifications, debt reductions or forgiveness in the current low interest rate environment. So, the American people now have absolutely no taste for too big to fail scenarios for rich banks and corporations: in fact the new mantra is they are too big to save. The American homeowner is too big to fail. Thus, no more bailouts especially for banks deemed indispensible to the economic life of our nation. However, given the deep divide in Washington, we can safely assume that the era of big government bailouts is over. If large banks collapse, we can rest assure that other entities will eventually fill the void. We showered trillions of dollars on these institutions in order to bail them out after the financial crisis, yet a large cross section of Americans (12 million borrowers) can’t receive $700 billion to bailout the housing market. And by 2012, there had been a long hard struggle for five long years trying to get these institutions to remedy the foreclosure crisis. The 2008 meltdown simply facilitated the consolidation of the banking industry, which had been an ongoing process for several decades. In 1970, the nation’s 5 biggest banks held 17 percent of all banking industry assets. By 2012, the 5 largest banks owned 52 percent of all U.S. banking industry assets. Before the 2008 meltdown, the assets of the five biggest banks in America were 43 percent of domestic GDP. After the 2008 meltdown, big banks grew even bigger. Bloomberg reported that Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. held $8.5 trillion in assets at the end of 2011. According to the central bankers at the Federal Reserve, this amount is equal to 56 percent of the U.S. economy. These are the banks that were bailed out and given a new lease on life, and now their total assets are much larger than the GDP of many countries in the world. They are absorbing many smaller banks that have fallen on hard times, they dominate the commodities markets, and their exposure to the high-risk derivatives markets is greater than ever. These are the financial titans that may one day bring financial collapse to the entire world. As one commentator stated so eloquently, “So if those banks were “too big to fail” before, then 40 Global Economic Boom & Bust Cycles what are they now?” In Chapter Seven on the 2008 meltdown, I present the findings of the Government Accountability Office report (GAO report) that lists bailout funds made available to some of the nation’s largest banks. We are informed of the following in regards to what each bank received in bailout funds: Citigroup: $2.513 trillion; Morgan Stanley: $2.041 trillion; Bank of America: $1.344 trillion; Goldman Sachs: $814 billion; and JP Morgan Chase: $391 billion. Undoubtedly, we will witness a move for massive reforms of the financial industry as we move deeper into the depression era. One area that will require deep attention is the Glass-Steagall Act. The Glass-Steagall Act of 1933 established the division between Commercial Banks and Investment Banks, setting up a Firewall between these entities. In the wake of the 1929 stock market crash and the subsequent collapse of the banking industry by 1933, New Deal politics enacted legislation that would prevent a repeat of the Roar- ing 20s speculative frenzy. Glass-Steagall was one of the main banking laws that came out of the 1930s Depression Era. The act separated investment and commercial banking activities. It was discovered that during the boom of the 1920s, banks took on too much risk with depositors’ money which involved stock market activities and investments. Glass-Steagall also prohibited insurance companies from dealing in securities. In addition, a new act was passed by Congress in 1956 to prevent banks from underwriting insurance products. All of this was designed to keep these distinct industries (banking, insurance and investment firms) from combining and forming massive conglomerates with overwhelming power in the market place. The 30-year deregulation era that began in the 1980s under Presi- dent Ronald Reagan, witnessed the slow but steady pace of systematic deregulation of the financial and banking industries. In the 1980s and 1990s, former Wall Street investment bank CEOs became Trea- sury Secretaries in both Republican and Democratic administrations. Senior advisors and several core administration leaders were chosen for their connections with the Wall Street and banking communities. America at the Crossroads 41

In 1987, Alan Greenspan was appointed to be Chairman of the Fed- eral Reserve System, where he stayed in power until February 2006. Chairman Greenspan, Congress and successive Wall Street and banking executive federal government office holders, moved aggressively to dismantle and implement laws and regulations favorable to a deregulated financial industry. The spirit of the times was to remove all remaining barriers to growth and competition. In 1994, Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act which authorized nationwide banking. Bank holding companies were now able to acquire banks in every state, and the new law removed most restrictions on opening branches in more than one state. Consolidation of the banking industry was given a green light under this new law. From 1990 to 2005, there were 74 megamergers of banks in the U.S. Both investment and commercial banks were moving aggressively to become larger financial entities with greater market share and global reach. The period from 1998 to 2007 would witness the five largest U.S. banks (Citigroup, JP Morgan, Wachovia, Wells Fargo and Bank of America) combined assets expand from $2.2 trillion to $6.8 trillion. By contrast, the five largest investment banks (Merrill Lynch, Lehman Brothers, Bear Stearns, Morgan Stanley and Goldman Sachs) combined assets grew from approximately $1trillion in 1998 to $4 trillion by 2007. In the face of rapid technological changes, new innovations and the growing need for transparency in the derivatives market, deregulation proponents and Federal Reserve officials have argued that financial institutions faced with the need to protect shareholders, can regulate themselves by “carefully managing their own risks.” Fed Chairman Alan Greenspan stated in 1997 “The self-interest of market participants generates private market regulation. Thus, the real question is not whether a market should be regulated. Rather, the real question is whether government intervention strengthens or weakens private regulation.” It was in the spring of 1998 that the last assault was initiated to tear down the barriers and restrictions that separated banks, securities firms and insurance companies. The 42 Global Economic Boom & Bust Cycles battle cry was the repeal of the Glass-Steagall Act. The next strategic chess move came in the shape of a proposed merger between Citicorp and the insurance behemoth Travelers to form Citigroup. The Fed approved of the merger, but cited a technical exemption to the Bank Holding Company Act which would force Citigroup to divest itself of many of Travelers assets within five years unless there were changes in the law. As Congress began working on the legislation to deal with this issue, the financial industry’s lobbying machine moved into full operation in support of new laws for the financial sector. Banks and other financial institutions spent $300 million lobbying to dismantle Glass-Steagall. The Glass-Steagall Act was repealed under the Clinton Admin- istration in November 1999. Congress passed and President Clinton signed the Financial Services Modernization Act of 1999 (also known as The Gramm-Leach Bliley Act) which brought about the reforms that the financial community was aiming for. When the measure went before the House of Representatives, 207 Republicans and 155 Demo- crats voted for its passage. In the senate, Senator Byron L. Dorgan (a Democrat from North Dakota) opposed the bill and stated propheti- cally, “I think we will look back in 10 years’ time and say we should not have done this, but we did it because we forgot the lessons of the past, and that which is true in 1930 is true for 2010.”4 Ten years later Mr. Dorgan is clear in his assessment that reversing Glass-Steagall was a dramatic failure as he further states that, “To fuse together the investment banking function with the F.D.I.C. banking function has proven to be a profound mistake.” Bank holding companies were now liberated to underwrite and sell banking, securities and insurance products and services. Opponents warned that allowing the financial industry to combine with this organizational power would promote excessive speculation and possibly trigger a crisis similar to the crash of 1929. Allowing the creation of these “Too Big To Fail” institutions gave America and the world the Meltdown of 2008! The repeal of Glass-Steagall was one of the main contributing factors that brought about the massive global collapse in 2008. And this problem still existed in 2012, which is another reason why we America at the Crossroads 43 will witness a deeper more profound collapse - an economic collapse in 2012 or shortly thereafter - that will lead us deeper into the Great Depression of the 21st century. The government reversed one of the key elements of the Depression-era banking laws, knocking down the firewall between commercial banks, which makes loans and takes customer deposits, and investment banks that underwrite securities. The repeal of the Glass-Steagall Act of 1933 was seen at the time as a way to help American banks grow larger and better compete in the global marketplace. This turned out to be a flawed business model and a financial hoax. Wholesale deregulation brings out the worse in some people in power (particularly irresponsible and greedy people in large scale financial institutions); a Wild West atmosphere is created and corporate greed runs amuck. Profligate behavior and cronyism is rampant, scandals permeate the system, and boom and bust periods become inflated economic and financial orgies. We need the right balance of regulations in the capitalistic system; the idea that unrestrained and total deregulated capitalism is the best model does not hold up under the microscope of history. And we have enough recent history to testify to that premise. Consider the Roaring 20s and the subsequent collapse that followed in the 1930s. However, we really don’t have to go back that far; the last 30 years provide enough examples of the fallacy of total deregulations. The 1980s Savings and Loan crisis and Junk Bond collapse; the Dot-com era boom and bust cycle and its aftermath of corporate scandal and greed; and the most recent mortgage and housing boom and bust era of the first decade of the 21st century. If you want economic insanity and a Wild West atmosphere, deregulate Wall Street and the banking system and see what you get. THE DEBT CEILING WAR OF 2011 The U.S. government hit its critically important debt ceiling on May 16, 2011, and it was announced that by August 2nd the final deadline date would be reached. A massive struggle in Congress took place by mid 2011 over the issue of raising the Debt Ceiling. 44 Global Economic Boom & Bust Cycles

An impasse emerged that threatened to plunge the country into an unprecedented debt default that left a bitter taste in the mouths of the American people and many nations around the world. We were treated to an extraordinary spectacle of divisive politics that essentially held the American people and its government hostage to a political battlefield. Even the prospect of the United States losing its top-notch AAA credit rating did not stop fiscally conservative Tea Party-aligned Republicans in making a point of no new taxes, and other vows and pledges. What was needed, and without delay, was to raise the $14.3 trillion debt ceiling in order to prevent a debt default by the number one economic and financial power in the world. It was a form of economic suicide to use this issue in a political battlefield and toy around with America’s debt rating in the world. And each day that the battle continued (and this went on for many weeks) only made matters worse in the end. And amazingly, stock markets remained relatively calm while all of this was going on, patiently awaiting the outcome. This was a clear demonstration on center stage of how deeply polar- ized American politicians and lawmakers had become: we were essentially witnessing hyper-partisan politics in Washington D.C. Some interesting numbers began to surface, illustrating what would happen if the federal government could not pay all of the 80 million bills that would come due in early August 2011. An early bill due on August 3rd would be $23 billion payments in Social Security benefits; on August 4th the government needed to pay $87 billion to retire maturing Treasury securities, and on August 15th $30 billion in interest payments were due. Federal employees, Medicare pro- viders, defense contractors and others required payments of $5 to $10 billion daily. World leaders were shocked by the dysfunction in Washington and some began to wonder if America was going through some form of political insanity. The need to do something to stop the escalation of debt in America was something that required a national discourse, however the venue to debate and resolve this issue should not have been at the time when the debt ceiling needed to be raised. Pushing America at the Crossroads 45 the nation to the edge of a national default was clearly irresponsible politics and a reckless display of partisan politics. According to Eu- gene Robinson of the Washington Post, the Republicans in Con- gress have three priorities: defeating President Obama, cutting taxes and reducing the size of government. That’s it and, I guess by any means necessary. They chose the “debt ceiling” to make their stand. What was interesting about this event was that since 1962 the United States had raised its debt ceiling 74 times. In addition, in more recent years, the debt ceiling had been raised NINE TIMES during the presidency of George W. Bush (a Republican) which added over $4 trillion dollars in debt. In essence the government had to take on more debt to pay its bills because the tax cuts during the Bush era that were in place lowered the amount of tax revenue. The Bush Tax cuts and the Iraq War definitely played a role in jacking up our overall debt. The following are some of the times when the debt ceiling was raised during the Bush Administration:

♦September 2007 the Senate Finance Committee approved in creasing the debt to $9.82 trillion. ♦Housing and Economic Recovery Act of 2008: Debt Ceiling rose to $10.615 trillion. ♦H.R. 24 2008: the debt ceiling was raised to $11.315 trillion.

World Bank president, Robert Zoellick, stated that the “United States was playing with fire.” China, America’s largest foreign creditor, stated that the United States had been “kidnapped by danger- ously irresponsible politics.” The fiscally conservative Republican majority in the House of Representative have pledged to oppose any new bailouts and raise any new taxes. This means that fiscal policy is going to be very limited in what it can accomplish in the future. Federal Reserve Chairman Ben Bernanke warned lawmakers that their failure to raise the debt ceiling could trigger a major financial crisis. He also stated that a United States default would send “shock waves through the entire financial system.” 46 Global Economic Boom & Bust Cycles

The deadline to avert the debt default was August 2, 2011. After a failed attempt (the so-called bipartisan “grand bargain” that sought to save $4 trillion over a decade) during the third week of July to work out a fair deal with Republican House Speaker John Boehner, President Obama stated in a press conference that, “I put a deal before the Speaker of the House, John Boehner, that would have solved this problem. And he walked away because his belief was we can’t ask anything of millionaires and billionaires and the big corporations in order to close our deficit…It is hard to understand why Speaker Boehner would walk away from this kind of deal and frankly, if you look at the commentary out there, there are a lot of Republi- cans puzzled as to why it couldn’t get done.” One of the main reasons why a deal did not happen at that point was the White House and Obama’s insistence on increasing tax revenues on the rich and wealthy corporations which the Republicans were adamantly against. Obama later warned that a default would trigger “economic Arma- geddon.” What came out of this political impasse was a clear recognition of each party’s sacred cow: Democratic support for entitlement programs and the Republican’s opposition to tax increases and their stated position of “fiscal discipline.” What was clear to any business person looking at this situation, and to the majority of independent voters, was that spending needed to be cut and revenue (taxes) had to be raised in order to have a significant impact on the debt problem. A combination of tax increases and spending cuts had to be included in a solution to this problem. Instead, the American people received a plan with NO tax increases; the entire package consisted of spending cuts. A deal on the debt ceiling was reached on D-Day (August 2, 2011) and signed in the 11th hour. The debt ceiling would expand by up to $2.7 trillion through a series of installment periods accompanied by a package of budget cuts. The American people would be spared another “debt ceiling” battle until early 2013, after the 2012 elections. Thus, we dodged the imminent American default on its national debt and the entire country breathed a collective sigh of relief: “Thank God that's over!” America at the Crossroads 47

As part of the deal, a bi-partisan congressional committee (the so-called “Super Committee” or “Super Congress” of six Democrats and six Republicans) was formed to come up with a plan by Novem- ber 23rd to cut $1.2 trillion in deficit spending over a decade. The official name of the panel was “Joint Select Committee on Deficit Reduction” and their role and mission was to cut the annual budget deficit and slow the explosive growth of federal debt: stop the mis- allocation of capital and scale down the scope and size of government expenditures. If they failed to achieve their mission of joint agreement (a plan that at least seven members agree on in $1.2 trillion in cuts over a decade) of a solid plan by the November deadline, a series of “triggers” in automatic cuts across-the-board would kick in to bring about another desired outcome of saving $1.2 trillion over ten years. Thus, in the event that the negotiations fail billions of dollars of cuts in discretionary spending and the defense budget would automatically kick in and no political party will be allowed to stop that process. The new budget cuts and tax increases would not kick in until 2013. The final agreement hammered out included no tax revenue; it was all based on spending cuts. The ceiling would be raised by between $2.1 trillion to $2.4 trillion in three installments and all of this additional debt will be monetized and covered through monetary inflation. Once the cuts take root in the U.S. economy, the net result will be a shrinking economy with less tax revenue and major cuts in various programs and agencies which will continue to feed a vicious cycle: lawmakers could have readily observed this phenomenon by doing a quick analysis of the crisis that was currently afflicting the Greek economy. Each time the International Monetary Fund (IMF) imposed more austerity measures on the Greek economy and its people, the net result was further economic decline and greater hardship for the backbone of the nation. The fundamental issue here is, if budget cuts are made too fast and too deep, any chance for a recovery is destroyed and an economic problem that could have been manageable becomes a catastrophe. 48 Global Economic Boom & Bust Cycles

After the drama and spectacle on Capitol Hill had concluded, global markets began to voice their disapproval: On August 4, 2011 panic swept through the markets with the Dow Jones Average div- ing 512.76 points (4.3 percent to 11,383.68), the S&P 500 lost 60.20 points (4.8 percent to 1,200.14) and the Nasdaq fell 136.68 points (5.1 percent to 2,556.39). It was the worse panic that had hit the markets since October 22, 2008. Observing that this date was Presi- dent Obama’s birthday, hardcore critics of his administration saw this as some kind of a birthday omen. Fear was clearly beginning to manifest itself after the debt-ceiling battle in Washington. The fiasco in Washington demonstrated to traders and investors that the American political scene was in turmoil. Record high unemployment, diminishing consumer spending, fears of deepening economic troubles in Europe and political paralysis in Washington fed into a belief that the U.S. would probably stumble into a new recession, or the dreaded double-dip recession. Then, on Friday, August 5th (after the market had closed) for the first time in history, Standard & Poor’s downgraded the sterling credit rating of the United States from AAA to AA+.5 The other two major credit agencies, Moody’s and Fitch, kept their AAA ratings on U.S. government debt. The title of the S&P statement of the downgrade was as follows: “United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden” The interpretation of this downgrade, and as most people clearly came to understand, is that the U.S. was fully capable of paying its debts, however political gridlock in Washington placed the country in a possible position of not wanting or agreeing to pay its debts. Standard & Poor’s (S&P) reached a conclusion that this was a huge problem for the nation and that it would likely continue into the election year of 2012. S&P is the world’s largest ratings agency and is in the business of assessing the likelihood that a debt will be re- paid. Thus, the focus was on the political process and the rapidly rising debt overload by the federal government. As an independent observer, S&P played a powerful role in waking up the Washington America at the Crossroads 49 political establishment to broader realities beyond the political battles in the halls of Congress. S&P emerged as an important factor (an outside force) that brought sobriety to the drunken political crowd in Washington. Removing Treasury Debt from the list of nearly risk- free investments was a major financial defeat for the American economic system and was something that could have been avoided, particularly at that point in history. The agency had first warned the government about its concerns in April 2011 and that the U.S. needed to get its fiscal house in order to avoid a possible downgrade. I guess some people in Congress weren’t listening or felt that the U.S. was immune to such an event by the credit agencies. But they were wrong! The U.S. debt load and rising trillion dollar deficits were seen as serious problems for a country whose debt was considered risk- free. S&P, Moody’s and Fitch (the major three credit agencies) watched as the titanic struggle continued in Washington in the months leading up to the August 2nd deadline. S&P saw major deficiencies in the deal that was hammered out in Congress; mainly that the deal focused on spending cuts with no emphasis on tax revenues. S&P was also dismayed over the political process and stated that the agency was, “pessimistic about the capacity of Congress and the Adminis- tration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government debt dynamics anytime soon.” China, the largest foreign holder of U.S. debt ($1.16 trillion) stated that the U.S. needed to overcome its “addiction to debt.” The Xinhua News Agency (a state-run media organization) declared, “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.” Dagong Global Credit Rating, a Chinese credit rating firm, had already downgraded U.S. debt in November of 2010 from AA to A+ after the U.S. announced its second round of quantitative easing (QE2). And after the U.S. agreed to increase its debt limit on August 2nd, Dagong downgraded the nation’s debt again from A+ to A. In more ways than one, China was raising red flags concerning the deteriorating 50 Global Economic Boom & Bust Cycles position of the American economy. Weiss Ratings, a U.S. leading independent rating agency of financial institutions and sovereign debt, introduced its “Weiss Sovereign Debt Ratings” on April 28, 2011. In its July sovereign debt release the United States was graded C-. Prior to the S&P downgrade on that fateful Friday, $2.5 trillion had already gone up in flames in global markets: This event dealt another serious blow to the nation and to global stock markets. The world absorbed and digested this event over the weekend and on Monday (August 8th) the global stock, currency and bond markets spoke loud and clear: there was a huge collapse. The Dow fell 634 points (5.5 percent) to 10,809, falling below the psycho- logically important 11,000 mark, an area the Dow had not seen since November 2010. The S&P 500 was down 79 (6.7 percent) at 1,119.46 and the NASDAQ fell 174.72 points (6.9 percent) to close at 2,357.69. Thus, political gridlocks in Washington lead to an S&P downgrade which sparked a major collapse in the stock market, wiping out trillions of dollars. Needless to say, this was definitely a serious matter. In a White House appearance, President Obama spoke to the nation as the markets were in a steep decline declaring that: “Mar- kets will rise and fall, but this is the United States of America. No matter what some agency may say, we have always been and always will be a triple-A country.” Obama blamed the downgrade of the U.S. credit rating to political gridlock in Washington and stated that our problems are “imminently solvable.” Compromise in Washing- ton is expected to become much more difficult especially since the majority of Republicans had signed Grover Norquist’s (president of the tax payer’s advocacy group, Americans for Tax Reform) “no new taxes” pledge (in the 112th Congress 238 Representatives and 41 senators signed the pledge). In light of this hardcore stance, many economists warn that a recovery would be virtually impossible without new revenues. In its report, S&P warned of a further downgrade if the U.S. was unable (or unwilling in political gridlock) to solve its debt problems. Ultimately, fiscal policy decisions are political decisions, and that was one of the main factors in the downgrade. John Chambers, America at the Crossroads 51 head of S&P’s debt-rating committee, was clear in his assessment that the political gridlock in Washington is something that could definitely be a problem moving forward. Stock Market losses were brutal: From July 26, 2011 through August 8, 2011, $7.8 trillion in equity had gone up in smoke. S&P came under fire from lawmakers, economists, commentators and others - questioning its competence and credibility - for using a faulty base line in stating that the U.S. needed to focus on cutting $4 trillion over a decade: critics stated there was a $2 trillion error in the agency’s calculations. Even the Obama Administration pointed out this error. Treasury Secretary, Timothy Geithner said, “They’ve shown a stunning lack of knowledge about basic U.S. fiscal budget math.” They also began to look at S&P's past track record in rating companies, particularly its ratings of companies leading into the 2008-2009 collapse. S&P and the other credit agencies gave AAA ratings to companies involved in mortgage-backed securities that crashed and burned and brought the financial world to a standstill. Bear Sterns, before its demise in the first quarter of 2008, received an AAA rating from S&P. Prior to the seizure of Fannie and Freddie in the summer of 2008, their ratings were AA; and in the fall of 2008 Lehman Brothers had an AAA rating just before its fatal bankruptcy that nearly brought the world to its knees. In light of these past failings of S&P, Senator Bernie Sanders (I-Vt) stated, “I find it interesting to see S&P so vigilant now in downgrading the U.S. credit rating…Where were they four years ago.” Rep. Brad Sherman of California stated, “I don't know what makes them experts at this…Obviously, they got it pretty wrong in mortgage-backed securities.” After the August 8th market plunge, the stock markets fell into a frenzy for the remainder of the week: The Dow soared 429 points on Tuesday (8-9-11) fell 519 points on Wednesday (8-10-11) and rose again sharply 423.37 points on Thursday (8-11-11). In short, the Dow moved more than 400 points on four straight days for the first time during the week of August 8th. Fear and greed was running rampant 52 Global Economic Boom & Bust Cycles as traders, investors and computer program trading platforms were stampeding in and out of the markets for daily profits. On Tuesday, August 9th (in an effort to calm down the frenzy in the markets) Federal Reserve Chairman Ben Bernanke announced at the Federal Open Market Committee (FOMC) meeting that the Fed would keep its key interest rate near zero through mid 2013, a projection for nearly two years. The Fed indicated that it would keep its target rate between 0 and 0.25 percent, a range that had been in place since December 2008. Analysts concluded that the Fed had a dismal view of the economy: the weakness in the U.S. economy, a depressed housing market and high unemployment had become chronic. Ben Bernanke, who is an expert on the Great Depression of the 1930s, was clearly following a lesson from history to not tighten monetary policy too soon during a prolonged economic slump. This particular lesson came from the policies of 1937. After Franklin Delano Roosevelt (FDR) implemented the New Deal in 1933, the economy began a recovery for three years but was stopped as a result of the then Federal Reserve clamping down hard on lending and the government instituting 10 percent cutbacks in Federal government spending. This resulted in economic contraction in 1938 and a new high unemployment rate. Ben Bernanke did not want to repeat that mistake this time around; however, the White House and Congress will need to have a fiscal policy that will not generate huge cutbacks in spending, particularly on safety-net programs that millions of Americans rely on to at least stay afloat during hard times. This was an indication that the Fed was starting to run short on solutions to the economic malaise. Obama proposed increasing taxes on the wealthy by $1.5 trillion over the next decade; which is essentially the right step towards reforming the system that favors the rich. In an article written by Warren Buffett in mid August 2011 for The New York Times entitled “Stop Coddling the Super-Rich,” Buffett stated that, “My friends and I have been coddled long enough by a billionaire-friendly Congress…It’s time for our government to get serious about shared sacrifice.” He points out in his article that his tax rate is lower than America at the Crossroads 53 that of the people who work for him in his office: “Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.” Buffet urged the new “super committee” to raise rates immediately on tax- able income in excess of $1 million, and even more for those making more than $10 million. In addition, a group known as Patriotic Millionaires for Fiscal Strength sent a clear message to Congress and the super committee in particular to “MAKE US PAY” in response to the issue of tax increases for the wealthy. The organization that was formed in 2010 and has a membership of more than 200 members sent a 21 member delegation to Washington in mid No- vember (a week prior to the super committee deadline of November 23rd) to request meetings with members of the senate, super committee and other representatives in Congress. Their expressed and stated message was: “Any super committee deal that does not include higher taxes for millionaires should be killed.” Erica Payne, a spokeswoman for the group, stated that the organization would like the tax rate for those grossing more than $1 million to return (at a minimum) to 39.6 percent from the current 35 percent rate. However, she also stated that, “Many would like the tax rate to be higher.” It’s interesting; too, that this millionaires’ group does not believe that taxing the wealthy will deter job creation, as many proponents of “no new taxes” advocate. Erica Payne clearly asserted, “worries that higher taxes on millionaires will hurt job creation are unfounded.” Internal Revenue Service (IRS) records show that 235,000 households in 2009 reported adjusted gross income of at least $1 million. The nonpartisan Tax Policy Center estimates there were 289,000 individuals in 2011 with at least $1 million in adjusted gross income. Thus there was definitely a tax base in place to assist in the budget deficit problem. Obama wanted tax increases on the wealthiest Americans (a so-called Buffett Tax); the Republican politicians clearly oppose raising taxes on the wealthy. After weeks of secret talks, the congressional super committee revealed in late October 2011 that the Democrats and Republicans were still far apart on reaching a resolution on spending cuts and tax 54 Global Economic Boom & Bust Cycles increases, with Republicans (as usual) not agreeing to any tax increases. The members on the super committee were dug in on their positions with no possibility for concessions or compromise. In the streets, Occupy Wall Street was driving the discourse for the Demo- crats; the Tea Party did the same for the Republicans. As expected, and due to all of the barriers blocking a compromise, on November 21st the Super Committee emerged from weeks of negotiations with no deal for the American people. In essence, the six Democrats and six Republicans were too far apart on the right combination of spending cuts and tax hikes. In the end, a major point of contention was the Republican insistence of extending Bush era tax cuts for the wealthy. According to Sen. John Kerry, D-Mass., a member of the panel, “We simply could not overcome the Repub- lican insistence on making tax cuts for the wealthiest Americans permanent… this was simply doctrine for some of our Republican colleagues, even as many worked very hard in good faith to find a better way forward.” In a tweet to his followers, Nouriel Roubini, professor of economics at New York University (also known as Dr. Doom) referred to the Super Committee as “Super Pathetic,” “Super Gridlock,” “Super-GOP-Lunacy on Taxes” and “Super-Fiscal Drag in 2012 that ensures double dip.” However, since this panel could not get the job done, the automatic triggers were set to kick in with across the board cuts in 2013, which would be spread across the following nine years. The targeted programs to receive cuts are defense and a select group of domestic programs. A few hours after the Super Committee admitted defeat on the debt reduction process, S & P announced that it would not be downgrading America’s credit rating as a result of the failure of the Con- gressional Committee to hammer out a deal to reduce the deficit by $1.2 trillion. It said that, “it did not plan a further downgrade of the rating based on the Super Committee’s failure to agree on a plan.” However, S & P warned that its present rating was based on a clear expectation that the automatic cuts would continue to be implemented in 2013. This process would be closely monitored and downgrades America at the Crossroads 55 considered if the scheduled $1.2 trillion cuts were cancelled. Moody’s and Fitch stayed firm on their AAA ratings for the U.S., however, Fitch did indicate that the sovereign credit rating of the U.S. was under negative watch. The S & P announcement gave some relief to jittery global stock markets and put to rest (very quickly) what they intended to do about the Super Committee collapse. The August 2011 Safe Money Report (published by Weiss Re- search, Inc.) published the following data on Treasury and Bond holdings: “According to the Federal Reserve, U.S. Treasury holdings by American financial institutions is $486 billion. Bond holdings total $2.2 trillion. U.S.financial institutions hold $6.3 trillion in securities (bonds, etc.) subject to immediate or possible future downgrades in the wake of U.S. government downgrades.” Downgrades by the rating agencies poise a serious threat to the value of these holdings and could cause massive dislocations and chaotic declines in several markets in 2012 or beyond. Investors took aim at this scenario, reflecting on the recent history of August 2011 when we witnessed 4 days of drops of 400 points or more in the Dow from August 4th to August 18th. For stock market investors, the best strategy and trading opportunities in coming periods would be on the short side of the markets. Given the massive dislocations and uncertainties in the world, a devastating market collapse could happen at any time and very quickly. Volatility in the markets will be the norm for some time to come and definitely for part of 2012. However, in early 2012, U.S. stock markets were experiencing a positive uptrend, an unusual calm, stability and growth. Some observers and financial analysts stated that the primary reason for the stock market rally was due to central bank money printing around the world; another quantitative easing monetary strategy. But the rally would not be sustainable. The price of oil broke the $100 a barrel range and Americans began paying over $4.00 per gallon at the pump. With Greece in an economic depression and the rest of Europe either in a recession or very near that condition, it was clear to see that this was an “anemic recovery” courtesy of the Fed 56 Global Economic Boom & Bust Cycles and its central bank counterparts throughout the developed world, particularly in Europe. THE OBAMA ERA DILEMMA AND ECONOMIC RECOVERY What happened in the year 2008 was an extraordinary economic collapse that generated massive destructive power that could not be fully mitigated in a few short years. There were many challenges and powerful forces facing the new Obama Administration, and most of the conditions that represent dire statistics discussed thus far in this chapter (and throughout this book) could not be reversed during the first term of this presidency. With a deeply divided Congress and massive efforts to derail many of the Obama era economic solutions, this epic political struggle has resulted in half-measures and limited response, especially in regards to the deeper issues of the mortgage crisis. Thus, the first term of the Obama Era has been largely focused on a massive struggle to prevent the United States and the world from falling into a deep global economic depression. It is also important to understand what a new administration inherits from the policies of a previous era. As stated earlier, eight years of the Bush era squandered the budget surplus left by the Clinton years. It’s worth repeating that in 2001, Congress approved a $1.35 trillion dollar tax cut package, primarily for the wealthy. And this was followed by a second package of $350 billion in 2003. Bottom line, Bush era policies wiped out nearly $6.3 trillion in expected revenue and generated more than $7 trillion in debt and, as the Pew Fiscal Analysis Initiative tell us, is the main source of the huge yearly deficit numbers. These are long-term economic consequences that need to be acknowledged in order to fully understand what we are dealing with. This is one of the main reasons why the Obama era had to endure $1 trillion deficits each year in order to maintain stability and avoid a full blown depression. In addition, the idea that we should return to the policies of trickle-down economics and not ask millionaires and billionaires to pay a little more in taxes during the first stage of this bust cycle is America at the Crossroads 57 wrong, and is not a mathematically feasible or an economically viable solution. As stated earlier, during America’s “Debt Ceiling War” of 2011, its sterling credit rating was downgraded by Standard & Poor’s (S&P) from AAA to AA+. When S&P looked at the final debt ceiling deal hammered out by Congress, it included no new taxes. This was not a credible plan, and S&P slammed the U.S. to the mat for producing this terrible deal. The end result for that spectacular failure was the Crash of 2011 and its aftershocks that wiped out trillions of dollars of stock market wealth. This event also left us with Fiscal Cliff 2013, and the automatic cuts that are scheduled to kick in, in order to start the process of balancing the national budget. These economic realities cannot be ignored when we examine what has transpired since the 2008 meltdown. Add in 30 years of deregulations, a powerful banking system entrenched in Washing- ton, outsourcing and the internationalization of wage competition, two wars, and a massive sweep of productivity gains by information age technologies and job displacement, and we are forced to experience the kind of depression-era analysis outlined in this book. All of the necessary reforms and economic depression-era policies could not be implemented in one four-year term. In addition, the United States is now going through a de-leveraging era similar to what Ja- pan experienced in its nearly two decade bust cycle (more on this issue in Chapter Five). Our economic system is in a healing mode working its way through a slow anemic recovery. I don't expect that we will see a boom cycle or “happy days are here again” scenario anytime over the next several years. Politicians and economists have to do a reality check here: Americans are de-leveraging and will be for some time (some experts believe it may take nearly ten years). So trickle- down economics is not the prescription for this type of economic situation: showering millionaires and billionaires with extended tax breaks in 2012 and beyond is not the sure-fire remedy to produce 12 million jobs in five to ten years. The timing for this type of economics is completely off; it simply does not work well during the initial 58 Global Economic Boom & Bust Cycles stages of a de-leveraging depression. This argument of not asking the rich to pay more taxes will ultimately collapse, and when it does we will be in a much stronger position to move forward. The length of America’s bust cycle will depend on a number of factors; chief among them is how this nation responds to the end of the Age of Oil and the massive adoption of the clean energy revolution. As stated in the Prologue, the coming of Barack Obama heralded the birth of a new era replacing the Bush era and the decline of the Age of Oil. Passage of the Recovery Act of 2009 was President Obama’s signature legislation and down payment on America’s recovery on its clean energy future in the 21st century and beyond. This was the start of President Obama’s 21st century New Deal, and if Americans hope to see the continuation of these economic policies, the Obama era would need four more years to complete the mission. The forward look and vision of the Obama era is critical at this point in history and should not be underestimated, especially when it comes to the environment, energy and the Information Age Revolution. I wanted to make it crystal clear in this section (especially to Americans reading this book) that I do not believe that the Obama Administration is the primary source and initiator of all of the problems we’ve had to contend with since the meltdown of 2008. Clearly, there have been some short-comings and missed opportunities by this administration, and those issues are raised and given proper concern in the pages of this book. However, given the enormity of the challenges that President Obama and his team faced when they began their journey in January 2009, I think that they managed to stop the economic hemorrhage, began a slow reversal from the abyss and put in place a vision (and practical investments) on America’s clean energy future. Like FDR, Barack Obama is a depression-era president and during his second term he will need to bring together a much more powerful team of reformers dedicated to the transformation and revision of the American economic and clean energy requirements of the future. America at the Crossroads 59

FISCAL CLIFF 2013 Fiscal Cliff 2013 is deadly and will have to be managed by a bi-partisan agreement on Capitol Hill. If our political leaders fail to achieve a compromise on this issue, then the largest and most significant democratic government in the world will have become dys- functional. The U.S. has literally painted itself into a corner with this budgetary issue. No matter what ultimately transpires; this event will be like walking on a tightrope. The Bush era tax cuts for the wealthy are set to expire by the end of 2012, and they should be allowed to do so. Bottom line, millionaires and billionaires can afford to pay more taxes; the world will not come an end because a billionaire has to pay a little more in taxes. In January 2013 the series of “triggers” in automatic cuts across- the-board will kick in to bring about the desired outcome of saving $1.2 trillion over ten years. Billions of dollars of cuts in discretionary spending and the defense budget will automatically begin to take place, and this may become a huge problem for the anemic economic recovery in America. Budget cuts that cut too deep and too fast have a high probability of derailing the economic system and igniting a major stock market crash. This is what history tells us. When we examine U.S. government and Fed policies in 1937 during the Great Depression, we see the introduction of austerity measures and a reduction in fiscal stimulus that resulted in the economy slipping into a meltdown mode and derailing the recovery of that time. A similar reaction occurred in Japan during its lost decade in the 1990s. The plan in 1997 in Japan was to reduce the fiscal deficit by 15 trillion yen with various cost cutting measures (see Chapter Five) and this led to the economy falling into a downward spiral for five straight quarters. And once an economy begins to move in a negative direction it is very difficult to reverse the engines of a downward spiral. The best strategy is prevention: don’t allow this to happen in the first place, especially if lawmakers can control the situation. Thus, American lawmakers need to wake up and look at the facts and examine the historical data. Fed Chairman Ben Ber- 60 Global Economic Boom & Bust Cycles nanke knows this, which is why he’s been running the printing presses and going where no Fed Chairman has gone before. COMPUTER TRADING PROGRAMS Another factor to consider during this era of sudden and extreme volatility in the markets (similar to what happened in August 2011) is the power and speed of the new dynamic trading platforms. Indeed, volatility in the markets (particularly in stock markets) is driven more so by high-frequency traders using programmed systems that buy and sell stocks thousands of times a minute based on computer-programmed algorithms. These systems are designed to take advantage of rapid price changes, looking for weaknesses in market conditions, and exploit situations for short-term gain: thus, they are very active in volatile market settings. High-frequency traders can account for up to 60 to 70 percent of market activity (swings of hundreds of points within minutes) during days of high market volatility, such as what we witnessed during the week of August 8th. The power of these trading platforms was also on full display during the flash crash of May 2010. On May 6, 2010, the Dow lost almost 1,000 points in 20 minutes before recovering. In 2005 these systems accounted for 30 percent of market activity in the U.S., so the use of these platforms had become more pervasive. The program trading platforms that were utilized in 1987 and cited as partly responsible for the Crash of ‘87, had been eclipsed by newer, faster and more efficient models that included more of a global analysis and greater technical features. The major players are using supercomputers, co-location connections with the major exchanges and the most sophisticated trading platforms in the universe. Major computer systems now dominate a massive part of daily market activity. It's all technical analysis and mathematical algorithms. I will have more to say on this issue in Chapter Eight on the “Informa- tion Age Revolution.” CRASH OF 2011 ANALYSIS The major sell-off in the equities markets that began in August America at the Crossroads 61

2011, roughly two months after QE2 ended in June, was something professional traders had mostly expected to happen. Once the stimulus money was gone, the stock markets went into remission. It appears that stocks were due for a correction after doubling from the March 2009 lows. In addition we entered a second leg down in the real estate markets, both residential and commercial. And as we shall see, financial weapons of mass destruction (WMD: derivatives) increased in global markets, making 2011 and 2012 a lot more riskier and subject to a collapse greater than what happened in 2008. The entire global economic system is inundated with debt, extreme risk and unsustainable derivative leverage that has mushroomed into a much greater problem than what was attributed to the collapse of 2008. The Comptroller of Currency reported in 2008 that the total notational value of derivatives in the largest 25 banks in the U.S. was about $180 trillion.7 In 2011, the Options Clearing Corporation (OCC) reported that, “The notational value of derivatives held by U.S. commercial banks increased $12.8 trillion, or 5.5%, from the fourth quarter of 2010 to $244 trillion.”8 And since 1999, there has been a 473% increase in the notational value of derivatives at the top 25 banks in America. Since the Crash of 2008, the derivatives market has increased in value year after year, which means that the level of real risk in the financial markets has literally soared. According to a report published by the Bank of International Settlements, as of June 2011, the global notational value of outstanding over-the-counter derivatives rose 18% in the first half of 2011 to the astronomical level of $708 trillion!9 Thus, in late 2011 we were looking at a situation far worse than what was present in 2008! Given the massive uncertainties of the European crisis and the ongoing debt crisis in the U.S., banks and other wealthy institutional investors were loading up on hedge positions. The White House and Congress refused to regulate the over- the-counter Derivatives Industry and now it is set to explode in our face once again when everyone starts running for the exits all at the same time. Most Americans will be caught completely off guard when 62 Global Economic Boom & Bust Cycles this avalanche breaks; the speculators are clearly pushing the limits in the pursuit for billions in profits in short periods of time. However, we must come to grips with the fact that it took decades of debt accumulation, mismanagement, over-speculative markets, and several boom and bust cycles to arrive at this place in history. It is very unlikely that we will emerge from this crisis in a few short years. We are now at a place where excess liquidity is not solving the problems, not creating enough jobs, business expansion and strong economic growth. Banks are sitting on excess reserves of $1.57 trillion (not lending) with the Fed paying an interest rate of .25 percent per year on balances maintained at the Fed. Corporate America is sitting on $2 trillion of cash but refusing to deploy these resources due to weak demand and manufacturing, and a weakening overall economy. We are in a Liquidity Trap, where decreasing interest rates fail to spur spending and borrowing; consumers and investors are weak on the notion that the economy will get better. The strategy for many Americans is to concentrate on de-leveraging and severely curtail the use of any debt! Japan was afflicted with this syndrome in the 1990s, their so-called Lost Decade. And now, the question of if we will experience another major economic downturn is something to seriously consider, given the global realities of debt, leverage and the extreme risk of derivatives! Part of the answer in combating this syndrome is to attack the unemployment problem. Indeed, economist, Paul Krugman, advocates a strategic economic policy that would focus on unemployment rather than deficits as our biggest economic problem. In his weekly column, Krugman explains his vision of what the government could do to help the economy and the American people: “First of all, it would involve more, not less government spending for the time being - with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the America at the Crossroads 63 economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.” On September 8, 2011 President Obama unveiled a new job plan for America. Before a joint session of Congress, he called on lawmakers to enact a $447 billion package of tax cuts and new government spending, designed to revive a stalling economy. The bill, known as the “American Jobs Act,” included a plan to provide $140 billion for modernizing schools and repairing roads and bridges, an extension and expansion of the cut in payroll taxes, worth $240 billion, under which the tax paid by employees would be cut in half through 2012. Smaller businesses would also get a cut in their payroll taxes, as well as a tax holiday for hiring new employees. It appears that the White House started listening to its critics, and perhaps Paul Krugman had started to finally make headway with his ideas. Obama stated in his speech that, “Ultimately, our recovery will be driven not by Washington, but by our businesses and our workers…But we can help. We can make a difference. There are steps we can take right now to improve people’s lives.” If there are to be governmental intervention programs, then what's important at this point in the crisis is to maintain a functioning economy. Massive resources need to be focused on the recovery of the American people and the consumer market that makes up 70% of the U.S. GDP. SLOW GROWTH ECONOMY Recessions that follow a financial crisis tend to be deeper and more uncontrollable. The debt problems that caused the crisis shifts from the private sector to the public sector generating a negative impact on government revenue streams (taxes). High unemployment has a major impact on governmental finance and budgets: lost jobs means government collects less tax revenue; government has to spend more on unemployment benefits, food stamps, and other social programs. Anemic economic growth makes it difficult to grow your way out of the crisis, so the problem lingers on for many years. 64 Global Economic Boom & Bust Cycles

During the Great Recession many big companies slashed spending, fired employees, cut backed on R&D spending and curtailed any prospects for growth in order to survive. As a result, collectively they are now sitting on a $2 trillion treasure chest of cash and are able to borrow funds from banks at historic low interest rates. So, this group of corporations is not limping along half dazed, but is sitting on the sidelines, buying back its shares at lower prices, acquiring weaker competitors in bargain basement deals and waiting for the next upswing in the economic life of the country and global economy. These corporations will not deploy the bulk of their massive resources until the process of real economic growth has become reality. However, none of the fundamental problems that caused the crisis of 2008 have been fixed. There is this gigantic mountain of debt, leverage and risk sitting there waiting to explode in our faces in a sudden burst of implosion. A survey taken in late 2011 found that 48 percent of Americans believe that another Great Depression will set in over the next 12 months. We could are heading for a bigger crash than what occurred in 2008. A slow growth economy cannot take much of an economic shock to the downside, an event that would clearly move us into negative territory very quickly. In a question and answer session after a speech in Cleveland, Ohio (September 28, 2011) Federal Reserve Chair- man Ben Bernanke stated that lawmakers needed to do more to provide help to the battered housing industry. He was clear in his assessment that monetary policy can only provide part of the answer and solution to the economic crisis; the Federal Government needs to implement effective fiscal policies to help fight the economic malaise. At the annual gathering of central bankers and economists in Jackson Hole, Wyoming (late August 2011) Bernanke stated, “In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” In a statement after the Federal Open Market Committee (FOMC) meeting in late January 2012, Chairman Bernanke announced that America at the Crossroads 65 interest rates would likely remain near zero until at least 2014. Ac- knowledging that the overall economy was still weak, Bernanke stated “I don't think we’re ready to declare that we've entered a new, stronger phase at this point…If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then …the logic of our framework says we should be looking for ways to do more.” On September 30, 2011, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) presented a very interesting observation regarding cycles; that a deadly cycle has started in the U.S. economy: “The vicious cycle is where lower sales, lower production, lower employment and lower income leads back to lower sales.” ECRI’s observation is that this type of cycle is a “contagion” and will spread like a “wildfire.” In addition, the institute's weekly leading indicator (which measures the pace of growth in the economy) was growing at a 27.8 percent rate in October 2009 when the economy was in its first four to five months of monetary recovery. In August of 2011, this indicator decelerated to a very low point of 1.7 percent. This meant that the U.S. economy was creeping along at an anemic pace; a sign that we had entered a major downward cycle. Accord- ing to the dozen economic indicators ECRI tracks on the U.S. economy, the verdict was that a new recession was unavoidable. Private and public debtors are saddled with enormous debt loads; this has the net effect of prolonging an economic downturn, sometimes for more than a decade. Economic studies conducted by Carmen M. Reinhart and Kenneth S. Rogoff (authors of This Time is Differ- ent) are suggesting that our economic contraction is of the deeper variety. In fact Rogoff has stated that this is not a “typical downturn” and that the name recession “doesn’t fit.” According to Nigel Gault (chief U.S. economist at HIS Global Insight) “There is no approachable precedent, at least in the postwar era, for what happens when an economy with 9 percent unemployment falls back into recession…The one precedent you might consider is 1937, when there was also a premature withdrawal of fiscal stimulus, and the economy (my emphasis) fell into another reces- 66 Global Economic Boom & Bust Cycles sion more painful than the first.” Regarding our long-term unemployment situation with 45 percent of Americans out of work for at least six months and 30 percent out of work for a year, he stated, “This has never happened in the post-war period in the United States. They are losing skills they had; they are losing their connections, their attachment to the labor force.” He stated that the, “unemployment situation we have…is really a national crisis.” With business and consumer confidence being eroded with collapsing stock markets, business closures and soaring unemployment on full display, Americans in turn will spend and invest less, and this will cause more turmoil in the markets. This generates what some analysts call a “negative feedback loop” that drives an economy into a recession or deeper economic crisis. This is one reason why I believe we didn’t really have a traditional recovery after the so-called Great Reces- sion. The employment situation either remained stagnant or grew at an anemic pace, and the housing problem was left without a nationwide depression-era solution. EMPLOYMENT CRISIS Americans are experiencing deep economic distress over the slow but steady collapse of the American dream. There are short- term, mid-term and long-term implications to the general mental and physical health of the nation. Financial stress and anxiety over loss of jobs and homes, no health insurance, dental care, etc. will clearly test the financial and economic resolve of the American people. A prolonged crisis will take its toll. As we headed into the fourth quarter of 2011, the question on the minds of some analysts and economists is whether the employment situation is a cyclical or structural employment crisis? As demand and confidence reassert itself in a recovery period, cyclical unemployment will normally get resolved, however, in the case of a structural unemployment crisis, the situation is more permanent and is the result of the loss of various industries, jobs, technological change and new global job market realities. Nearly 15 million people were out of work in 2011 and corporations were focused on using America at the Crossroads 67 more part-time and temporary workers. By November 2011, one third of America’s roughly 15 million unemployed did not have a job for a year or more. Many were no longer receiving any kind of unemployment benefits. And having fallen on hard times, some of the unemployed people with a car had no money for gas and insurance. Bottom line, the U.S. is faced with crippling high unemployment, modest growth and trillion dollar deficits in the foreseeable future. If a major decline finally sets in, the situation will likely spiral quickly to the downside. According to a study conducted by Forbes, America has lost, on average, 50,000 manufacturing jobs per month since China joined the World Trade Organization in 2001. Hundreds of former industries in the U.S. have been wiped out and millions of American jobs have been erased from our national ledger, never to be seen again. The majority of the jobs that have been lost will not be recovered. The industrial base is being decimated, piece by piece. Since 2001, 42,000 American factories have permanently closed their doors. America is at the crossroads! Manufacturing jobs have declined to just 10 percent of our economy, however, America is still the second largest manufacturer in the world. We’re the third largest agricultural nation on the planet, but just two percent of Americans are farmers. Increased productivity, technological innovations, robotics, software, artificial intelligence, expert systems and automation of many job functions that were previously held by people is what will continue to drive production and productivity not only in America but throughout the world. In fact America may have a better opportunity of coping with this dynamic issue than many other nations around the world with populations five times greater than our own. Many of the workers who have lost jobs were in industries that may never regain their former strength. By mid 2010, the U.S. industry in home building had lost nearly 1 million jobs, auto industry 300,000 jobs, finance and real estate 500,000 jobs; local government layoffs of teachers and other government workers 159,000 jobs, and most were teachers. When Obama took office in January 2009, 68 Global Economic Boom & Bust Cycles the unemployment rate was 7.7 percent. Since World War II, no president had been re-elected with an unemployment rate greater than 7.2 percent (Obama broke that record). In late 2011, the rate was 9.0 percent, and at the current pace of job creation, we can’t expect full employment to return until 2018. However, according to the Bureau of Labor Statistics, by September 2012 the unemployment rate had declined to 7.8 percent, indicating that some progress was being made and the anemic recovery was starting to gain some traction. The impact has been severe, decimating the middle class in America. The ability to own a home, send the kids to college, go on a two week vacation every year and eat out at least once a week is a thing of the past for many people. As defined by a federal government task force, the middle class is defined by these factors: (1) Home ownership; (2) Retirement security; (3) automobile ownership; (4) the ability to send the kids to college; (5) healthcare coverage; (6) family vacation. By these measures, many Americans have fallen out of this category and are struggling to make ends meet. Middle-income jobs are disappearing. Sherle Schwenninger’s report “The American Middle Class Under Stress” tells us that 17 million Americans with college degrees are doing jobs that require less than the skill levels associated with a bachelor’s degree. The middle class in America is shrinking and severely decimated. Schwenninger states, “I worry that we’re becoming a barbell society - a lot of money, wealth, and power at the top, increasing hollowness at the center, which I think provides the stability and the heart and soul of the society…and then too many people in fear of falling down.” Some Americans have to rely on public assistance for the first time in their lives: middle class people who have fallen financially into a hole. A New York Times article calls them “The New Poor.” In mid 2011, Larry Katz, economist at Harvard University, had these remarks on the continued migration of jobs to cheaper labor markets and new technologies: “Employment growth has stopped, or even declined, among many middle-class jobs that are high wage….A lot of traditional middle-class, upper-middle-class jobs America at the Crossroads 69 have been disappearing. If you look at general managers and middle- management jobs, those are ones that have been in decline and will decline further.” Companies have been (and will continue) to search for ways to reduce the employment levels in this group. The use of software and other forms of new technologies are ways to decrease the use of middle managers. Studies have shown that companies look at rising medical costs as a significant factor in lowering the use of middle managers. For the unskilled labor market, the situation is far worse; it has essentially collapsed in the West. Over the past 40 years there have been dramatic changes in the world. Globalization and technological advances have had a serious impact on the American worker. The manufacturing base in America was decimated as corporations went abroad for low-paying labor markets and cheaper cost of operation, driving growth and expansion in places like China, India, Mexico and other strong emerging markets. Good paying jobs in factories and heavy industries in America took a beating in the new era of the “internationalization of labor costs.” Labor unions in America lost their power to negotiate for higher wages and better benefits. In addition, the power of the Internet, robotic manufacturing, and other technological advances increased productivity dramatically and shifted the spotlight away from the American worker. The first wave was the manufacturing base where automation has cut 5.6 million jobs since 2000; the second wave came in white-collar jobs: accounting, data entry, reading medical images and answering phones and virtual assistants for small and large business owners are just some of the jobs that were sent offshore. Intense global competition is a driving force searching for higher productivity and lower wages. Indeed, something has changed and it will continue to shift in the direction of low cost labor markets and the more efficient use of information age technologies, such as robotics, expert systems, artificial intelligence (AI), the Internet, etc. Many jobs are clearly going to machines, software, and foreign workers. The higher wages of American workers are under assault. We are looking at the triumph of productivity: cheaper goods searching for cheaper labor costs. 70 Global Economic Boom & Bust Cycles

There has been a persistent 30-year decline in earnings of the American worker. In addition, some analysts point to free trade, globalization, off-shoring and outsourcing as contributing factors in the disappearance of jobs in America. This strikes deep into the heart of the American dream. Industries that will take a huge hit and may not recover are: state and local government jobs, pharmaceuticals, big telecom, news- papers, airlines, realtors, and bank tellers. Other doomed industries include: video postproduction services, newspaper publishing, ap- parel manufacturing, textile mills, record stores, video rental, local photo shops, wired telecommunication carriers (the remaining players will migrate to Voice Over Internet Protocol (VOIP) and broadband Internet) and manufactured home builders. In August 2011, the Postal Service announced that it would be cutting 120,000 jobs in the near future. By mid November Postmas- ter General, Patrick Donahoe sounded the alarm before Congress stating that the Postal System was facing “imminent default” and possible bankruptcy, as losses would continue to accelerate in 2012. He told Congress, “We are at a point where we require urgent action.” The changing face of communication was cited as the main reason for these layoffs: less mail delivery due to the massive use of the Internet and other new technologies. More private mail and bill payments have migrated to the Internet. Tens of thousands of more layoffs are expected to take place as well as closure of hundreds of underused post offices throughout the nation. While productivity is making some things in life cheaper for many Americans, the basic essentials have become more expensive especially in the face of shrinking income. The cost of health care, electricity, homes, higher education and gasoline are higher in comparison to average wages. The decline in earnings has cut into the American worker’s take home pay. Wages have been falling. Effi- ciency, productivity, technology innovation, globalization and cheaper labor costs have chipped away at American wages for over three to four decades. In 2011 we were witnessing the end result of this historic struggle. What has happened cannot be reversed; we America at the Crossroads 71 can only go forward which means that this is a historic structural change baked into the new global economic system. This is a game changer event, and the sooner the American people come to grips with this issue the quicker it can be addressed with the proper remedies, solutions and strategic initiatives. For instance, some jobs are not being filled because the skills are not there. While baby boomers are moving towards retirement (those who can afford that luxury) the U.S. should be implementing major initiatives encouraging young people to focus their energy and talents on fields that are the growth areas of the future (engineers, math, science and technology, STEM education, etc.). By late 2011, the unemployment rate among America’s young adults stood at roughly 24%! America needs to rebuild a strong industrial base; encourage more young people to become engineers and migrate to jobs and industries of the future. In addition, entrepreneurship and independence are essential for a vibrant future in America; areas of revitalization that have always played a key role in the growth and development of the American Dream. In the summer of 2007, the unemployment rate was 4.4%, by mid 2010 the rate was 9.5%. And by October 2011, the unemployment rate had been stuck at around 9 percent for two years. The economy needs to add roughly 100,000 to 150,000 jobs per month just to keep up with population growth and to bring down unemployment. Labor experts say the economy needs at least 100,000 new jobs per month just to handle the new entrants in the job market. The third quarter release of President Obama’s $447 billion Job’s Bill was the White House response to the deepening employment crisis in the nation. As predicted, the Republican opposition in Con- gress rejected the bill, and Obama pivoted and took his bill and message to the American people. President Obama stated in reference to his Republican opposition on the need to create jobs in America: “If Congress does nothing then it's not a matter of me running against them. I think the American people will run them out of town because they are frustrated and they know we need to do something big and 72 Global Economic Boom & Bust Cycles something bold.” Indeed, at that point, the American people (Demo- crats, Republicans and Independents) were frustrated and fed up with Congress, the Treasury, the Federal Reserve and the President. How- ever, as this analysis has revealed, an important observation regarding this crisis of unemployment in America is that the Obama Ad- ministration was confronted with historic structural change in the job market, a process that had been going on for well over three decades: technology innovation, globalization and cheaper labor costs abroad. And without any significant support from Congress, Obama and the Democrats were fighting a very tough battle to bring stability to the American economy. THE HOUSING CRISIS As of June 2010, 75 million Americans still owned a home. Of that number, 23 million owned their home free and clear. Another 37 million households were renters. And in 2010, there were 4 million foreclosures. The states hardest hit were California, Nevada, Florida and Arizona. They accounted for about 30 percent of national economic activity. These states were also at the epicenter of the boom and bust of the housing crisis. Over-building and asset appreciation went to greater extremes in these markets. Baby Boomers, who represent a significant amount of economic activity in America, were slammed to the mat by declining stock investments and home prices during the Great Recession. By Janu- ary 2011, household net worth was still down by $9 trillion from peak levels of 2007 (pre-recession peak was $65.9 trillion). Home equity and stock market investments were the greatest casualties. Most baby boomers are now poorly prepared for retirement. Indus- try analysts reported that many boomers do not have a guaranteed pension plan that they can count on any more. Many boomers are forced to postpone any retirement plans and continue to work in order to survive. Baby boomers reaching retirement with no savings may never be able to retire. The Fed, White House and banking community didn’t push to the deep core of the mortgage crisis. They tinkered with the issue America at the Crossroads 73 and got Tinkerbell results. People in power have not been thinking outside the box; we are in a de-leveraging era and the response needs to be a radical de-leveraging of the American people. In other words, instead of bailing out the banks and their cronies, the focus needs to be on bailing out the American homeowner with across the board loan modifications and debt reductions. The American people, as a consumer base, represent 70% of GDP; if that base dries up and is completely tapped out, there will be NO recovery for many years to come. The Fed continued to tweak long-term interest rates as Ben Ber- nanke introduced Operation Twist on September 21st as another stimulus plan to lower the key mortgage rates. The policy involved selling $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds, starting in October 2011 and ending in June 2012. This was considered by many analysts as a non-event; however, the FED was signaling to the White House and Congress that it was doing its part in keeping interest rates low in order to revive the housing market. They also wanted to be seen as doing something to keep the markets calm and to help build confidence in a recovery scenario. Washington needs to do the unthinkable, provide low-rate mortgages across the board to the American people, a bailout for the American homeowner. Politicians need to wake up to the fact that the mortgage crisis has to be solved in order to regenerate the massive American economic system: there will be no sustainable recovery without this economic repair. Ask the banks, Freddie and Fannie to take a 50% haircut on the mortgage debt the way institutional investors were asked to take a 50% to 75% haircut on hundreds of billions of dollars of sovereign debt loans to Greece. We have reached a point where this type of a solution is necessary. Nearly 11 million people owe more than their home is worth, and that’s a crisis that needs a broad-based remedy. By the third quarter of 2010, a coalition of 50 state attorney generals and various federal agencies began investigating and probing the abusive foreclosure practices by major banking institutions 74 Global Economic Boom & Bust Cycles on their use of robo-signing and other questionable tactics designed to foreclose on American homeowners. After news reports surfaced of widespread robo-signing, the issue that banks may have improperly foreclosed on troubled borrowers began to move to center stage; particularly where issues of fraud, illegality, fabrication of missing documents and even the bundling of mortgages into marketable securities were beginning to resonate with prosecutors, attorney generals and legal scholars throughout the 50 states. An important show- down had finally come to challenge the banking industry on its practices and foreclosure procedures: the big guns had entered the arena on behalf of the American people. Five banks were targeted for the investigation: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. The stage was set to finally deal with an industry that had received enormous sums of bailout money but had done very little to alleviate the pain and suffering of the Ameri- can homeowner. The 50 state attorney generals in negotiations with big banks insisted that debt forgiveness or principal reduction, reduced monthly payments and other relief for distressed homeowners be part of any settlement over the bank’s faulty mortgage practices. In exchange for these settlement conditions the banks were seeking legal immunity and release from liability for past illegal actions and that there would be no further lawsuits stemming from the foreclosure crisis. Settlement amounts of between $20 and $30 billion were considered to be divided among the 50 states. One proposed deal contemplated was to set aside $5 billion in cash penalties and a $20 billion fund for modifications and refinances of underwater mortgages. Some participants pointed out that the settlement amounts were insufficient to cover the massive problem afflicting the American homeowner. And they were right. A settlement of even $30 billion may not even be sufficient for the state of California alone, especially when we are talking about debt forgiveness and across the board loan modifications. It was estimated that out of 2.2 million underwater homeowners in the state of California, only about 20,000 homeowners would have been given aid. And in exchange for this America at the Crossroads 75 deal, the banks were to be given broad immunity from any further legal actions. The legal immunities that banks were seeking included the following: (1) release from any faulty practices covering loan origination (2) release from any issues regarding securitization and servicing practices (3) release from legalities of fair-lending procedures and (4) release in their use of the Mortgage Electronic Regis- tration Systems (MERS). Some of the state attorney generals and the Obama administration were eager to reach an early settlement with the banks in order to implement another solution for the crippling foreclosure crisis. On the other hand, there were state prosecutors that wanted to pursue a more comprehensive investigation, probing deeper into such legal issues of whether banks followed the state’s laws (in the case of New York) when bundling mortgages into securities; the issue of whether mortgages were properly transferred in the securitization process. A full investigation, including origination and securitization practices, was demanded before any settlement could be contemplated. The banks wanted the coalition to give away too much immunity for alleged illegal conduct in the past. Many felt that the banks needed to be held accountable for all of their actions in the same way that they were using an iron fist on the American homeowner, showing no mercy even for people who qualified for mortgage relief options. In the case of New York, Attorney General Eric Schneiderman took a more aggressive stance probing deep into the securitization process of mortgages and possible criminal charges against financial executives in the robo-signing scandal and other alleged wrong- doings. Early on in the negotiations, Schneiderman was adamantly against allowing the banks broad-sweeping immunity, freeing them from any future civil lawsuits. In addition to New York, Delaware, Massachusetts, Kentucky, Nevada, Minnesota and California left the negotiation talks to pursue their own state investigations. In October 2011, California Attorney General, Kamala Harris announced that she would no longer take part in the national multi- state foreclosure probe. She stated, “The relief contemplated would 76 Global Economic Boom & Bust Cycles allow too few California homeowners to stay in their homes.” In essence, California was saying that the contemplated settlement was not enough to deal with the size of the problem in the Golden State. In an interview with The Times, Kamala Harris stated that she removed herself from talks by a coalition of state attorneys general and federal agencies because the nation’s five largest mortgage servicers “were not offering California homeowners relief commen- surate to what people in the state had suffered…It has been a process of negotiating and sitting at a table in good faith, but ultimately I have decided that we have to go our own course and take an independent path. And that decision is because we need to bring relief to Californians that is equal to the pain California experienced, and what is being negotiated now is insufficient.” She also indicated (again) the issue that the banks were demanding to be granted overly broad immunity from legal claims. This was clearly not the time to close the door on these investigations for this would bar any revelations regarding Wall Street’s role in the mortgage meltdown. And that was the position that absolutely should have been taken! After President Obama’s State of the Union Address in January 2012, negotiations between the attorney generals and the banks quickly moved towards a resolution. As part of his speech and stated mission to do more regarding the housing crisis, Obama stated: “I'm asking my Attorney General to create a special unit of federal prosecutors and leading state attorney general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.” New York Attorney General Eric Schneiderman was appointed by President Obama as the co-chairperson of the Unit on Mortgage Origination and Securitization Abuses. This was a welcome sign by many who considered Schneiderman a major factor in dealing effectively with the mortgage crisis and the abusive big banks. Schneiderman didn’t waste much time in excising the power in his new position: In early February, he filed a lawsuit against Bank of America, Wells Fargo and JPMorgan Chase in New York State Su- America at the Crossroads 77 preme Court in Brooklyn. The focus of the lawsuit centered on the Mortgage Electronic Registration System (MERS) accusing the banks of fraud in their use of the electronic mortgage database which (as he stated) resulted in deceptive and illegal practices, including false documents in foreclosure proceedings. According to Schneiderman, “The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse.” The lawsuit asserted that over 70 million mortgages have been registered in the MERS system, saving the banks over $2 billion in recording fees. Bank of America, Wells Fargo, Fannie Mae, Freddie Mac and other major financial institutions formed MERS in 1995 to effectively bypass county records offices to facilitate faster processing of their mortgage-backed securities business. On February 9, 2012, the federal government announced that a $25 billion settlement had been reached between five of the nation’s largest banks and 49 attorney generals. California Attorney General Kamala Harris, New York Attorney General Eric Schneiderman, Delaware Attorney General Beau Biden (son of Vice President Joe Biden) and Massachusetts Attorney General Martha Coakley (the attorney generals who had previously rejected or walked away from the negotiations) joined the final settlement agreement once it was understood that this settlement would not be the end of this matter and that the big banks would not be given absolute immunity. Thus, this deal did not release the banks from future criminal lawsuits by individual states. About one million homeowners would be helped under the settlement, and mortgages held by Fannie and Freddie would not be included in the process. The rough estimates of how the money would be allocated are as follows: (1) $17 billion would use to reduce principal balances on loans that are underwater, with each homeowner receiving approximately a $20,000 reduction on their mortgage (2) $5 billion would be placed in reserves accounts for various state and federal programs. Some of this money would be used to make cash payments of be- 78 Global Economic Boom & Bust Cycles tween $1,800.00 and $2,000.00 to roughly 750,000 American homeowners who lost their homes due to the deceptive practices by the banks (3) roughly $3 billion would be set aside to help homeowners refinance their mortgages at 5.25 percent. This was not a great deal for the American people, and certainly a lot more needed to be done. Following the multi-state settlement with the nation’s biggest banks, California Attorney General Kamala Harris called on Freddie Mac and Fannie Mae to temporarily suspend all foreclosure sales in the state of California. Harris sent a letter to Edward DeMarco and requested “a good-faith pause.” The state of California was scheduled to receive $18 billion in benefits over three years for homeowners. As part of the deal, Bank of America Corp., Citigroup, Wells Fargo, Ally Financial and JP Morgan Chase agreed to $12 billion in the form of principal reduction and short sales. In mid April, Attorney General Harris presented her “Home- owner Bill of Rights” package to the California Democratic-controlled banking and Finance Committee and ran into stiff opposition. The measures and list of consumer protections Harris presented were similar to those accepted by the five major banks in the nationwide settlement. Included in her package was a request to have lenders delay foreclosure action while a borrower is working through the loan modification process. This and other measures were not given wide acceptance by California legislators. The fear among several lawmakers was that legislative “overreach” would drive business out of California. This process was clearly going to take some time even in a state where the housing crisis is still very severe. California was one of the hardest hit states in the nation’s foreclosure crisis. The number of foreclosures in California is expected to reach 2 million before the end of 2012. This is a real catastrophe that needs to be stopped by any financial means necessary. This is an extraordinary crisis that requires extraordinary solutions. Fannie and Freddie guarantee about 60 percent of all mortgages in California, so these organizations are a vital part to the solution process. America at the Crossroads 79

On October 26, 2011, 19 Democrats in the House of Represen- tatives met with the head of the Federal Housing Finance Agency (FHFA) Edward DeMarco, who oversees Fannie Mae and Freddie Mac, to discuss a proposal that would allow bankruptcy judges to reduce principal amounts on loans. One suggestion by Representa- tive Zoe Lofgren is to allow for a temporary reduction in the interest rates of those homeowners who file for bankruptcy. The plan would allow homeowners to pay down loan principal and reduce negative equity during a five-year period with no interest. In exchange, borrowers would agree to settle claims against servicers which shield them from litigation. The push is to allow more underwater homeowners to refinance their mortgages at the current historically low interest rates (30-year fixed rate mortgage hit 3.94 percent by early October 2011). The need for principal forgiveness is essential in the fight to stop the deepening foreclosure crisis. In addition, 34 Democrats in California’s congressional delegation sent a letter to President Barack Obama on Oct. 11, 2011 urging him to take action on pushing Fannie Mae and Freddie Mac to implement new procedures to do refinancing of loans with principal reductions for underwater homeowners. They wrote, “Our current economic crisis began in the housing market. Until the housing market is stabilized, our economy will not be able to fully recover.” And I would add to this that when the banks come to you (President Obama, Treasury Secretary Timothy Geithner and Fed Chairman Ben Ber- nanke) for another bailout; tell them what they need to do: Bail Out the American People! As of November 2011 Fannie and Freddie guaranteed up to 70 percent of the country’s home loans and they had yet to approve of debt forgiveness. Under conservatorship since 2008, Fannie Mae and Freddie Mac (tax-payer-funded companies) were not part of the multi-state deal and had not granted any principal reductions on its huge portfolio of mortgages. Fannie and Freddie have 3 million mortgages that are underwater, and of those, most are not delinquent. According to the acting director, Edward DeMarco, the cost of implementing principal reductions on all of the 3 million loans would cost taxpayers 80 Global Economic Boom & Bust Cycles almost $100 billion. DeMarco presented a letter to Congress on Janu- ary 20, 2012 stating his hard line opposition to principle reduction. It’s interesting to note that the U.S. government had spent $190 billion since 2008 keeping Fannie and Freddie alive and kicking. Congress, the Federal Reserve, the Obama administration, MoveOn.org, several attorney generals, and Martin Feldstein, a chief economic advisor to the late President Ronald Reagan, have all called for DeMarco to institute principal reduction. He clashed with members of Congress and the Obama administration who supported the idea that reducing the amount borrowers owe would be an essential component to the housing recovery. And again, the irony here is that the federal government bailed Fannie and Freddie out of its financial difficulties before the meltdown of 2008, and now it could not play a key role in helping to bring about a housing recovery in the United States. Democrats in Congress and some state attorney generals have called for DeMarco’s resignation. Attorney General Ka- mala Harris called on DeMarco to step down due to his response to the foreclosure crisis. Rep. Elijah Cummings (D-Md) stated of DeMarco, “...he and he alone stands in the way of hundreds of thousands of people, if not millions, being able to [literally] get a new lease on life.” Several high profile observers called on the Obama administration to push harder to get a nominee to replace DeMarco. Shaun Donovan, the Secretary of Housing and Urban Development, has stated, “Our goal is to get a good nominee and get someone in there who shares our view.” The Federal Reserve sent a report to Congress on January 4, 2012 that presented the case of 12 million borrowers being weighed down by $700 billion in aggregate negative equity. This was a very interesting report coming from the Fed, especially when you consider the trillions of dollars spent bailing out the banks since 2008. Yet during these extraordinary times, no housing solution for less than $1 trillion could be found to help 12 million American borrowers - part of the backbone of this nation! Something is absolutely wrong with that picture. America at the Crossroads 81

In March of 2012, U.S. Treasury Secretary Timothy Geithner began showing signs of interest (after years of silence) in resolving the U.S. housing crisis. In testimony before a U.S. Senate panel, he stated his belief that Fannie Mae and Freddie Mac should reduce the principal on some home mortgages held in their inventory. In his testimony he stated, “We’ve been encouraging Fannie and Freddie to take another look at the map, at the economics of the finance because we think there is a strong case in some circumstance to add principal reduction as part of their strategies to help maximize return of the taxpayer.”10 Geithner had finally joined the party to find a solution to the crippling crisis. He indicated that they were now trying to “work on a credible national strategy.” Since the start of the Great Recession in December 2007 until late 2011, nearly 5 million homes had been foreclosed upon in America. With nearly 11 million homes still underwater, the crisis demanded a solution of much greater scope and with a much broader base of power to move domestic and international banks to a comprehensive resolution. Debt forgiveness and loan modifications with historic low interest rates (while the rates were still low in 2012) are considered indispensable tools for fixing the housing problem. Smaller independent investor organizations that purchase non-performing notes and performing notes from banks at discounts employ debt forgiveness as a tool to restructure the mortgage debt. This process has done a lot to help keep people in their homes. John Taylor, president of the National Community Reinvestment Corporation, stated, “It's sinful, is the word I would use, that they won’t do this” (regarding debt forgiveness). “And the only reason they won’t is they don’t want to realize the red ink that’s already on their books.” One in five homeowners is underwater; total estimated negative equity is $700 to $800 billion. The banks and Fannie and Freddie could take this haircut. For less than a trillion dollars, the mortgage crisis could be placed on stable ground, and that’s a better solution than orchestrating another massive bailout for “Too Big To Fail” institutions that are doing very little to stabilize the housing crisis. We need solu- 82 Global Economic Boom & Bust Cycles tions that go straight to the heart of the matter and not to some questionable entity that is simply not interested in solving the problem. The peak of home ownership in America was reached in 2005 with 70 percent of all occupied households owned by their residents. However, the good times had come to an end! CoreLogic (a financial Analytics company) was another company that presented an analysis of 11 million homeowners underwater in their mortgages with lenders. A new and improved HARP program introduced by the Obama Administration in October 2011, offered little relief to millions of homeowners who were behind in payments on their mortgages. The new program states that a homeowner can be underwater; however they would have to be current on their mortgage payments. This is tantamount to tinkering with a massive depression era problem. This did absolutely nothing for people who were behind in their payments. In 2011, GOP presidential candidate Mitt Romney told the Las Vegas Review-Journal in regards to the mortgage crisis, “Don't try to stop the foreclosure process…Let it run its course and hit the bottom.” This is a flawed observation offering no remedies! Rep. Dennis Cardoza was not pleased with how the mortgage crisis was being handled: “I am dismayed by the administration’s failure to understand and effectively address the current housing foreclosure crisis…Home foreclosures are destroying communities and crushing our economy, and the administration’s inaction is infu- riating.” Many economists have suggested writing down current mortgages to market value. For example, consider the case where a family purchased a home in Sacramento in 2005 for $356,000, however, by October 2011, the value of the property had declined to $150,000. The solution is to write this mortgage down to market value. If the family is still in the home and still has an income, then the bank should work with the family to make the mortgage affordable: principal reduction, a restructured loan program and provide this family with historic low interest rates. If the bank were to foreclose on the property and take it back as an REO, it will only be able to sell it at America at the Crossroads 83 market value, $150,000. The question is: will the bank be made whole (not lose money) by any type of insurance they may have on this mortgage (i.e. PMI or mortgage backed security insurance) if so, then there is no incentive to do loan modifications. Some banks have clearly chosen to simply foreclose because they will suffer no major loss due to their insurance coverage that pays for the deficiency in the foreclosure process. The banks need to be encouraged to do loan modifications that will make them favorable (and in their best interest) in a number of ways: no foreclosure action, avoidance of holding in inventory REO properties, legal fees, and avoidance of future lawsuits. The states that experienced rampant overbuilding and bubble pricing in property values - Florida, California, Arizona, Nevada - need “New Deal” type remedies to address this crisis. Many of the cities in these states are experiencing very difficult times. However, that is not to say the rest of the nation is not experiencing the same gut-churning process. A key victory by attorney Kathy Patrick, who won a lawsuit against Bank of America for $8.5 billion, was a very important step in the right direction. This was the second largest such settlement in U.S. history. Backed by Blackrock, Pimco and 21 other bond giants, this legal expert dealt a serious blow to the massive B of A. As she stated in an article in Forbes Magazine, “This group did not come together just to deal with Bank of America. They came together because they wanted a comprehensive industry wide strategy and an industry wide solution.”11 During the third week of September 2011, a proposed plan surfaced that the U.S. government was considering bulk-selling the massive portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private investors, mainly Vulture funds. The transactions would involve huge discounts on the properties sold to private investor conglomerates. The plan includes the stipulation that the buyers of these properties would turn around and rent the properties to the American people who had been made homeless in the process. Under the pretense that neighborhoods would be stabilized and that there would be an increasing supply of rental prop- 84 Global Economic Boom & Bust Cycles erties at market rates, this plan was flawed from the beginning and another plan to increase the holdings of wealthy people. Why not offer the American people pennies on the dollar for these properties instead of sovereign wealth funds, investment banks, vulture funds and wealthy individuals. Bail out the American people! Billed as a “Rental Conversion” plan it’s nothing more than a colossal transfer of wealth. The American people don’t need or deserve “Billionaire Landlords.” After the rollout of this program, I was further convinced that President Obama needed a new Treasury Secretary; Timothy Geithner was not the right person for this job as a depression era cabinet member. He was simply not thinking like a reformer in the best interest for the American people, especially in regards to the housing crisis. In January 2012, Geithner indicated in an interview with Bloomberg Television, that Obama would probably not be asking him to remain the Treasury Secretary for a second term if he is re-elected. Obama needs to clean house and begin setting up a complete cabinet of reformers and New Deal architects. And many people were aware of this issue as we entered 2012 and election year politics. By 2012, the housing crisis in America had been smoldering for five years and was the deepest U.S. housing crisis since the Great Depression of the 1930s. However, in election year 2012 the stage was set for part two of the downturn with banks moving to wreak more havoc. However, the majority of the people still fighting for their homes in 2012 were hardworking, everyday Americans who had fallen on hard times due to a rough economy. And since this was a national crisis in extraordinary times, it would require national solutions with extraordinary remedies. Any politician running for the office of president who didn't recognize this problem as a national tragedy, especially since the crisis had been smoldering for over five years, should not be voted into office. The acid test will be which candidate and major political party will offer the grand solution. Middle class, suburban and rural, employed, unemployed and underemployed Americans are the grand target of the foreclosure crisis. With nearly 13 to 14 million Americans jobless, the reality is America at the Crossroads 85 that many of these people are struggling to keep up with their mortgage payments, and many have good mortgages with reasonable rates but need a better solution at the ultra-low historic interest rates. What’s the point of keeping these rates low (other than keeping the federal government’s borrowing costs low) if only a few people can qualify for loan modifications or refinancing programs. In election year 2012, politicians will have to offer answers and solutions to the tough questions regarding the U.S. housing crisis that had wiped out over $7 trillion in household wealth. In addition, what will they do about the 9.5 million homes still at risk of default? And the American people should not accept any kind of song and dance on this issue: this problem needs to be solved and it needs to be solved now! Some housing analysts were starting to predict that the national market would hit bottom in 2013 and stay there until 2016. Job creation and a national solution to the housing crisis are the key factors in resolving this economic dilemma. The Wall Street Journal reported in March that, “A full-fledged recovery is still years off for many housing markets - as well as for millions of people who purchased homes or took cash out during the bubble.” THE ONE TRILLION DOLLAR STUDENT LOAN CRISIS America’s trillion dollar student loan crisis has swelled into a bubble rivaling the mortgage crisis. Average student loan debt is $25,000, up 25% in 10 years, with the escalating cost of tuition increasing far faster than the rate of inflation. As one commentator stated, this crisis is “creating a system of indentured servitude.” Ac- cording to William Bennett, the U.S. Secretary of Education from 1985 to 1988, there has been a “400 percent increase over the last 25 years in college tuition. Why spend $60,000, $80,000, $100,000 to go to school if students can’t find a job in their field…I think higher education will be the next bubble.” The student loan debt of $1 trillion has surpassed the total amount of credit card and auto loan debt in America. And to make matters worse, many students after 86 Global Economic Boom & Bust Cycles leaving college are simply unable to find work. Half of all recent graduates are unemployed and we now have a surplus of 10 years of underemployed educated people. According to the Federal Reserve Bank of New York, at least 37 million Americans are saddled and trapped in student loans, that’s 15 percent of the population. About two-thirds of student loans are held by people under the age of 30, while people age 50 and over have acquired as much as $135 billion in what should now be labeled toxic student loan debt. According to the Obama administration, as of April 2012, 7.4 million students had subsidized student loans with millions more applying for loans in the current year. The federal government back about 84 percent of student loans issued in the country. The roughly 15 percent of private student loans are offered by a list of non-federal lenders such as banks and Sallie-Mae Corp. Approximately 5.4 million borrowers have at least one student loan past due. With the average student loan debt at roughly $25,000, the majority of young people will be paying off their student loans for many years after they graduate. And the sad part of this story is that many of these students will not find good paying jobs after graduation. Zac Bissonnette, author of How to Be Richer, Smarter and Bet- ter Looking Than Your Parents, says he hates student loans. Stu- dents are starting to recognize the collective $1 trillion mess they are in. Bissonnette is on a mission to champion the issue of this debt crisis. At age 23, he is well aware of the enormous burden this debt crisis is having on his generation. He is calling the student loan crisis a ticking time bomb. His recommendation to students is that “…if you have private student loans, pay them off as quickly as you possibly can…I would throw every nickel I had at the private loans.” He further states that “Probably 10 percent of borrowers have essentially ruined their lives with student loans.” I agree with his assessment and that private student loans are absolutely toxic and should be avoided if at all possible. Until 1976, all forms of student loans were dischargeable in bankruptcy. It has only been since 1998 that federal government student America at the Crossroads 87 loans became non-dischargeable in bankruptcy. In 2005, private student loans were the next category that could not be discharged in a bankruptcy proceeding. This is the key toxic feature of these loans; bankruptcy is not an option either for federally funded student loans or private funded loans. In addition, while the student is in school, interest payments on the loans are accumulating. Under the Federal Stafford loan program the interest (3.4 percent) is paid by the government until the student graduates. Sallie Mae and other private loans require the student to make the interest payments or the interest will accumulate over time, making the final bill an enormous burden (toxicity). In addition, the best interest rate programs require that a parent cosigns for a loan, putting the parent on the hook for a debt trap loan (another toxic trap). My final assessment is that student loans are “debt traps” and toxic liabilities. Unpaid student loans cripple young people financially even before they get started with their careers. However, at least in the case of government loans, students will have fixed rate obligations whereas private loans come with variable rates that are likely to adjust in future periods. Americans 60 and older owe about $36 billion in student loans and more than 10 percent of those loans are delinquent. And in this category of student loans, social security checks are being garnished, as well as any other federal payments that the creditor can find. Some of the baby boomers went back to school to learn new skills and took on more student loan debt. Others have co-signed for their children and grandchildren, or are simply trying to pay off loans taken out decades ago. This is a nightmare for older Americans living on fixed income or limited financial resources. Thus, this is another significant level of debt choking American households. Interest accumulation, late fees and missed payments all add up to a horren- dous nightmare for someone struggling to make ends meet. And to make matters worse, especially for a baby boomer, these loans are not dischargeable in bankruptcy. The 2005 legislation that extended this restriction to include loans made by banks and private financial institutions should be changed. Like child support, criminal fines, and unpaid income taxes, private student loans cannot be discharge 88 Global Economic Boom & Bust Cycles in bankruptcy. An American citizen that has legitimate reasons for filing bankruptcy should be allowed to discharge private student loan debts. Huge defaults on student loans are occurring and putting many people in dire straits. In many ways, this debt is worse than mortgage obligations; chief among them is the fact that creditors can garnish a borrower’s wages, seize tax refunds, social security and other federal benefit payments. And consider the situation of gar- nishment of entry-level wages on a student just entering the workforce. On July 1, 2012 the interest rate on the federal Stafford student loan program was scheduled to increase to 6.8 percent unless lawmakers extended the lower rate. Obama asked Congress to extend the current tuition tax credit and keep the rate at 3.4 percent. Obama was also pushing to allow students to consolidate multiple loans at reduced rates as well as requesting for an increase in work-study jobs. On Tuesday, May 8, 2012, Senate Republicans blocked a vote on a bill that was designed to extend the current low interest rate of 3.4 percent on the federal Stafford student loan program. After the vote on the Senate floor, Democratic Senate Majority Leader Harry Reid simply said, “They’re sending a clear message they would rather protect wealthy tax dodgers than help promising students achieve their dreams of higher education.” Just as in the debt ceiling debacle in 2011, gridlock in Washington turned this into another political saga of Democrats versus Republicans. The American people are watching and they will decide in November which leaders are more responsive to their needs. While on a visit to college students at the University of North Carolina at Chapel Hill, President Obama told students, “At this make-or-break moment for the middle class we’ve got to make sure you’re not saddled with debt before you even get started in life.” The bursting of this bubble will finally force politicians, lawmakers and business leaders to face the fallout of another mountain of debt in America. America at the Crossroads 89

ICELAND’S RECOVERY STORY: ECONOMIC JUSTICE Iceland’s banking and financial system collapsed in December 2008, a victim of global corruption and widespread greed of politicians and bankers. Iceland’s experiment with a deregulated banking system proved fatal. With a GDP of $13 billion and a population of roughly 318,000 people, Iceland became one of the most severe cases of mismanagement and corporate greed in the 2008 meltdown, after the country’s three largest banks went broke and defaulted on $85 billion in debt. Over time their banking system swelled to over 10 times the GDP, so this small nation did not have the capacity to bail out its megabanks in the time of severe crisis. Thus, these banks were simply allowed to collapse. In the wake of the collapse, the nation’s currency, the krona, was severely devalued, losing half its value against the euro. Inflation soared to 20 percent, people lost jobs, were deeply in debt and the nation went thru a period of austerity. After over three years of working on recovery measures and repairing their broken economic system, the country emerged in early 2012 in better economic health, illustrating to the world what can be achieved when a nation applies broad-based economic and financial solutions that benefit the majority of the people instead of a select few rich corporate CEOs and their cronies. An agreement between the government and the banks paved the way towards providing relief for Iceland’s struggling population. With the banks still partly owned by the state, Bloomberg reported that they “…forgave debt exceeding 110 percent of home values. On top of that, a Supreme Court ruling in June 2010 found loans indexed to foreign currencies were illegal, meaning households no longer need to cover krona losses.”12 According to a report published by the Icelandic Financial Ser- vices Association, Iceland’s banks have “forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of 90 Global Economic Boom & Bust Cycles more than a quarter of the population.” The government of Iceland stepped up to the plate and put its people back on their feet as part of a broader plan to revive the national economic system. They bailed out the people that are the main drivers of the economic system and not just a few rich “Too Big To Fail” institutions that created the crisis in the first place. According to Lars Christensen, chief emerging markets economist at Danske Bank A/S in Copenhagen, “You could safely say that Iceland holds the world record in household debt relief…Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”13 When the people of a country are facing widespread insolvencies and bankruptcies, extraordinary measures and policies need to be implemented. Iceland clearly didn’t tinker with their problem like the U.S. has done over the past four to five years. Lars Christensen reminds us that “the bottom line is that if households are insolvent, then the banks just have to go along with it, regardless of the interests of the banks.” Iceland was bold enough to bring in the reformers to make the necessary changes. That’s what the United States needs in 2012 and beyond. Our banks, along with many European banks, were given trillions of dollars during and after the meltdown in 2008, yet it would have probably taken just $1 trillion to help stabilize the American housing crisis. Bloomberg made this very succinct statement in its article on Iceland, “Iceland's approach to dealing with the meltdown has put the needs of its population ahead of the markets at every turn.” Clearly what happened in Iceland cannot be duplicated in the U.S., but the guiding principles and some measure of reforms can be implemented to stabilize the housing crisis and other broken aspects of our economic system. This is truly a success story for the people of Iceland! OCCUPY WALL STREET The Year 2011 started with the Arab Spring and mass movements in the Middle East and North Africa, sweeping long-standing rulers from power after decades of corruption, mismanagement and control. The Internet revolution and social media played a critical America at the Crossroads 91 role in organizing and linking people together throughout the protest movements. Facebook, Twitter, cell phones and laptop computers illustrated the power and flexibility of 21st century new technologies in revolutionary movements. In Egypt it was Tahrir Square, and by mid-September a popular protest movement had hit America on Wall Street. “Occupy Wall Street Protest” made its debut on the streets of New York City on September 17, 2011, protesting the greed and corruption on Wall Street. The movement started with a few students camped out in Zuccotti Park in Manhattan, staging rallies, sit- ins and marches to showcase the profligate behavior of Wall Street and corporate America. The movement initially tried to pitch tents in front of the New York Stock Exchange; however, they were forced to change that strategy. So Zuccotti Park became ground zero. Occupy Wall Street (OWS) is angry about the 2008 bailouts that the banks received while average Americans were treated to high unemployment, loss of homes and job insecurity: Bankers were bailed out with taxpayer money and the America people were left to fend for themselves. As the perceived epicenter of global financial power and corruption, Wall Street became the focus of a movement that seeks to bring to the surface the frustration, disgust and rage over the near destruction of the American economic system. In the 2008 meltdown, the world came extremely close to complete economic collapse and the formal start of a Great Depression. The diverse group has been using unconventional means to protest the unbounded greed, irresponsibility and fraud they perceive in the corporate community. A global platform and voice began to showcase Wall Street’s role in the global economic downturn. Wall Street is identified as a destructive force and politicians as pawns in the money game: hapless corrupt politician and the super-rich influence over American life. About 700 protesters were arrested as they marched on the Brooklyn Bridge during the first weekend in October. In a march on Wall Street, some demonstrators dressed up as zombies with money in their mouths highlighting the greed syndrome and near zombie 92 Global Economic Boom & Bust Cycles behavior that characterize some of the power-hungry people on Wall Street and in corporate America. More and more people began to associate the 1% super-rich with rising unemployment, the housing crisis and declining school budgets and neighborhoods. From Wash- ington to Wall Street, and from corrupt elites to politicians, Occupy Wall Street was raising the banner that enough is enough on economic injustice in the world. As mainstream media began to pick up the story, sympathizers in other cities throughout the U.S. and the world were starting to join the protest: this was a clear sign that the movement had struck a nerve in certain areas among certain groups in the country and in protest movements around the world. And thanks to the near universal use of social media and the Internet, this cry for economic justice was heard loud and clear. Nearly 146 cities around the globe began to recognize the movement as a voice of change. The protest quickly expanded to other cities throughout America. Support came from unions, teachers, transit workers, nurses, college students, the unemployed, from people losing their homes, from grandmothers concerned about the economic future of young people in America and from some Democratic politicians who were sympa- thetic with their message. In fact, several Democratic lawmakers expressed support for the protesters. As one writer stated, for awhile the Democratic establishment viewed the Occupy Wall Street protests “as something of a crazy relative.” However, as the movement quickly began to spread and found a global support base, OWS became part of the national dialog. President Obama stated that the protesters were expressing the frustrations of the American public. He also stated at a news conference that the movement “may be jelling into a political movement.” The Occupy movement hit the streets of Sacramento during the first week of October with more than 500 protesters marching in the downtown area carrying signs that stated, “Save the Middle Class” and chanting the nationwide rally cry that they represent the “99 percent.” Throughout the month of October demonstrations and rallies were planned and some took place in cities across the nation: America at the Crossroads 93

Memphis, Tennessee, Allentown, Pennsylvania, Hilo, Hawaii, De- troit, Michigan, Portland, Oregon, Minneapolis, Minnesota, Little Rock, Arkansas, McAllen, Texas, Santa Fe, New Mexico, Mobile, Alabama, and Mason City, Iowa. On November 2nd, in Oakland, California, Occupy Oakland called for a general strike to shut down the city of Oakland. It was a daylong citywide protest that ultimately shut down the Port of Oakland; the fifth busiest port in the U.S. Thousands of protesters marched, danced and waved signs to protest inequality and corporate greed. During the third week of November, Occupy UC Davis witnessed a “pepper spraying” incident by university police on a line of inno- cent protesters, seated quietly blocking a path on campus. A video of the spraying immediately went viral on the Internet and helped to galvanize the Occupy movement, showcasing what many felt was a case of police brutality. The student body of the university circu- lated a petition calling for the resignation of Chancellor Linda P.B. Katehi. The use of pepper spray by police officers on peaceful demonstrators was a clear reminder of the risks these young people had to take in order to bring this message to the world.14 On November 17, 2011 - a date that marked the second month of the movement and known as “Day of Action” - OWS protesters were marching, chanting and staging sit-ins in cities throughout America: New York, Los Angeles, Las Vegas, Boston, Portland, Ore., Seattle Washington, St. Louis, Mo., Chicago and elsewhere. Over- all, the demonstrations and marches had been peaceful; however, there have been instances of violence (mainly from outside agitators and opportunists) and some occupation sites were cited for sanita- tion hazards, drug problems and sexual assaults. As the movement matures and becomes better organized, it is hoped that many of these issues will get resolved. Supporters from around the world and abroad began sending letters of support, supplies, money and encouragement for them to continue their mission to raise the consciousness of the world to the real disaster and the culprits that are responsible for our crumbling 94 Global Economic Boom & Bust Cycles economic system. Labor unions began supporting the protesters with manpower and donations of goods and services. Letters of support (offering hope, advice, tactics and criticisms) poured in from around the world: from Germany, South Korea, Aus- tralia, Scotland, the U.K….Los Angeles, Boston, Seattle and Provi- dence, R.I., and many other cities around the U.S. One supporter wrote: “Please accept these humble donations…I am poor and fighting foreclosure, but if you are willing to occupy and keep this message alive, I will support you.” One activist stated that “This is the voice of the people rising up.” For many activists, it was clear that this could become a much broader mobilization of people in America against the growing inequality (the 1% vs. the 99%) and corrupting influence of money in politics. After a jobs speech given in Manchester, New Hampshire in November, 2011, President Obama received a note from a protester stating the following: “Mr. President: Over 4000 peaceful protesters have been arrested while bankers continue to destroy the American economy. You must stop the assault on our 1st amendment rights. Your silence sends a message that police brutality is acceptable. Banks got bailed out. We got sold out.”15 Cornel West, a Princeton professor and political activist, joined the protests and quickly became one of the prominent voices in the movement, participating in marches and rallies in Seattle, Washing- ton and Oakland, California. Other social activists, political figures, notable intellectuals and celebrities have visited the camps and gave their support to what the protesters are attempting to achieve. Slo- gans on signs and marching chants deliver the messages: “We are the 99%”; “We Are Free People”; “human need over CORPORATE GREED”; “Keep It Made In America”; “We got sold out, banks got bailed out”, “Our Constitution Has Been Hacked”; “Where are the Jobs? I Graduate In May.” The sign of one woman at a protest rally in Sacramento, California stated, “we have three choices: Republi- can, Democrat and Fed Up.” The selected choice was “Fed Up,” supported by a quote from Abraham Lincoln, “government of the people, by the people, for the people.” America at the Crossroads 95

The global response to OWS was phenomenal: On September 15th, many cities from all over the planet staged demonstrations and rallies in a show of Democratic solidarity in denouncing bankers, businessmen and politicians for the rape and pillage of the global economic system. Hundreds, and in some cases, thousands of protesters hit the streets in cities throughout Europe, Asia and North America. The majority of the protests were peaceful, however, in Rome, Italy (where tens of thousands of protesters assembled) a demonstration turned violent, with demonstrators clashing with police officers. Dozens of protesters and 26 police officers were injured. In the cities of Auckland (3,000 people), Wellington and Christchurch, New Zealand, demonstrators gathered to denounce corporate greed. In Sydney, Australia, about 2,000 people, including members of Ab- original groups, trade unionists and communists gathered outside of the Reserve bank of Australia protesting the global plight. Hundreds marched in Tokyo, Japan supporting the Occupy movement and included anti-nuclear protesters; people marched in Manila in the Phil- ippines; in Taipei, Taiwan, dozens of people protested in front of the Taipei stock exchange chanting, “we are Taiwan’s 99 percent”; in Hong Kong, China, over 100 people (students and retirees) protested in the Central district with banners labeling banks as cancerous; in Paris, France they gathered in front of city hall; they gathered in the cities of Madrid and Barcelona, Spain; in Berlin, Ham- burg and Leipzig, Germany the protesters gathered; in Athens, Greece, Vienna and Helsinki, and throughout cities in America, it was a clear demonstration of solidarity and a coordinated effort to bring the message of the Occupy Movement to the capitals of the world.16 OWS has its own newspaper, both a print and online version: The Occupy Wall Street Journal, the official voice of the movement. It chronicles the struggles of the movement and the people who are involved in that movement. The group’s work in progress manifesto identifies some of the key issues of the movement and their basic list of grievances: (1) Bring back the Glass-Steagall Act (2) Account- ability and economic justice and punishment for people who com- 96 Global Economic Boom & Bust Cycles mitted economic crimes against the American people (3) Jobs and financial security and lack of job opportunities (4) Affordable education for the nation’s students (5) A plan for Homeowners to keep their homes and a broad-sweeping solution to the housing crisis (6) A fairer distribution of wealth and taxes and (7) The movement does not want to see major cutbacks in social and economic programs, and other safety-net systems. This list will continue to grow and the ranks of this movement was on a path of growth in 2012 as the economic crisis deepened throughout the nation. The protesters took a stand against the high-leverage robbery of the American and global economic systems. Now it is the time for policy intellectuals and politicians to clearly articulate their message and make it a formal part of the national dialogue for economic justice for all. OWS and all of its offshoots, from New York to Cali- fornia, had given a loud voice to the countless millions of Ameri- cans that were suffering and quietly enduring the fallout of 2008. This movement has the potential of changing the political climate in America. The Obama Administration and the Democratic Party need to take this movement very seriously because it will grow and may match the power of the Tea Party in U.S. politics. The Tea Party has solidified a strong political base (in the Republican Party) in the U.S.; Occupy Wall Street may likely do the same within the Demo- cratic Party. The Tea Party’s focus is on scaling down the size of government and taxation, while OWS is focused on the power of corporations, banking institutions and their influence in American politics. After the forced shutdowns of encampments in Washington, New York and other cities, the movement had to regain its momentum and structure a new strategy for the election year in 2012. With the start of the New Year, the Occupy Wall Street movement was firmly entrenched in its new role of fighting foreclosures and evictions, and actively working to keep people in their homes. Through rallies, home occupations and court appearances, the group has taken up the fight to prevent foreclosures. In 11 states, coast to coast, the America at the Crossroads 97 movement has made a difference in the fight against the banks and in taking the foreclosure battle to a new level. As stated earlier in this chapter, one of the key issues election year politics should have focus on is the devastating foreclosure crisis in America. Occupy Wall Street is helping to bring that issue front and center where it should be. According to Matt Browner Hamlin of occupyourhomes.org, “more than 100 occupy groups” have taken direct action on this issue. By April 2012, activists in Los Angeles had helped a dozen homeowners in stay in their homes. Activists have clearly identified fighting evictions and foreclosures as a long-term strategy and as a way to build a broader base for the movement. The tangible results of keeping people in their homes, exposing the hypocrisy of many of America’s banking institutions, and helping to stabilize neighborhoods will ultimately enter the national debate in solving the destructive crisis. OWC has gotten the attention of America and the world: It has started a dialog among supporters, critics and skeptics. Points of reference are used in the discussion and debates on student loans and tuition hikes, mortgage relief, unemployment, wealth disparity, taxation issues, etc. Inside of two months in 2011, OWS became a national movement searching for a much stronger foundation and political base. It has youth and energy, and among these protesters, are our future leaders. By November 2012, OWS may very well become a significant factor in determining which party will occupy the White House for the next four years. The movement will continue to tap into a national nerve center of this nation and bring to the surface the national rage people are feeling about the rape and pillage of Wall Street architects who nearly plunged this nation into an economic sewer hole in 2008. The story has been told in movies, documentaries and books; now people are in the streets speaking out and protesting the injustice of the system. There is this feeling of “why was this allowed to happen?” And in 2012, the volume on this national dialog will be turned up and the world will listen. To be continued... 98 Global Economic Boom & Bust Cycles

SUMMARY ANALYSIS America has been firmly entrenched in its global superpower role since the end of World War II, well over half a century. The requirements and responsibilities of being a global superpower are never-ending and subject a nation to continuous wars and constant pressure to protect vital interests in almost every corner of the world. A very large military budget must be maintained at the expense of other vital national needs. The economic and financial costs to maintain this global presence are enormous and will break the national budget/bank at some point in the near future. If history is our guide, the most likely scenario is that America will continue on this path until it finally experiences a grand economic collapse: what this nation is attempting to do is unsustainable in the current - high cost - global economic context. We are on a collision course with economic destiny. America is facing some very challenging economic and financial times and has crossed a point of no return. My hope is that our nation will wake up one day - soon - before it's too late. A country with a weak domestic economy where millions of its citizens are living in poverty (or near poverty) and its middle class has been decimated, cannot maintain its global superpower status for long; neglect of domestic priorities will weaken the American Dream and hasten America’s decline in the world. We are spending trillions of dollars fighting wars and rebuilding other nations (and in some cases completely wasting hundreds of billions of dollars of taxpayer money) while our cities and states are crumbling and our people have fallen on hard economic times. This book supports the premise that since 2008, America has struggled through the first phase (labeled the Great Recession) of the Great Depression of the 21st century and we are about to enter the second phase of this massive downturn in 2012 or shortly thereafter. The economic, financial and political data presented throughout this publication is evidence that the downward spiral will be very difficult to avoid no matter what our leaders do at this time. What’s important is that we come to grips with this matter and try to maintain some level of stability, economic order and a collective America at the Crossroads 99 purpose and unity during a very difficult bust cycle. And it’s important to cut back on budget expenses that are wasteful and an over- bloated military budget that is certain to bankrupt this nation at some unsuspecting time. It is worth remembering that during the first three years of the 1930s Great Depression, Herbert Hoover’s administration was not completely aware of the severity of their economic situation; as the nation sunk deeper into a downward spiral, the Hoover Administra- tion was predicting a recovery after what was considered a basic garden variety recession. It wasn’t until 1933 and the election of Franklin Delano Roosevelt that the crisis was finally addressed with strong central government actions and reform policies. Federal Reserve Chairman Ben Bernanke should have a firm understanding of this significant history lesson (as a scholar on the Great Depression era) that we are now facing a similar crisis of not responding to our current bust cycle with strong depression era strategies and structural initiatives. He should know that our reform policies are weak and thus far our economic initiatives have been even weaker. The collapse in 2008 dealt a major financial blow to the American economic system, something that will not allow this nation to bounce back quickly in a few short years. Chairman Bernanke and some of the other Federal Reserve officials did start to become more vocal and supportive in early 2012 of stronger remedies for the housing crisis. At a home builders’ conference in Orlando, Florida, Bernanke stated “The state of housing has been an impediment to a faster recovery…We need to continue to develop and implement policies that will help the housing sector get back on its feet.” The Fed Chairman acknowledges that the housing recovery has been slow for several reasons which include: (1) overly tight credit by lenders that are holding back the origination of good mortgages, or simply unwilling to do loan modifications (2) a glut of vacant homes and foreclosures that continues to depress markets throughout the United States. In a special paper to Congress outlining possible remedies to the housing crisis, Bernanke argued that Fannie and Freddie could play a significant role in the housing re- 100 Global Economic Boom & Bust Cycles covery if they were allowed to provide cheaper mortgages to a “broader pool of homeowners.” I can't help but wonder why it has taken Chairman Ben Bernanke (the 1930s Great Depression scholar) over four years after the meltdown of 2008 to arrive at these conclusions. While there is still time and resources, it is necessary to begin the process of implementing major economic reforms and strategic plans and policies for bailing out the American people. The consumer market in America is vital to the growth of world commerce as well as the continued growth and vitality of this nation. An immediate push to restore and regenerate the housing and employment situation should be top priority by the Obama Administration and Congress. In 2012, America should strongly consider implementing a Marshall Plan or New Deal initiative to combat the devastation and downward spiral of the housing market/mortgage crisis and crippling unemployment. There must be a broad-sweeping industry-wide strategy focused on these critical areas of our nation. Stabilizing the housing crisis should be a number one economic priority for the Obama Administration. This is the foundation of the American family and there will be no recovery until this is firmly dealt with in a way that benefits the American people (the 99%). The White House, Congress and the Federal Reserve System need to concentrate the vast resources of this nation on rebuilding and regenerating the American infrastructure and formulating new energy policies (making preparations now for the post Oil Age) and better equipping this nation for the challenges of the Information Age Revolution. Economic policies that fall short of these goals will be too weak and will not stop the destructive descent of the depression. In 2008, Obama was elected as a depression-era president, similar to the election of Franklin Delano Roosevelt in 1933. However, it’s important to note that FDR became president after America had gone through the first three years of the Great Depression. Thus, FDR had plenty of time to observe and study the economic situation America at the Crossroads 101 before he entered the oval office. President Obama had to walk straight into the firestorm and the first phase of the Great Depres- sion of the 21st century; his administration had to hit the ground running fast with novel economic remedies. During the early 1930s, the Republican administration of Herbert Hoover took a small government approach to the depression (similar to what is advocated by Republicans in 2012) and considered the early years of the massive bust cycle as a basic garden variety recession. The Roosevelt Ad- ministration took a big government approach to the depression and instituted some of the most powerful reforms in the history of government: FDIC, Social Security Act and unemployment insurance, SEC reforms, The Glass-Steagall Act and the Works Progress Ad- ministration. That was a major difference and each approach produced radically different results. There were two New Deals: The First New Deal of 1933-1934; and the Second New Deal of 1935- 1938. President Obama was elected on a platform of change and he has a similar role to fulfill in orchestrating one of the greatest governmental reform movements in the history of U.S. government. The Recovery Act of 2009, Obamacare, and his clean energy revolution began his first New Deal; he will need four more years to complete this journey (and perhaps his second New Deal). He must find this mission and fulfill it just as FDR did in the 1930s. With his historic re-election in November 2012, it was imperative that he selected a cabinet of very strong-minded reformers and visionaries who could help him execute one of the most daring economic regeneration programs in the history of organized big government. That is his legacy. NOTES (1) With shrinking tax revenue particularly from their real estate tax base (as a result of foreclosures, tax defaults, etc.), many municipal governments began considering the option of bankruptcy. In bankruptcy law the option for municipal governments is the Chapter 9 bankruptcy. The Chapter 9 bankruptcy law was enacted in 1934 during the Great Depression era. State approval is required before a city can file a Chapter 9 proceeding. (2) Named after the then Secretary of State, George Marshall, the Marshall Plan (officially named the European Recovery Program, or ERP) was the large-scale 102 Global Economic Boom & Bust Cycles

United States economic aid program to put Europe back on its feet after the massive devastation of World War II. America put monetary resources to work to rebuild a bombed and shattered European landscape and also to combat the spread of Soviet communism. Beginning in April 1948, the plan was in full operation for four years. No bombs had fallen on the mainland of the United States so it was the perfect engine and industrial base to rebuild the developed economies after World War II. Approximately $13 billion was allocated for the Marshall Plan. (3) Margaret Newkirk, “Alabama Governor Loses as State's Economic Capital Goes Bankrupt,” Bloomberg, November 17, 2011, Online, 3:27 PM EST. (4) Cyrus Sanati, “10 Years Later, Looking at Repeal of Glass-Steagall,” The New York Times, November 12, 2009. And: Allen W. Smith, PhD, "Why the Economy Cannot Heal Itself," FedSmith.com: For the Informed Fed, November 10, 2011. (5) The U.S. first received its prized S&P rating in 1941. (6) Stacy Curtin, “Nouriel Roubini: Government Gridlock ‘Ensures’ 2012 Re- cession,” Interview with Nouriel Roubini by Aaron Task on The Daily Ticker, November 23, 2011. (7) “OCC’s Quarterly Report on Bank Trading and Derivatives Activities First Quarter 2011,” Comptroller of the Currency Administration of National Banks, First Quarter 2011 Report. (8) Notational Value represents the underlying market value or amount of derivative contracts. It reflects the value of the trades in the system; however, it is not an accurate value of the amount of money at risk among the participants. That number is determined by the actual performance of the assets underlying the contracts: stocks, bonds, currencies, commodities, stock indices, etc. The credit worthiness of the trading counterparties is also considered in the valuation process. (9) Katy Burne, “Swaps market tops $700 Trillion,” The Wall Street Journal, Digital Network, November 16, 2011. (10) Meera Louis and Clea Benson, “Geithner Says Fannie, Freddie Should Cut Some Principal,” Bloomberg, March 28, 2012. (11) Nathan Vardi, “Wall Street’s New Nightmare,” Forbes, November 7, 2011, p. 113. (12) Omar R. Valdimarsson, “Icelandic Anger Brings Debt Forgiveness in Best Recovery Story,” Bloomberg, Feb. 19, 2012, Online pg. 1 (13) IBID, pg. 1 (14) Kim Minugh, “UCD’s pepper spraying at issue,” The Sacramento Bee, November 23, 2011, pg. 1; and Sam Stanton, “Katehi: UCD police defied my orders,” The Sacramento Bee, November 23, 2011, pg. 1. America at the Crossroads 103

(15) Rebecca Leber, “Obama Gets A Note From The 99 Percent Movement: ‘We Got Sold Out’,” Think Progress: The 99% Movement (Online Website: www.thinkprogress.org), November, 2011. (16) Cara Buckley and Rachel Donadio, “Rallies in cities across globe protest economic policies,” The Sacramento Bee, November 16, 2011, pg. A6. CHAPTER TWO THE EUROPEAN SOVERIGN DEBT CRISIS

“A disorderly default would cast our country into a catastrophic adventure. It would create conditions of uncontrollable economic chaos and social explosion…Greeks’ standard of living …would collapse, and the country would be swept into a deep vortex of recession, instability, unemployment and penury. These developments would lead, sooner or later, to exit from the euro.” Prime Minister Lucas Papademos

“Spain is facing an economic situation of extreme difficulty, I repeat of extreme difficulty, and anyone who doesn't understand that is fooling themselves…the alternative is infinitely worse.” Prime Minister Mariano Rajoy

hat’s happening in Europe is monumental; an ongoing Wcrisis that offers no easy solutions. With the world still reeling from the credit crunch and meltdown of 2008, the question remains if we are very likely looking at a replay of 2008, but this time on a much grander scale. It was the financial sector in 2008 that was on the brink of failure, now it is entire nations. Since the 2008 meltdown, European banks, along with their American partners, continued to pile on huge mountains of debt, leverage and risk. For European nations, the possibility of massive bailouts employing trillions of euros is near with dozens of major banks on the verge of collapse. The fate of euro zone nations and the euro would suffer a similar decline to the time when Richard M. Nixon took the U.S. off the gold standard in 1971. When America came off the gold standard, that event literally broke the Bretton Woods accord. The dollar suffered deep inflation and stagflation for nearly a decade until Federal Reserve Chairman, Paul Volcker, broke the back of inflation in the early 1980s and re-established confidence in the American currency. A massive euro decline and devaluation - at this time in history - represent the most serious crisis we have seen since the 1970s, and most likely, the 1930s as well.

104 European Soverign Debt Crisis 105

Created out of the ashes of World War II, the development of the European Union (EEC or EU) initially focused on prevention of any further conflict on the continent. After centuries of war, and in particular, the two world wars of the 20th Century, the Europeans were seeking to establish a new era of lasting peace and prosperity. The post-war era witnessed the establishment of NATO, a common market, the beginnings of a common government under the Euro- pean Union of nation states and a new global currency under a single monetary policy. It was a very ambitious undertaking and it took decades to actually arrive at a working model and framework. The success of a single euro zone market was the foundation paving the way for eventual political union of all participating Euro- pean nations. With the birth of the euro and its promise of a strong world currency, many skeptics condemned the idea from the start as an unworkable experiment that would not last. However, having gone this far with the development of a new currency, which has become the second leading currency in the world, a possible breakup of the euro zone block is now viewed as the greatest economic threat to the entire world. As the strongest nation in the euro zone, Germany, at the time of forming the monetary union (at that point West Germany) decided to give up its currency, the Deutschmark or D-mark, which was the world’s second reserve currency. With the collapse of Eastern Euro- pean communism and the demise of the Iron Curtain during the closing months of 1989, West Germany was presented a grand opportunity to work on the massive project of reunification with East Ger- many. This was probably one of the main reasons why the Germans elected to back the establishment of the euro; the new currency bought West Germany time to absorb the economic realities and enormous costs of merging with East Germany. The U.K. elected not to give up the pound to be part of the euro zone, which many Britons now consider a very smart move at the time. Over the years the European Union (EU) has grown from six countries to 27. Currently, out of these 27 nations, 17 are committed member states of the euro zone and have adopted the euro as their 106 Global Economic Boom & Bust Cycles official currency. In reality, a federal structure (similar to the U.S. with a central government and states) is not the functioning model of the EU. To achieve that goal, each nation would be required to give up a degree of its sovereignty to a central government entity in Brussels. That is not likely to happen anytime soon. However, Euro- pean leaders are now faced with a choice of either more unification or fragmentation. Two major problems facing the global economy are global imbalances and financial leverage. There is an epidemic of over-leveraging throughout the global financial system. It is this buildup of debt and leverage that threatens the very core of Western societies and is central to the massive economic crisis facing Europe, and by extension, America. In 2012, we were not just looking at enormous banks that were Too Big To Fail, but also at nations that were Too Big To Bail. As we shall see in this discussion on the EU, the IMF and World Bank did not have the resources to cope with a problem of this magnitude. T. R. Reid’s book released in 2004 entitled, The United States of Eu- rope: The Rise of a Superpower and the End of American Supremacy, heralded a new global power bloc as the next greatest world power in the 21st century with the euro destined to replace the dollar as the reserve currency of the world. After nearly a decade of circulation in global markets, the euro is now the subject of a massive struggle to maintain existence and credibility in a world of enormous change. For the euro, it is now a situation of prepare for the worse and hope for the best. RISE OF THE EUROPEAN ECONOMIC COMMUNITY Since 1957, the founding members of the European Economic Community (EEC) labored to lay the foundation of a unified Euro- pean market. After nearly three decades of existence, a group of twelve European nations adopted a plan in 1985 to remove all trade barriers among themselves by 1992. That seven year plan captured European Soverign Debt Crisis 107 world attention due to the immense possibilities and world economic response to a unified European marketplace. Approximately 320 to 330 million people would be economically linked in a grand system that could promise greater prosperity and strength to the member nations. Upon completion, it was envisioned that this market would be 30 percent larger than the United States and was estimated to be the single wealthiest marketplace by the mid-1990s. Many of Europe’s large corporations expanded their business concerns in both Europe and abroad. Multinational corporate executives actively formed strategic alliances and established trans- European business conglomerates in a merger and acquisition frenzy surpassing the level of activity in the United States during the Boom- ing 1980s. Giant European companies were created in the banking, media, computer and food industry sectors. It was a strategic move designed to take full advantage of the increased expected economies of scale. In anticipation of 1992, European corporations increased their stakes in the United States to a level representing over 50 percent of all foreign investment in this country. According to the United States Commerce Department, direct investment by British companies grew by $13.3 billion in 1988. Britain held the number one spot with total investments of $88.2 billion. As the devaluation of the dollar continued, the European master plan for 1992 and beyond centered on the development of a strong and powerful global network, head- quartered in the Europe of the future. The member nations of the original EEC are illustrated in Table 3. In the spring of 1989, many observers and analysts felt that the deep-rooted nationalisms in Europe would prevent the continent from unifying politically. This was essentially true, for the EEC had no proposed political agenda for unity, nor was there much hope for a single currency or EEC central bank by 1992. However, in one year, with the earth-shaking revolutions of 1989, everything changed and Europe’s definitions and timetables were adjusted accordingly. In 108 Global Economic Boom & Bust Cycles short, the world no longer had to guess whether Europe could erect a new global empire, the pieces simply fell in place. By mid-1990, the EEC had begun the dialogue and process for a political merger starting sometime after 1992. At a summit meeting held in Dublin, Ireland in April 1990, West German Chancellor Helmut Kohl and French President Francois Mitterrand presented a

THE EUROPEAN ECONOMIC COMMUNITY: 12 MEMBER NATIONS

1) Germany 7) Denmark 2) Britain 8) Greece 3) Italy 9) Spain 4) France 10) Portugal 5) Ireland 11) Belgium 6) Luxembourg 12) The Netherlands

Table 3 proposal for a political union of the 12 members. In their proposal, Kohl and Mitterrand stated that a political union should strive for a “common foreign and security policy” as well as a stronger Euro- pean Parliament and bureaucratic commission based in Brussels. The proposal was ultimately accepted, and in December of 1990, a constitutional congress would rewrite community rules to include the concept of “political unity!” Final ratification of this arrangement occurred by the end of 1992. Another significant event occurred at the April summit: an agreement among the members to set 1992 as the target date for both an economic and monetary union. This began the ground work for a single EEC currency, the euro (that would compete against the dollar and the yen) and the development of a “central bank” for all the European Soverign Debt Crisis 109 members in the union which would constitute a federal system of central banks. At a meeting in the Dutch city of Maastricht in De- cember of 1991, the community took greater steps towards political, economic and monetary unity. The “Maastricht Treaty” specified, among other things, that a single currency will be created on Janu- ary 1, 1999, provided the majority of the community members have met the “convergence” requirements for a successful union. Under the “convergence” criteria, each member nation’s budget deficit, inflation rate, interest rates and currency stability would be measured to see if the system could move forward without any major disruptions. A referendum vote, in Denmark in June of 1992, rejected the Maastricht treaty. On September 20th, a French referendum vote (a crucial test in the continued push for unity) passed by a narrow margin, but gave hope and continued sustenance to the ideals for a single currency and other Maastricht Treaty mandates. The Eurocrats’ and politicians’ dreams of a completely unified Europe were deferred and now required more careful consideration by the 330 million people it would ultimately incorporate. During the last quarter of 1992 (the year of the first phase of economic integration) a chaotic currency crisis erupted (the collapse of the ERM, discussed below) bringing into focus the unstable economic realities that still persisted despite the push for unity. The world saw that Europe still needed to resolve some deep-seeded problems and was not sufficiently prepared to be the world’s next greatest superpower. This currency crisis and a deepening worldwide recession generated doubt about the ultimate success of the new Eu- rope of the future. In 1992, Europe entered a turbulent transition period on its road to world economic and political power. Europe’s ultimate desire to be the world’s most important trading, economic and political force - with a loud and commanding unified European voice - was a central force in the 1990s development of a new world order. Upon completion, the Eurocrats hoped to bring about a “European Renaissance” and a political will and 110 Global Economic Boom & Bust Cycles mechanism that can manage common interests, prevent armed internal conflict and insure a considerable measure of peace and prosperity for all its member nations. COLLAPSE OF EUROPE’S “ERM” Europe’s Exchange Rate Mechanism (ERM) suffered a major collapse during the month of September 1992. Established in 1979, the ERM was developed to fix the exchange rates among the 12 European Community nations (EEC) rather than allow for a free floating system. A ban was established (similar to the one developed for the dollar in the free floating system) to maintain their monetary relationships within certain boundaries. If a currency broke through a ceiling or fell below a floor level, corrective actions were required by members to restore the proper balance in the system. Due to some major differences among the economies of the EEC, this system reached an impasse and began to unravel. Germany stood in the center of this crisis as the strongest economic entity in all of Europe and with the world’s second strongest reserve currency. The massive monetary and economic requirements of reunification of East Germany had come home to roost. World markets finally woke up to the fact that the largest monetary merger of the century had been an extremely expensive proposition. West Germany taxed, borrowed and printed money to help finance this venture which eventually led to higher interest rates and an outbreak of inflation. With other EEC member currencies tied to the German mark via the ERM, interest rates were driven higher throughout all of Europe at a time when low rates were required to fight the growing global recession. Britain was in its third year of recession while Italy labored under an enormous debt load. Unemployment rates ran high in the majority of the European Community. Foreign exchange traders took aim at this situation and went in for the kill. Individual central banks raised interest rates, bought and sold currencies and basically did all they could to defend their national currencies. How- European Soverign Debt Crisis 111 ever, the financial markets prevailed, and when the smoke cleared, the ERM was in disarray. Britain and Italy were eventually forced to temporarily suspend their membership in the ERM which meant devaluation of their currencies. Spain devalued its currency, and Sweden - which was not a member of the EEC - raised one of its key interest rates to a whopping 500% in an effort to support its currency, the krona. The initial response of Germany was to lower its key Lombard rate by a mere one-quarter of a percent from 9.75 to 9.50. This was still too high by prevailing international standards, particularly with American short- term rates hovering around 3 percent. Enormous pressure would continue to be placed on Germany to lower its interest rates, but like the Crash of ‘87, the Collapse of the ERM was a graphic display of the global interdependence of the world’s industrialized economies. The dollar survived this crisis with international investors using America as a safe haven. During the month of October 1992, Germany’s central bank reported that the equivalent of nearly $30 billion was spent in a massive effort to support the British pound sterling and the Italian lira during the currency crisis of September. Overall, analysts estimated that combined central bank interventions ran upwards to a whopping $100 billion! With several countries suffering currency devalu- ations, billions of dollars were lost. Currency specialists and analysts stated that major international banks, big time speculators and others generated profits of $4 to $6 billion which was an enormous windfall in such a short period of time. It was during this time that George Soros, the legendary investor, made $1 billion in a single day. Thus, the struggle for a single European currency would be an ongoing issue throughout the remainder of the 1990s. BIRTH OF THE EURO On January 1, 1999, the euro took center stage as Europe’s leading currency of the future. In Europe’s bid for Economic and Mon- etary Union (EMU) 1999 represented the initial phase wherein the euro would exist on paper, be used in electronic transactions, estab- 112 Global Economic Boom & Bust Cycles lished as the currency for valuation of stock and bond prices (ultimately the center of a $2 trillion bond market in Europe) traded in the international currency markets against the dollar, yen and other major currencies, and other optional financial uses. The member states agreed to combine together economically by using a single currency, however, each nation would continue to set their own fiscal policies independently. The EMU was finally initiated by 11 of the founding European Union members which included Germany, France, Aus- tria, Belgium, Finland, Ireland, Italy, Luxembourg, Netherlands, Por- tugal and Spain. These nations had to undergo years of domestic cost controls, fiscal austerity and a process of inflation convergence prior to entering the euro zone and its new currency. Former national currencies needed to converge smoothly in order for the process to work for an individual country. Britain, Denmark and Swe- den opted to stay out of the initial process for various economic and financial reasons; and Greece was finally admitted into the EMU in the year 2000. On January 1, 2002, 12 billion euro banknotes (of various de- nominations) and 70 billion coins were put into circulation. This represented the point at which the new currency began to have a universal impact on all of the citizens of the euro-zone nations. By July 1, 2002, the monetary conversion was completed; only the euro was used as legal tender in transactions. The switch from national currencies (marks, liras, francs, escudos, drachmas, etc.) to the euro was pulled off without any major problems. In a few short years the euro quickly became a strong global currency in the same league as the dollar and the yen. With the ultimate goal of establishing economic and monetary union in Europe from the Atlantic to the Russian border with a single, stable currency, many new members would be phased in over multiple year periods. It was expected that by the mid-21st century, the EMU would include such countries as Britain, Denmark, Cyprus, Czech Republic, Estonia, Hungary, Poland, Slovenia, Sweden, Bul- garia, Latvia, Lithuania, Romania and Slovakia. With an independent European Central Bank committed to safeguarding price sta- European Soverign Debt Crisis 113 bility and other key economic measures, this global economic development represented a major turning point in world affairs as we entered the 21st century. It was a huge undertaking and will ultimately go down in history as a “global paradigm shift” with very similar economic implications as the “Bretton Woods Agreement.” A United States of Europe is a grandiose concept and a massive political undertaking. Its rise, along with the “Asian Renaissance,” represented major political, economic and financial developments at close of the 20th century. SHADES OF THE 2008 MELTDOWN The 2008 meltdown opened wide the problems and weaknesses of the euro zone, exposing many unresolved issues that prevented compromise and collective action. When there is total systemic collapse and confidence is lost in the banking system, a lot of hidden problems are unveiled. For instance, companies learned that their credit lines were frozen as the banks fought for their own financial survival. Global credit could freeze up again (as in 2008) very quickly in a sovereign debt crisis. Credit lines simply cannot be relied upon when banks are fighting for survival. Greece of 2011 was very similar to Lehman of 2008, except on a much grander scale. The contagion factor is very strong and chaos and mayhem could spread very quickly. Letting Lehman fail in 2008 had very dire consequences; the resulting meltdown nearly plunged the world into a full blown depression and events moved very quickly. After the experience of Lehman in 2008, no one wanted to risk Greece leaving the euro or defaulting on its debt. Since financial groups do not disclose what they hold in sovereign debt, global markets would quickly panic from the unknowns and uncertainties. Fear and panic would quickly cascade into Italy, Spain, and many other countries. The ultimate risk in this scenario is that the implosion of the euro would mean the explosion of Europe. No one wanted a disorderly Greek default. Investors are terrified of a repeat of 2008. In not knowing which institutions were truly solvent, banks stopped lending to each other. 114 Global Economic Boom & Bust Cycles

The hidden reality in late 2011 was that banks in America and Eu- rope were still suffering from the fallout of 2008. A sudden default will force big banks to absorb huge losses on government bonds and other asset classes. The EU is America’s biggest trading partner; a slowdown there will have a measurable impact on American business and finance: there would be a significant short fall (in Europe) of spending on American goods and services. U.S. Banks hold about $2 trillion worth of investments (burdened with sovereign debt) in European banks. A major recession in Europe would quickly spur the onset of a recession in America. If the European sovereign debt crisis spirals out of control, it would be hugely detrimental to the American economy. After the Lehman collapse in 2008, China began a massive stimulus program. In the face of a severe slump in its export markets, China implemented a $586 billion (4 trillion yuan) stimulus package to encourage growth and domestic consumption which was instrumental as a stabilizing force in the global economy. These measures provided world economic support at a critical time. In 2011, the world was again looking to China and other emerging nations (the other BRICS member nations: Brazil, Russia, India and South Africa) to serve as stabilizing economic forces in the face of the European sovereign debt crisis. After a half century of European integration, the response to the sovereign debt crisis was viewed as a severe lack of political will by the EU. Some saw the European leadership response as piecemeal, half-measures and tentative guarantees; dragging their feet over bailouts. The EU was viewed as being behind the curve on the issues and events, struggling to manage a crisis that was driven by the markets that rapidly got out of control. And continued implementation of half-measures has failed to cure the problem. The European Central Bank’s (ECB) financial power to print money and monetize debt was not initially agreed to by Germany and other conservative and economically stable EU members. Ger- many felt that the more profligate countries would be let off the hook for their bad fiscal conduct. German leaders were extremely European Soverign Debt Crisis 115 fearful of the potential of hyperinflation and a banking system collapse similar to what ripped apart their nation during the 1920s and 1930s which ultimately gave rise to Hitler and the Third Reich. So to the German mind-set, the issue of central banks printing money to solve debt problems was not the right approach; it was a solution that only extended the problem and risked creating a much larger problem down the road. Current rules only allowed the ECB to buy government bonds in the secondary market but on condition that it used an equivalent amount of assets. The Germans had previously stated that they did not want to compromise the ECB for the sake of a collective solution. Thus, it has been a step by step reaction to events and it will continue to be that way until a major disaster strikes. At that point, the Germans will need to decide either to leave or stick with the euro. Given the choice of risking inflationary ECB lender- of-last-resort policies or walk away, some analysts believed that the Germans would elect to walk away. However, by the first quarter of 2012 it appeared that the decision behind closed doors was to allow the ECB to print money. De- spite the hard line rhetoric, the ECB, like the central banks in the United States, Japan, Britain and elsewhere, was overtly and co- vertly conducting essentially quantitative easing (QE) operations in the euro zone. They had joined the global party in collectively printing trillions of dollars in new currencies. For the ECB, the 1.02 trillion euro Long Term Refinancing Operation (LTRO) backdoor approach to strengthen the euro zone bond markets was just the beginning of a series of “money printing press parties!” Either by design or economic necessity, the ECB has become the euro zone’s de-facto lender-of-last-resort. Asian countries, the United States and others were hesitant to pump more resources into the sovereign debt crisis until they saw the Europeans investing more of their own resources, much firmer controls being instituted and fiscal and economic reforms put in place. As one G20 official stated, “Nobody wants to spend money on something they doubt would work.” The more I pondered the problems 116 Global Economic Boom & Bust Cycles confronting the euro zone in this time of crisis, the more I began to think that the U.S., by comparison, may not be as bad off (politically) as predicted. THE GREEK TRADEGY Greece did not initially qualify for admission into the euro zone in 1999. However, by June 2000, it was deemed that Greece had made the grade and could participate in the new currency by January 1, 2001. The initial attraction to the euro by peripheral countries, such as Greece, was access to cheap funds. However, in joining the euro zone, a nation had to give up its own currency. By doing this, Greece (and every other country in the euro zone) gave up the ability to adjust exchange rates with their own currency whenever a crisis hit; the ability to print money was abdicated and it could no longer respond flexibly to economic events. But the allure of the euro was strong and offered a weaker nation an opportunity to participate in a promising new global currency. After adopting the euro, Greece went on a spending spree and borrowed money. During the lending boom of the early 2000s, it was believed that membership in the euro zone made Greece, Portu- gal and Spanish bonds safe investments, thus, foreign investment capital flowed into these nations. According to an article appearing in The Week, what happened in Greece and how they fell into an economic ditch is due to digging themselves “into a deep hole by creating a society of high public - and private - sector salaries, lavish benefits, early retirement, and rampant tax cheating and corruption.” All of this generated inflation: a general rise in wages and prices in these countries compared to the other more stable economies of Ger- many, Finland and France. Then the global financial crisis hit in 2007-2009. The inflow of capital ceased: revenues plunged and deficits rose sharply. As a result, Greece found that it could not pay its bills or repay the bonds. Now Greece must accept the remedy of deflation: falling prices and wages; where incomes fall but the debt burden stays the same. That’s what makes deflation a tough pill to swallow. S & P, UBS and European Soverign Debt Crisis 117 other analysts have warned that Greece did not have the capacity to grow itself out of this crisis, that this would likely go on for years. In early October 2009, Greek bonds were dumped by global investors, driving their market values down and yields up. Portugal’s 10-year government bonds started to plunge in December 2009. By April 2010, Greece’s credit rating was reduced to junk status. This was the beginning of a new contagion of fear about sovereign debt. And, as this fear began to spread, the cost of sovereign debt borrowing began to escalate to unsustainable levels. Bailouts were initially forbidden by the euro zone treaties; however, as the crisis continued to deepen, this became a necessary evil. EU leaders did not want to bailout Greece for fear that this would create an unwanted precedent. Without the ability to borrow money in the bond markets due to the extreme cost of borrowing (Greece was effectively shut out of the debt markets) Greece petitioned the EU and the IMF for economic rescue funds. The first bailout package was provided in May 2010 for 110 billion euros ($140 billion). The IMF, Germany, Aus- tria and Finland were the main creditors for that deal. In 2005, Greece owed 195.4 billion euros; by 2011 the debt burden had grown to 328.6 billion euros: debt to GDP had risen to 143 percent. The founding EU treaty agreement had established the debt to GDP ratio to be 60 percent. Greece was clearly over-extended and exceeded the al- lowable GDP ratio by a wide margin. In late 2011, most professional investors knew that Greece would have to default at some point. It was not a question of if, but, when it would happen and under what circumstances. Greek debt levels were not sustainable. The economy had been in recession for years and was not expected to turn around anytime in the near future. After two years of austerity measures that witnessed crippling strikes, violent demonstrations, street attacks on lawmakers and high unemployment Greece was near a breaking point. In early August, the main labor unions ADEDY and GSEE called for a nationwide strike in order to effectively shut the country down and to focus attention on the powers that be (the Greek government, EU and the 118 Global Economic Boom & Bust Cycles

IMF) that their policies were too severe on the population. The troika (the European Commission (EU), International Monetary Fund (IMF) and European Central Bank (ECB)) was demanding 15 austerity measures of Greece before it could receive the October tranche of bailout money. These measures included some of the following: firing another 20,000 state workers, cutting or freezing state salaries and pensions, increasing heating oil tax, shutting down state organizations that were losing money, speeding up privatization and cutting health spending. The government had already instituted salary cuts, pension reductions, tax hikes and layoffs in succession in order to meet the demands of the IMF austerity measures; however, the troika wanted more cuts. In response to these greater demands, another layer of austerity measures were added which included a property tax surcharge tacked onto electricity bills and an agreement by the Cabinet to suspend 28,000 public sector employees with reduced pay by the end of 2011. They also decided to dock a month’s pay from all elected officials from the head of state to the country’s 325 mayors. All of these measures were only extending poverty and driving people further into the mud. Civil servants rallied, and in response to shortages in school books and other school essentials in government-run schools, 250 high school students staged a protest and marched in the center of the city. A spokesman for GSEE stated, “Unfortunately the new measures are just extending the unfair and barbaric policies which suck dry workers’ rights and revenues and push the economy deeper into recession and debt.” These two unions represent about half of Greece’s 5 million person workforce. They had staged repeated strikes since the bailouts began in 2010. With the people of Greece enduring severe economic pain, tax increases, public-sector cuts and unemployment (16 percent) a contracting economy of 5.5 percent (a previous estimate in May had placed this number at 3.8 percent indicating a worsening of the crisis) in 2011, the protests and riots would continue to grow worse. Government revenues were falling and there was less money to pay off debts. European Soverign Debt Crisis 119

By late 2011, the debt load had swelled to160 percent of GDP. As the economy grew weaker, the tax receipts declined and budget deficits grew larger: the vicious cycle of a negative feedback loop had set in. Without bailout money, Greece could not survive and financial markets (knowing the dire situation was growing worse) continued to move quickly to raise the cost of borrowing due to the added risk. In early October 2011, the yield on a 2 year Greek bond was 65 percent; on 1 year bonds, a whopping 135 percent! The markets were making a statement that a Greek default was imminent. Thus, since May 2010, Greece has literally been surviving on bailout money provided by the EU and the IMF to service its debts and pay salaries and pensions. Indeed, the only thing preventing a Greek bankruptcy is the bailout money; this nation has essentially been on a financial life support system. It has to keep a program of cutbacks on course in order to receive the bailout money. Due to the severity of the crisis, it had not begun the process of restructuring what many considered its “bloated public sector.” In July 2011, the embattled nation was given another promise for a second bailout loan with an initial value of 109 billion euros. During the first week of October, the Greek government stated that it would not meet its budget goals in 2011 and 2012, citing a further decline in the economy. It was clear to most EU leaders and to global power brokers that letting Greece default and fail would mark the beginning of a global economic collapse: there were just too many unknowns in the financial system and the haunting specter of Lehman Brothers was always the BIG unknown factor that had to be strongly considered. The contagion from Greece, as a financial nightmare scenario, could take down the entire EU system if not enough capital was in place to sustain what the banks must endure if Greece were to fail. Banks recognizing big losses immediately would throw the region into a financial crisis. In addition, the Greek crisis and default threatened to drag down the global economy which is why enormous effort was exerted to prevent that from happening. It has the potential of derail- 120 Global Economic Boom & Bust Cycles ing the euro, the common currency for 17 countries and 330 million people. Like a major financial cancer, the EU has struggled mightily to staunch the growth and spread of the disease, however, the ultimate solution began to look more and more like removal from the system rather than containment and recovery. Analysts stated that conditions were being set for an organized default of Greece rather than a chaotic episode that could derail the global economy. If it were to happen, the timing of such an event would be of extreme importance. There were simply too many unknown factors in an uncontrolled collapse scenario. But in a controlled or organized default, what would be the terms of the default? Could the EU limit the effects of contagion on the global economy? In July, Greek bond yields swelled to 40.46%. After the eight largest banks in Greece were downgraded in mid-September, the two-year Greek bond yield soared to 84.52%. With the crisis moving deep into the red zone, in late October, a new plan was presented for a newly revised second bailout for 130 billion euros (increased from the 109 billion euro offer in July) with private banks voluntarily accepting a 50% haircut (reduction in total debt) on the money they were owed. The new deal agreed to on October 27, 2011, would give Greece a 130 billion euro ($179 billion) rescue package. Banks would take voluntary write offs of 50% of what they were owed: about 100 billion euros ($138 billion). The goal was to reduce the debt load to something that would be manageable by the struggling government and to prevent Greece from seeking additional bailouts. After all night talks in Brussels, the Greek plan that was hammered out by German Chancellor Angela Merkel, French President Nicolas Sarkozy and other high officials was a move to quickly stop the contagion and prevent the Greek default. They labored very hard to put that package together. An embattled Greek Prime Minister George Papandreou (whose popularity had plummeted) went back to Greece, and to the shock of everyone in the EU, called for a public vote referendum on the new package. European Soverign Debt Crisis 121

Chancellor Merkel and President Sarkozy were very upset over this development and quickly summoned the Prime Minister for a private meeting and told him that he had to accept this package or risk losing the euro. And if the people of Greece were going to vote in a referendum, it would be a very simple vote; does Greece want to stay in the euro: Yes or No? And, they then froze a new 8 billion euro loan to Greece, awaiting the final outcome of the referendum. Prime Minister Papandreou abandoned the referendum and (amidst the turmoil) shortly thereafter, resigned. As the effective paymaster of Europe, Germany’s power in the EU carries a lot of weight. The second bailout package came with some special side deals in order to get it done: Finland demanded and received cash as security against their share of the bailout package. Austria, the Nether- lands, Slovenia and Slovakia also requested similar deals. This was a new development that grew out of resentment in some countries about providing bailout money to other member states. In the case of Finland, an anti-bailout nationalist party had made sizable gains in the April elections and they demanded the collateral or the Finn- ish government would not sign off on their share of the bailout funds. The other nations simply wanted to make similar deals. Observers noted that Greece would have a tougher time repaying its debts if it had to put collateral money up for various countries; it would simply weaken its ability to pay back the loans in the bailout package. Other very significant financial problems emerged with the development of the new bailout package. The write down of the debt by 50% saddled the ECB with a big bill to contend with; there would be huge losses for big French, German and Belgium banks; and Brit- ish and American holders of Credit Default Swaps (CDS) were left with contracts that did not pay off in the event of a Greek default. This was a gray area where European politicians worked out a plan to avoid the appearance of a sovereign default by stating that the banks took a voluntary 50% haircut on their debts. Hence, the CDS hedge against default was proven useless after Greek debt was given a voluntary 50% discount on its outstanding bond debt. The voluntary status meant that the CDS contracts were 122 Global Economic Boom & Bust Cycles not triggered; no default meant that no payouts would be made on $3.7 billion in debt insurance contracts that were outstanding. In the aftermath of this maneuver, the net result was the undermining of the CDS contract model and the rise in borrowing costs. This was seen as a dislocation in the financial marketplace with CDS contracts essentially losing their purpose and value. Athanasios Orphanides, governor of the Central bank of Cyprus and a member of the European Central Bank Governing Council, agreed with this assessment in the aftermath of sovereign bond yield increases throughout the euro zone during the month of November. In a statement to Cypriot lawmakers, he lamented, “It was a terrible mistake …By forcing the impairment of any state bond we have triggered concern internationally of all state bonds in the euro zone…It is because of this tragic mistake …that the yields of so many bonds are so high.”1 The markets were signaling that confidence and credibility had broken down and this had to be restored or the union and the euro would soon collapse: this was D-Day for the Euro Zone. To put it plainly, investors in CDS contracts were burned; this clearly angered some people. Buyer beware was the watch word. CDS buyers needed to make changes to the International Swaps and Derivatives Association (ISDA) standard documentation backing these contracts. The language needed to be modified in order for the purchaser to receive the full protection of the contract. The implications to the high-end or institutional investor community were to beware of these contracts for the payout trigger was being adjusted to suit political conditions. This was a serious matter and there were immediate consequences in the bond markets. Across the board, euro zone nations became riskier! Borrowing costs started going up after this episode. And this was starting to happen very quickly as bond yields started moving up sharply for Italy, Spain and other countries. Rapid escalation of the crisis began to threaten all of the region’s sovereign ratings. The endgame was being priced in by investors. The global investor would decide this matter in the end one way or the other. If the politicians wanted to shift the legal and regulatory goalposts to European Soverign Debt Crisis 123 suit their political ends, then so be it, however, there would be consequences in the marketplace. This is one of the main reasons that prompted the call for an EU summit (in Brussels) in early Decem- ber. In solving one problem, the EU architects had created a much bigger mess! Investors were concerned about the integrity of credit- default-swap markets, the breakdown of the euro, the safety of sovereign debt and were demanding higher yields on bond issues: there was a development of panic in the markets.2 The new Prime Minister of Greece, Lucas Papademos (economist) head of the new unity government in Athens, had just 100 days to fulfill the terms for the new 130 billion euro bailout plan. Prime Minister Papademos replaced former Prime Minister George Papandreou and was sworn in on November 11, 2011. He was the former vice president of the European Central Bank and former head of the Greek central bank. Chancellor Merkel laid down the law: She said the next tranche (sixth tranche) of Greek bailout money would not be delivered until the new government leaders agreed in writing (required signatures of Greek PM and the party leaders supporting the government) to the austerity measures. The new Greek government had to either embrace or reject the austerity measures in order to stay solvent. Tough commitments to maintain fiscal targets, structural reforms and privatization were on the table and had to be dealt with as a condition to move forward. The next tranche of money was needed by mid December in order to pay bondholders and prevent a default from being triggered. In late November, Greece received the official approval for its sixth tranche of 8 billion euros. The euro zone debt crisis started to dominate the thinking of world policymakers and government leaders. There were tragic flaws in the design of the euro zone monetary union and these flaws began to emerge as the Greek crisis continued to deepen. It was understood that France and Germany could not continue on an endless road of hopeless bailouts without destroying their own balance sheets. In 2011, Greece was facing its third consecutive year of recession and contraction, surviving on bailout money and continued aus- 124 Global Economic Boom & Bust Cycles terity measures. For some observers, the dire economic events in Greece were a window of the future for many other countries in the West facing similar circumstances. The continent’s financial system will be injured severely if the crisis runs its full course of default and collapse of the euro. A default for any other country would present the same set of conditions: stock markets would plunge, banks would suffer major losses, credit markets would freeze up for businesses and consumers and borrowing costs would rise for companies and households. Default would lead to more defaults, setting into motion the domino effect. If Greece ultimately defaults, it will then return to the drachma, its previous currency. This would result in huge losses for German and French banks. By late 2011, money had been leaving the Greek banking system with more and more Greeks withdrawing their money from Greek banks and moving it offshore, in effect, capital flight. For most Greeks, the rational thing was to pull their money out of the Greek banking system. ATHENS BURNS IN 2012 As we entered 2012, the crisis in Greece continued. After seven months of painful negotiations, the 130 billion euro ($172 billion) EU/IMF bailout package was approved during the third week of February, just ahead of a March 20th deadline to avoid an imminent “hard default” of $14.4 billion euro (roughly $18.5 billion) payment to its creditors/bondholders. This deal came with some very stringent requirements and more harsh austerity measures. In effect, Greece was driven deeper into a hole of endless debt misery. The impact on the people of Greece was devastating and this lead to further chaos in the streets of Athens and other cities throughout the country. Frustration with Greek politicians had reached a boiling point; many politicians can’t walk in public without bodyguards. Even former Prime Minister George Papandreou was still being held accountable for the current crisis. For other politicians, angry citizens threw yogurt, flour and eggs on them to voice their disapproval European Soverign Debt Crisis 125 of the harsh austerity measures. In commenting on the bailout package and the politicians who approved it, one Greek citizen stated “We are like drug addicts who have just been given their next dose; this is what they’ve reduced our country to.” The discontent and some of the key events leading up to this final bailout agreement were as follows: a) Up to 80,000 protesters hit the streets of Athens while the politicians worked on the new bailout package. Some of the protesters started looting, burning buildings and destroying property. So-called masked anarchists battled with security forces in all-night confrontations on the streets of Athens, demonstrating their rage and utter disgust with the state of their economy. A total of 45 buildings in central Athens were destroyed in a weekend of violent protests. b) With an economy that was in its fifth year of recession and suffering from an over 20 percent unemployment rate, the bailout package was demanding: (1) a 22 percent drop in the minimum wage (2) the firing of 15,000 civil servants in 2012 (3) significant reductions in health, social, security and military spending and (4) the relinquish- ing of control of budget policy to outside European institutions. In essence, in order for Greece to receive the bailout funds it would have to allow European institutions certain decision-making powers over its fiscal policy. That was a tough pill to swallow, but it had it to be done in order to prevent complete collapse. c) Unions launched a two-day general strike that left hospitals running on emergency staff and disrupted public transportation and other public services. d) With museums nationwide suffering from a shortage of security guards and archaeologists (due to the austerity measures the nation was short 1500 guards) thieves began to target these locations for their priceless artifacts. Inside of a two month period (January and February of 2012) two major museums were robbed. On February 17th armed robbers walked away with over 60 priceless artifacts. 126 Global Economic Boom & Bust Cycles

The end result of the sovereign debt restructuring package witnessed bond holders accepting losses of 74 percent on the value of their investments that amounted to over 100 billion euros in debt forgiveness. And even with this incredible deal, it still did not stop the crisis that continued to drown the Greek economy. Moreover, the nation will continue to stagger from one crisis after another until it becomes impossible to go any further. In order to cope with the harsh austerity measures the Greeks implemented barter systems to meet their local community needs. International currencies are being rejected in favor of newly devised decentralized currency creations based on free markets, local cooperation and other measures of value. A NATION IN SHOCK On April 4, 2012, the 77-year-old retired pharmacist, Dimitris Christoulas, stood in Syntagma Square across from the Greek parliament building and shot himself in the head in protest to the harsh austerity measures that drove him over the edge. The suicide note left by Christoulas stated: “I see no other solution than this digni- fied end to my life so I don’t find myself fishing through garbage cans for sustenance.” His defiant act immediately became a national symbol of the pain and agony of an entire nation suffering through years of an outright economic depression (that Western media continued to label as a recession). Prior to the financial crisis, Greece had one of the lowest suicide rates in the world - 2.8 per 100,000 people. However, the ongoing economic depression has changed all of that. Other suicides that occurred prior to the scheduled May 6th election in 2012, included the following: (1) a 38-year-old geology lecturer hanged himself from a lamp post in Athens in response to the depression (2) A 23-year-old student shot himself in the head and (3) a 35-year-old priest jumped to his death off his balcony in northern Greece. According to psychoanalyst and author, Nikos Sideris, “The crisis has triggered a growing sense of guilt, a loss of self-esteem and humiliation for many Greeks…Some develop an European Soverign Debt Crisis 127 attitude of self-hatred and that leads to self-destruction…We’re seeing a whole new category: political suicide.”3 Greek voters were rapidly favoring political parties that were opposed to the fiscal policies of the eurozone and more brutal austerity measures; 40-50% of the popular vote favored politicians who in turn favored immediate default and exit from the eurozone. The first country that takes this drastic move would start a movement that others may follow. The central problem of the ECB was that it had a solid plan and strategy for austerity but no plan for growth. Continued policies of this nature would be unsustainable in the foreseeable future. What’s happened in Greece is a microcosm of what may spread throughout the world if the debt contagion is finally unleashed. It is not hard to imagine other countries in Europe or states and cities in America undergoing the same set of circumstances of protests, riots, looting, suicides and violent confrontations with law enforcement. Many nations are sitting on fragile recoveries and massive debt overload; Greece is not alone! As of the first quarter of 2012, at least 386 billion euros had been committed to prevent the collapse of Greece, Ireland and Portugal. This is not a situation that is sustainable; these were strategic bailouts designed to buy time and ward off the day of reckoning. COUNTRIES IN CRISIS: THE PIIGS Greece is not alone in the debt inferno of the euro zone; Portu- gal, Ireland, Italy and Spain (collectively known as the PIIGS) are on the brink of economic collapse. Collectively, these countries owe over 3.1 trillion euros and there is a titanic struggle to keep this from spreading like a wild fire. All of these countries are tied to the fate of Greece. If Greece were allowed to collapse, investors feared that the contagion would quickly move to the other PIIGS nations. When this happens, the cost of borrowing soars and this tends to further raise the prospect of default and bank runs. This sets a scenario for more bailouts which the wealthier nations strongly oppose. Portugal and Ireland were forced to seek bailouts after they were priced out 128 Global Economic Boom & Bust Cycles of the bond markets. An interesting observation is that the largest and strongest euro zone nations are Germany, France, Italy, and Spain. Thus, two of the leading nations of the euro zone are in the center of the massive debt problem. Since 2008, several governments in the debt embattled nations were toppled and replaced with new leaders promising a way out of the crisis. In Italy and Greece, prime ministers were forced to resign amidst the deepening crisis and the harsh austerity measures forced on these countries by the IMF, ECB and Germany. Despite the promise of better solutions, the new interim unity governments would still have to deal with economic stagnation, massive budget deficits and crushing debts. Ruling parties were swept out of office in Portugal in June 2011 and in Ireland, in February 2011. Financial markets were forcing the pace of events with higher yields on bonds, requiring each nation to pay exorbitant rates to borrow money in the bond markets. The credit rating agencies of S&P, Moody’s and Fitch were also playing a critical role in forcing the pace of events with frequent updates on potential downgrades on sovereign nations and major banking institutions. In November 2011, the situation reached a boiling point as investors were demanding a much higher risk premium from practically all euro zone nations. The ECB bought billions of Spanish and Italian bonds to help shore up the value and staunch the yield increases. EU leaders then called for more integration and consolidation of public finances in Europe. In late 2011 and early 2012, the ECB pumped over one trillion euros into the European banking system in a back door plan that was essentially designed to strengthen the sovereign debt positions of the peripheral nations. The nearly interest-free money was part of an operation conducted by the Long-Term Refinancing Operations (LTRO) to provide liquidity for the eurozone banking system while using banks as a conduit for the sovereign debt bond purchases. The banks who received these near interest-free loans were pressured by their own governments to use the LTRO money to purchase sover- European Soverign Debt Crisis 129 eign debt bonds. Between December 2011 and February 2012 Span- ish banks purchased 67 billion euros in sovereign debt (increasing their holdings by 26 percent to 220 billion euros) while Italian banks purchased 54 billion euros in debt obligations (raising their holdings by 31 percent to 267 billion euros). Portuguese banks increased their stake by 15 percent and Irish banks absorbed an additional 21 percent in bond holdings. This liquidity operation (similar to the U.S. “Quantitative Eas- ing” programs) temporarily removed market stress and financial pressures from the system, but the sugar high only lasted a few months. By March and April of 2012, interest-rate spreads for Italy and Spain were widening again as the markets priced in additional risk. With deficit targets being breached by member countries, the European Community is suffering from the constant pressures of austerity measures, economic contraction and little or no growth in the peripheral nations. Many of the weaker nations in the eurozone are revealing deepening signs of austerity and reform fatigue. Ac- cording to many observers and analysts, between one-fifth and one- third of the voters in both France and the Netherlands are supporting extremists parties that are against globalization, European integration and continued austerity measures dictated by Brussels. What we began to see in early 2012 was a movement of popular discontent with incumbent leaders throughout much of the eurozone. This current group of leaders had not delivered on their agendas, and therefore, the rallying cry was to have them replaced. In April 2012, Dutch Prime Minister Mark Rutte and his cabinet resigned after Parliament failed to agree on an austerity package and plan to bring the deficit in line with EU rules. This was another sign that sentiment in the eurozone had started shifting away from the center to grave discontent over the mission and purpose of the euro and the euro zone. PORTUGAL Severe austerity measures on Portugal’s economy and its people forced Prime Minister Jose Socrates to resign and be replaced by a 130 Global Economic Boom & Bust Cycles more conservative leader. Debt levels in the struggling country surged from 96.5 billion euros to 160 billion euros during the credit boom. And like the other PIIGS nations, the 2008 meltdown exposed the massive debt build-up. The debt to GDP Ratio rose to 92 percent. Portugal’s 10-year government bonds started to plunge in Decem- ber 2009. In May 2011, Portugal was granted a 78 billion euro ($111 billion) bailout package. IRELAND Ireland and Spain were among the poorest countries in Europe during the 1970s and 1980s. After the creation of the euro, these nations seized the opportunity to generate growth and infrastructure development in their economies; and real estate development represented a major part of that growth strategy. Before the 2008 meltdown, Ireland ran a budget surplus and stayed within the limits of debt and deficits established by the stability and growth pact. How- ever, during the credit bubble years, Ireland managed to develop a massive real estate bubble that proved to be extremely detrimental to its economy. The real estate boom created a major crisis and literally crippled the country. When the global crisis hit in 2008, the show was stopped. Ireland’s debt surged from 44.4 billion euros to 148 billion euros. Debt to GDP climbed to 96 percent. With the downturn came bank bailouts and a decrease in tax revenues that hit hard during the recessionary period. Ireland soon found itself (like Greece and Portugal) priced out of the bond markets. In December 2010, Ireland was granted an 85 billion euro bailout package. According to the Organization for Economic Cooperation and Development, from 1995 to 2005, housing prices more than quadrupled in Ireland; this was a sizzling bubble that witnessed the average house selling for 303,247 euros. According to one observer, the banks were throwing money at people to purchase property. This of course led to a great deal of speculation and other excesses that are common in super-heated bubbles. As reported by a special report in Bloomberg, investors and municipalities in both Ireland and Spain were provided ample incentives to invest during the boom period: European Soverign Debt Crisis 131

“In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments.” In order to deal with the housing crisis, Ireland created the Na- tional Asset Management Agency (NAMA) a so-called “bad bank” to purchase 74 billion euros ($98 billion face value) worth of mostly toxic commercial mortgages from banks holding these assets. NAMA paid 32 billion euros for the toxic assets and used bonds to implement its program. Five of the six largest lenders in Ireland were na- tionalized and the financial system was recapitalized in a bid to stabilize the system and set the stage for recovery. Unlike Spain, new real estate developments came to a halt during and after the global 2008 meltdown and the nation has been slowly working its way out of the massive downturn since that time. Like Fannie Mae and Freddie Mac in the U.S., NAMA is seeking investors to purchase its portfolio of discounted commercial properties (it is able to sell) and forcing debtors to rent out others for current revenue. In some cases, particularly for home buyers, NAMA is insuring against market price declines in order to get properties sold and occupied. What is interesting and novel, NAMA is rolled out a plan in 2012 that offered buyers an opportunity to pay only 80 percent of the purchase price of a property at “the time of transaction and only collect the remaining 20 percent if the market value remained the same or increased by a certain amount.” If the value of the property declines, the buyer would have to pay only part of the outstanding amount or, in some cases, nothing at all. U.S. officials need to consider “novel” approaches to resolving the American mortgage crisis! At the height of the real estate bubble, construction accounted for 20 per cent of the economy, by 2012 it had fallen to 5 percent, a clear indication that this nation was facing reality and working diligently on its economic crisis. Since 2007, Ireland has lost 230,000 construction jobs, nearly two-thirds of the total work force in that industry. In a speech to the Parliamentary committee on April 25, 2012, Finance Minister Michael Noonan stated, “The big knock to the domestic economy was the fact that building and construction 132 Global Economic Boom & Bust Cycles totally collapsed and that was over 20 percent of the economy and it was bang, gone completely…It is beginning to move, it is very tender shoots of growth at the moment.”4 Ireland went through a period of sheer real estate mania and explosive speculation with cross border lending playing a major role in the great explosion of debt. Since peaking in 2007, housing prices fell 49 percent by the second quarter of 2012. SPAIN Spain’s real estate bubble was one of the biggest in the world and clearly the largest boom and bust real estate crisis in Europe. With 2 million homes still vacant in Spain, in early 2012, developers were still actively building homes and apartments and not facing the reality of a prolong downturn. Property values have fallen nearly 40 percent from the height of the bubble in 2008. Once the construction boom began, it appears, that it was still very hard to stop it; similar to China, it became a necessity and part of the economic growth of the nation. Analysts believe that Spain is only half way through its housing crisis and that the country’s private and public sectors will be deleveraging for years. For a while, Spain had the highest rate of home ownership in the world. Spain’s economy is almost twice that of Ireland, Portugal and Greece combined. It is the fourth largest economy among the 17 nations that make up the euro zone. Just as Greece was the epicenter of Europe’s sovereign debt crisis in 2010 and 2011, in 2012, it appeared, that Spain will occupy that position. Its national debt is roughly 704 billion euros and the debt to GDP ratio is 79.8% and climbing. Spain’s 10-year bond yields are again topping 6 percent. This is another barometer that may push this nation to the edge and force it to tap out. When Spain’s bond offerings start to approach yield levels of 7 to 7.5 percent, the crisis will begin to boil. In response to the rapidly deteriorating situation in Spain, in April 2012, Standard & Poor's Ratings Services slashed Spain’s credit rating from A to BBB+. European Soverign Debt Crisis 133

The country is mired in a deep recession with the economy expected to shrink or decline by 1.8 percent to as much as 3.00 percent in 2012. Economic growth is nonexistent and the austerity measures are crushing the people. In Spain, the jobless rate is roughly 25 percent and unemployment among the youth is nearly 50 percent: This is the worst it has been in almost two decades. With a population of more than 47 million people, only 17,433,200 people have jobs in Spain.5 A quarter of Spain’s university graduates have not found jobs in three years. At the height of the real estate bubble, construction accounted for 20 percent of the economy. By 2012, it had fallen to 14 percent, however, that figure is still too high for an economy undergoing deflationary contraction. Like Portugal and Ireland, before the 2008 meltdown, Spain ran a budget surplus and stayed within the limits of debt and deficits established by the EU stability and growth pact. When the Socialist government took office in 2004, the Spanish economy was growing by 3 percent a year, the budget was balanced and unemployment was relatively low. When the global 2008 meltdown hit, the Spanish economy fell into a deep recession with property values and the construction industry imploding, deficit financing spinning out of control, bank bailouts escalating and unemployment soaring to new heights. Driven by record low interest rates, Spain’s real estate bubble was one of the biggest in recent memory. Apartments in Madrid, holiday villas in Costa Brava and millions of single family homes were purchased by eager buyers for profit, pleasure and primary residences. The peak was reached in 2007, and since that time, the market has been in a steady decline. Many debt-laden Spaniards can no longer make their mortgage payments, just like their American counterparts. In 2012, there were 663 billion euros ($876 billion) in home mortgages at risk of default. Similar to American banks, Spanish banks packaged their loans and sold them to financial companies to be structured as mortgage- backed securities. This market swelled to a 100 billion euro MBS 134 Global Economic Boom & Bust Cycles marketplace. These securities were sold to European pension funds, insurance companies and other institutional investors. Worldwide exposure to Spanish debt is estimated to be well over a trillion euros. Thus, Spain is absolutely a huge problem! According to Borja Mateo, author of The Truth About the Span- ish Real Estate Market, the city of Avila (population of 171,680 people) has 19,000 vacant and unfinished apartments and villas. In the decade through 2007, 23,419 homes were built in this province and an additional 11,000 homes were built after the 2008 meltdown. Thus, even when the party was clearly over, Spain’s developers kept building more homes and apartments. Huge developments are sitting vacant similar to the ghost developments in China. However, there is optimism among politicians and others that when the economy gets back on track demand for homes will be strong again and all the excess supply will be absorbed. According to Borja Mateo Spain’s real estate markets could descend by 60 percent in coming periods. His analysis reveals that as of early 2012, there were 1.9 million homes for sale in Spain and another 3.9 million properties scheduled to hit the market in coming years. Similar to China’s real estate investors, most Spaniards have upwards to 80 percent of their assets tied up in real estate, so a major decline in the market values would be devastating to a very large population of Spanish investors. As in other nations, the meltdown exposed the over expansion of real estate in Spain. Over spending by the public and private sectors created a huge bubble that in the end could not be accommodated. In a Bloomberg analysis, we were informed about some of the key factors that drove this sensational bubble. Their report revealed, “In Spain, there were incentives for municipalities to approve land for development because they could keep 10 percent of all of the land they reclassified. The towns would get revenue from the developments and they could use the land they acquired as collateral for loans.” This probably explains why certain airports were built but were never used. Ciudad Real Central Airport (located 150 miles to the north of Madrid) is an example of local government spending on a project European Soverign Debt Crisis 135 that went nowhere and essentially wasted taxpayer money. Opened in 2008, at the cost of $1.5 billion, the new airport was built to re- lieve traffic at Madrid’s busy international hub, but this business opportunity never really materialized. Analysts pointed to this and other failed projects financed by profligate local government spending that went haywire all across Europe, constituting another level of debt implosion. Spending and investments on major building projects racked up huge budget deficits. Spain stopped growing in the third quarter of 2011 which signaled that it would have serious problems meeting its debt reduction targets. This out-of-control real estate bubble is largely attributable to Spain’s economic demise. In November 2011, the economic crisis deepened as Spain (like other euro zone nations) was hit with escalating bond yields. On November 24th, the cost of borrowing was raised to unsustainable levels: 3 month bills jumped from 2.3 percent in October to 5.1 percent in November, the highest yield paid since the government started offering these investments in 2003. The yields for 6-month bills went from 3.3 percent to 5.2 percent, and for 10-year bonds, Spain had to offer almost (6.37% to 6.9% in November) 7 percent at the auctions. This was a very significant development not only in Spain, but in Italy as well, two countries that were widely considered “Too Big To Bail!” S & P stated it would maintain its AA rating on Spain with a negative outlook. However, by April 2012 (as stated earlier) the rating had already descended to BBB+. With 5 million people unemployed and a 25 percent unemployment rate, Spain has to overcome some major obstacles in order to avoid total collapse. A new government was elected - the conservative Popular Party - to tackle the high unemployment situation, credit squeeze and debt crisis. The head of the Popular Party, Mariano Rajoy stated that this is, “The most difficult economic situation that Spain has faced in the past 30 years.”6 The early prognosis was that Spain would likely need a multi- billion euro bailout for its banks and the country. Prime Minister Mariano Rajoy stated Spain did not need or want an international bailout. The IMF agreed with that view and everyone was hoping 136 Global Economic Boom & Bust Cycles for the best in a bad situation. However, Bloomberg reported that non-performing loans at Spanish banks hit 8.2% in February 2012, the highest since 1994. As of the first quarter 2012, the country had sufficient reserves and had borrowed nearly half the funding it needed for 2012 (the nation had pre-funded 50% of its debt rollovers for 2012). Some analysts predicted that Spain could weather the storm in 2012, however, in 2013, a bailout would be imminent. As the bursting of the real estate bubble continued to unfold, Spanish banks began to buckle under the weight of the economic crisis. Collapse in its real estate markets finally brought the crisis to a head: After a series of special meetings during the second weekend of June 2012, representatives of Spain’s government announced that the nation would need emergency loans (a bailout) of as much as 100 billion euros to shore up its banking system. Burdened by more than 180 billion euros of bad real estate assets, Spain had become the next major epicenter of the European sovereign debt crisis. ITALY Italy has a more diversified economy than Spain and is the third largest economy in the euro zone. It is also considered the third largest bond issuer in the world. Italy is vast, a large euro zone nation that could conceivably topple the global economy. A major failure in the Italian economy would cascade into Spain, Portugal and Ire- land, and place at risk the stability of the euro, the global banking system, the world economy and global commerce. Its debt is 1.9 trillion euros ($2.6 trillion) bigger than Spain, Greece, Ireland and Portugal combined. Debt to GDP ratio is 120 percent. Bottom line, if Italy goes down in an economic crash the euro would not survive. The Economist reported (in its November 24th issue in 2011) that Italy’s economy “grew by less than any other country in the world, except Haiti and Zimbabwe.” Its economy was expected to grow 1 percent for the full year of 2011, an anemic growth rate. The largest union threatened a general strike and the country has a massive tax evasion problem. Italy needs to convince markets that it can European Soverign Debt Crisis 137 cut its huge debts, liberalize the labor market, attack tax evasion and boost productivity. Prime Minister Silvio Berlusconi, the flamboyant billionaire media magnate, presented a new austerity package in mid August 2011. The package consisted of 45.5 billion euros ($64.8 billion) with a mix of job cuts, spending cuts, tax increases and a solidarity tax for high earners. Despite his belated effort to address the debt crisis and other ills afflicting Italy, the 17-year reign of Berlusconi was viewed as a drag on the Italian economy amid allegations of corruption. The popular outcries against his leadership lead him to step down in November 2011. A new so-called technocratic government was installed after the collapse of Berlusconi. Lead by Prime Minister Mario Monti (a former European commissioner, and is both, the prime minister and finance minister) the new administration promised much needed structural changes and fiscal reform. However, in November, panic hit Italy’s bond market and yields gapped up to 7.5 percent and as high as 8 percent (a level that is totally unsustainable) during a time of extreme volatility in the markets. This was more than 500 basis points above comparable Ger- man bond yields. By comparison, bond yields were under 4 percent in 2010. So this was a clear sign that contagion was spreading to Italy. The first wave of panic that swept into the Italian bond market appeared on November 9th as bond yields began to rise. The markets began pricing in additional risk premium on Italian debt and according to The Economist, “LCH Clearnet, a clearing house, raised its margin calls - meaning that anyone dealing in Italian bonds now needs to set more capital aside against possible defaults.”7 A wave of selling hit the market as investors essentially rejected the extra cost of investing in these bonds, effectively abandoning Italy’s bond market. Thus, Italian debt was no longer considered risk free and credit ratings agencies were set to downgrade Italy’s credit rating. Analysts predicted that the finance industry’s extra margin call would not be reversed anytime soon. 138 Global Economic Boom & Bust Cycles

The next major hurdle was to keep Italy solvent and perserve the ability to borrow in the capital markets. The ECB stepped in with limited purchases of bonds as an intervention to halt the rise in yield. The ECB bought billions of Spanish and Italian bonds to help shore up the value and staunch the yield increases. With 167 billion euro debt coming due in 2012; 33 billion euro bond debt coming due in the last week of January 2012, and another 48 billion euro debt due in the final week of February, something had to be done to change this scenario very quickly. And given these sudden dynamics in the bond markets, it was still an unknown as to what Italy’s exposure was to the multi-trillion dollar derivatives market. On December 4th, Prime Minister Monti unveiled a list of harsh austerity measures that were designed to convince the markets that Italy was serious about reforms. Calling it the “Save Italy” measures, Monti’s three-year package of reforms included higher taxes, pension reforms, spending cuts and tax breaks for companies that hire new employees, significant cuts to regional governments, rein- troduction of an unpopular property tax and the retirement age would be raised. Prime Minister Monti was asking Italians to make major sacrifices so that Italy and the euro would survive the debt crisis. Collectively, Italy and Spain will have to refinance about 1 trillion euros worth of bonds over the next three years, in addition to borrowing to cover deficits. Italy’s borrowing costs hit nearly 8% in late November as European politicians and technocrats struggled to contain the contagion. Southern European banks were losing deposits, banks were dumping government bonds and investors were leaving the euro zone bond market. The new prime minister of Italy, Mario Monti, unveiled a new plan to put Italy back on track to deal with its debt problems: new austerity measures and structural reforms. FRANCE France, in partnership with Germany, is a central power broker on the stage in the EU economic drama. Officially the second stron- European Soverign Debt Crisis 139 gest political power in the EU, France has worked closely with Ger- many to develop solutions for the nearly four year debt crisis. As a strong supporter of the euro and the survival of the euro zone, French President Nicolas Sarkozy had called for a “refounding and rethink- ing of the organization of Europe.” As the crisis unfolded, French ministers have called for central bank interventions, the issuance of euro bonds and other central authority measures to stop a stampede out of euro zone bonds. French Finance Minister, Francois Baroin, recommended that the ECB should act as lender of last resort similar to the role of the U.S., British and Swiss central banks. French megabanks hold very sizable levels of bad government debts, particularly bad loans from Greece, so French authorities are looking for secure methods or mechanisms to back-stop their banking system and the troubled nations in the euro zone. France is a key contributor to the European Financial Stability Facility (EFSF) which is designed to serve as a financial support system and quasi lender of last resort. Sovereign nations who contribute to the EFSF must maintain an AAA credit rating or be dis- qualified. With debts of 1.6 trillion euros, high unemployment, and direct exposure to the more serious nations facing defaults, France was on the list for possible credit rating downgrades by some of the leading credit agencies of the world. Fitch had warned France that it was in a tight position and had very little room to maneuver before it could lose its AAA credit rating. The euro zone would be deeply wounded if France were to suffer a downgrade and not be able to contribute to the bailout fund; that event would constitute a major setback in the struggle and rescue plans to save the euro. With the start of 2012, S & P delivered a solid body blow to France, and by extension, the euro zone. In January the S&P downgraded France and Austria by one notch from AAA to AA+. After careful review of the European Union Summit that was held in De- cember 2011, S & P decided that euro zone leaders had not made enough progress to overcome the crippling crisis spreading throughout Europe. In their words eurozone leaders had “not produced a breakthrough of sufficient size” to deal with the massive issues af- 140 Global Economic Boom & Bust Cycles flicting the European Union. This decision angered a lot of Euro- pean leaders. The finance minister of France, Francois Baroin, stated, “It is not good news…but it is not a catastrophe…It is not the rating agencies that dictate the policies of France.” Olli Rehn, EU monetary affairs commissioner, called the decision “inconsistent” and stated that the S & P ignored the decisive actions taken by euro zone leaders. Gallup International conducted its “End of Year” poll to determine which country (among 51 nations) was the most pessimistic in 2011. France came in first, while the most optimistic nation was Nigeria, followed by Vietnam and Ghana. The extended nature of the euro zone plight was taking its toll on the mental and social health of the French population. The people were experiencing dwindling purchasing power and the steady erosion of the significant social support system that had been a critical feature of the French economic social structure. All of this was unraveling along with the specter of a collapse in the euro. In April 2012, the people of France went to the polls to select their next president. The first round of voting resulted in a runoff between conservative President Nicolas Sarkozy and his opponent, Socialist Party candidate Francois Hollande. The second round of voting took place on May 6th, and in a stunning victory, Francois Hollande was elected to be the next president of France. President Nicolas Sarkozy had been a central figure and major power broker in European Union politics, especially in his relationship with Angela Merkel and Germany. The so-called Merkozy team had managed to forge a solid partnership on many important economic issues in the euro zone. Then, in the sweep of an election, the Merkozy era was over. Going into the election, Sarkozy had a number of issues running against him: 10 percent unemployment, anemic economic growth and the dreaded austerity measures that were universally hated by population groups throughout France and the euro zone. With the unanimous defeat of Sarkozy, he would now join the ranks of ten European Soverign Debt Crisis 141 other leaders in the euro zone that had been swept from power since the debt crisis began in 2009. Some of the governments that were swept from power are as follows: (1) Spain (Jose Luis Rodriguez Zapatero, November 2011) (2) Portugal (Jose Socrates, June, 2011) (3) Greece (George Papandreou, October 2011) (4) Italy (Silvio Berlusconi, November 2011) (5) the U.K. (Gordon Brown, May 2010) and (6) the Nether- lands (Mark Rutte and his Cabinet, April 2012). All faced the wrath of enraged populations or strong political oppositions in parliaments that disagreed with their leaders and their economic policies. Sarkozy had to demonstrate that his performance had benefitted the French people and strengthened the nation’s standing in the EU; however, the majority of the people in France did not want to provide further support for his economic and euro zone policies. His opponent argued that Sarkozy had simply followed the lead of Germany and that France had bestowed on Germany the sole dominance of the entire union. In addition, Francois Hollande also presented a comprehensive program based on raising taxes on high income earners (a similar Obama campaign promise in America) controlling the deficit and introducing a plan for growth in the economy with less austerity measures. Hollande’s victory in May set the stage for the parliamentary elections in June where the Socialist Party hopes to capture both houses of parliament. After the crucial elections in June, the political landscape in France could be radically different and may usher in a new era in euro zone politics. France could begin to move into a different direction which may not be conducive to saving the euro and the euro zone. GERMANY In the center of the European Union, and at the very core of its existence, sits the powerhouse Germany. It is the strongest economic power in Europe and is in a unique position to orchestrate and complete a grand design started over 60 years ago. In short, Germany leads the EU and is the “reluctant leader of the rescue effort.” In a 142 Global Economic Boom & Bust Cycles rare display of political theatrics, Poland’s Foreign Minister, Radoslaw Sikorski, appealed for stronger German leadership in the crisis: “I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity. You have become Europe's indispensable nation.” Whether by historical design or crisis events, Ger- many has been placed at the core and heart of the EU and must fulfill its destiny or walk away. However, some observers speculate that Germany has backup plans if “things fall apart”: (1) In the event of a Greek default, Plan B would be to recapitalize German banks (2) Germany would simply return to the deutschmark if the euro doesn’t work. The Germans may be re-thinking the deutschmark. The percentage of Germans who believe in the long-term success of the euro had gone down from 78 percent in 2008 to 55 percent in early 2011. Many feel that the euro has a strong potential to drag Germany down into endless bailouts and a cesspool of debt. They have more faith and confidence in the German central bank (Bundesbank) than the ECB. To a certain extent, Germany is becoming more self-centered and concerned about its national survival. Germany’s exports to China now surpass its total exports to Portugal, Ireland, Spain and Greece, reaching 53 billion euros. In the near future China may also surpass France as Germany’s biggest trading partner. So Germany has other options in the event of total collapse and global depression. The euro zone crisis has established a new German dominance in Europe. Germany effectively sets the terms for rescues and bailouts. Germany has an intricate connection with the EU and euro zone mission, however, it will not allow the euro to drag it down or enter into any arrangements that would drive up inflation or potentially create hyper-inflation. The German experience with the Weimar Republic’s hyper-inflation in the 1920s (hitting hard in 1923) was devastating and has forever left an indelible DNA memory for this nation. That economic episode eventually led to the rise of Hitler in 1933, 10 years later. Thus, it is worth repeating that the German people have a deep aversion of inflation and printing money to buy European Soverign Debt Crisis 143 debt. Severe economic crisis can lead to extreme forms of government, particularly if the crisis lasts a long time. So the Germans are expected to put the brakes on anything that borders on the extreme. We are not likely to witness the Germans lifting this ban even if global markets are in a free fall. Germany believes that big recues or bailouts of sovereign nations are counter productive because they have a tendency to create new problems and unveil undisclosed issues. This sets the stage for a government in crisis to have less urgency to deal with deep seeded problems. The German position on central bank bond-buying is that it would generate inflation. German leaders are firmly against monetizing debt as a cure for the euro zone crisis. They have no desire to follow the lead of the United States whose Federal Reserve System printed trillions of dollars to deal with the 2008 meltdown. In the German mind-set using more debt to solve a debt problem is not a good long-term solution; it only delays the day of reckoning. Germany is against using the European Central Bank (ECB) as the lender of last resort in the sovereign debt crisis. Jens Weidmann, the president of the Bundesbank (the central bank of Germany) believes that in order to restore confidence in the credit/bond markets for a country’s bonds is for that government to introduce bold reforms. Even the president of the ECB, Mario Draghi, agrees with not using the ECB as the lender of last resort. There is this belief in the stronger northern nations that the southern countries are prone to profligacy and waste. German orthodoxy is adamantly against inflationary policies and bailouts, but very strict on austerity measures. However, these measures have a tendency of pushing a country deeper into recession. Chancellor Angela Merkel is on a mission to save the euro and understands that the severe austerity measures are counter productive, but they have not found the right formula to strike the balance of debt repayment and recovery/growth. With the rapid escalation of euro zone yields in November 2011, the sovereign debt crisis was driven close to near collapse. Germany got hit by investors on November 23rd. At a bond auction, Germany 144 Global Economic Boom & Bust Cycles was only able to sell half of its bonds. Due to the shortage of buyers, the cost of borrowing for Germany’s 10 year bond rose from 2.0 percent to 2.2 percent. By comparison, America was paying 1.8 percent and Britain 2.18 percent. This was another sign that confidence in Europe was shaken. It was also a sign that the investment markets were now placing a focus on the core of the euro zone. Prior to this point, the contagion was happening in the peripheral countries, the weaker nations of Greece, Portugal Spain and Italy. Some observers immediately issued dire warnings that Germany was being hit by the bond market for increased yield and that this could be the beginning of a slow descent. Bond investors were effectively demanding more yield from all euro zone member countries, interbank lending was starting to freeze up and depositors were withdrawing more money from banks in the PIIGS nations. Something needed to be done fast to stop the contagion. World leaders were alarmed at how fast things were starting to spin out of control. Events were beginning to resemble the Lehman collapse in 2008. The U.S. took the lead on prodding EU leaders to take massive action to gain control over the crisis. President Obama became more vocal and proactive issuing calls for quick resolution and to “Do whatever it takes to fix the crisis.” Obama also cautioned that “In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective coordinated fiscal policy.” Vice Presi- dent Joe Biden paid a visit to Greece and warned that “time is running short for European leaders.” In early December, President Obama dispatched Treasury Sec- retary Timothy Geithner to Europe to talk to leaders and central bankers prior to the major EU Brussels summit scheduled for December 8th and 9th. Geithner traveled to five European cities bearing the message and urgent call to defuse the ticking debt crisis, and no doubt, offering lessons on the massive actions taken by the U.S. in the 2008 meltdown. President Obama and other leaders were pressing hard for Europe to end the debt crisis, perhaps using more fire power with the use of the ECB and euro bonds. Geithner’s assess- European Soverign Debt Crisis 145 ment of the EU decision-making process gave rise for hope: “I am very confident they’re going to move in the direction of expending (their) effective financial capacity…They’re just trying to figure out how to get there in a way that is politically attractive.” The United States and the 27-nation European Union account for one-third of world trade and roughly half of all global economic output. The GDP of the EU is nearly $2 trillion larger than the United States. After Canada, the EU is the largest destination for U.S. exports, generating 18 percent total per year. Demand for U.S. goods and services in the EU are an important part of the growth scenario of the U.S. economy: If there is a major decline in the EU, our export market to Europe would decline with European countries buying less goods and services from America. By itself, the euro zone is one of the largest economic forces in the world and America is knee deep economically in the euro zone. This is not a case of a standalone European debt crisis. There is a deep connection with the European Union across the Atlantic and contagion is real and will spread instantly if, and when a default or collapse erupts. The reality is that U.S. banks have enormous exposure to European institutions. It may not be a coincidence that both economic blocs are facing deep economic and financial difficulties. The U.S./EU November 28th Summit meeting highlighted the close connection of these two powerful entities. There is a lot at stake for the U.S. in this crisis: if Europe goes down, so will America due to these long historical connections. A recession in Europe will hit the U.S. hard. President Obama clearly recognized that the European crisis was a “huge issue” for the U.S. economy. At the late November two-day European summit in Wash- ington, Obama stated, “If Europe is contracting…then it’s much more difficult for us to create good jobs here at home.” In 2008, it was Europe that experienced the massive fallout from the economic meltdown that had its origins in the United States. Now the same massive fallout will hit American shores if the EU goes into a similar meltdown. 146 Global Economic Boom & Bust Cycles

On November 30th, the Federal Reserve System and Fed Chair- man Ben Bernanke took the lead to coordinate a global central bank action to make it easier for banks, particularly in Europe, to borrow U.S. dollars and continue their lending operations. Five other central banks participated in the operation: the European Central Bank and the central banks of England, Japan, Switzerland and Canada. These actions were taken to ensure that there would not be a credit crunch and liquidity crisis like in 2008. The focus was “dollar liquidity swaps” and lowering the cost by 50 basis points, making it cheaper for banks to exchange currencies. In a press release the Fed- eral Reserve stated that the operations were meant to “ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.” On the same day, the People’s Bank of China (PBOC) also announced a plan to increase liquidity by lowering its reserve requirement ratio for banks by 50 basis points, thereby, making more capital available through their financial system. After the central banks’ coordinated efforts, Italy’s 10-year bond rate fell to 6.48 percent on December 5th from over 7 percent the day before. Stocks rose in Asia, Europe and America. The German 12-month bill yield fell below zero, an indication of extreme risk aversion and fear. These global economic actions bought the EU some time to work on a solution to the debt crisis. The next summit in Brussels (December 8-9) was billed as a do or die historic gathering. The entire world would be watching! Just to keep the politicians awake and on their toes, the S&P credit agency issued a warning to the EU that the ratings on 15 nations (including Germany) were on watch and could be downgraded if the summit did not produce a credible or solid financial plan to solve the sovereign debt crisis. The S&P was holding the EU’s feet to the fire, similar to their actions with the near collapse of the Con- gressional default debates in the U.S. in August. The aftermath of that political circus was the downgrade of the U.S. credit rating and a massive stock market collapse. However, in observing the EU model and the fact that so many independent governments needed to de- European Soverign Debt Crisis 147 cide and vote on policies before they could move forward and act on a plan, I began to fully appreciate that the American model and system is not as convoluted as the EU system. The opposition in most cases is just one party, either the Democrats or the Republicans. As the European plight deepens and drifts along in half-measure solutions, it is making American treasuries and the dollar look a lot better than similar investments in Europe. Even with all of the economic problems engulfing the U.S., global investors are looking to this nation as an alternative sovereign debt investment. In short, the dollar and treasuries are benefiting from the global unrest of the euro and the European sovereign debt crisis. Amid all of the uncertainty, gold hit a high of $1,822.00 in mid August. The longer the crisis lasts and the worse things get in the euro zone, the greater the chance that the contagion will spread to America in a major way. The digital revolution has brought into existence deep global connections: U.S. banks have German, French and private sector bonds and loans on their books. THE EU SUMMIT PREVIEW ANALYSIS In preparation for the historic December summit, EU leaders came to the realization that there were too many flaws in the operational framework of the euro zone. There was this constant reaction to crisis and disagreements over how or what to apply to solve a problem. To many of the key players in the euro zone drama, the Maastricht Treaty that founded the euro was considered incomplete and needed reform before a possible occurrence of a complete failure in the system. The leaders also recognized that there should be no more write downs beyond Greece. The extremes reached in saving Greece were to be avoided in the future. The 50% haircuts that banks were asked to take destroyed credibility with international investors and created great damage in the area of CDS contracts. The general conviction, at least among the key players of Germany and France, was that it was now time for greater integration in the euro zone. The EU had drifted for over two years reacting to each crisis and was consis- 148 Global Economic Boom & Bust Cycles tently behind the avalanche of events. As they say in America, it was time for change. The big meeting in Brussels would be about treaty changes and a change in EU rules and treaties which would not be an easy process. It’s a process requiring consensus in individual governments, popular vote in populations and parliament approval procedures in some nations. Merkel and the Germans are convinced that in order to ensure the Stability and Growth Pact, all of this has to be done now. The EU Commission in Brussels is the central power that would enforce the new treaty. EU President Herman Van Rompuy would present proposals for treaty change on December 9th. Chancellor Angela Merkel and the Germans came to the summit to move forcefully ahead with a plan to modify and redesign the EU Treaty. This was considered a necessary first step before they could move forward with providing additional resources. She lik- ened the debt crisis to a marathon, a very tough and strenuous or- deal, wherein one has to pace oneself for the magnitude of the run. On December 2, 2011, Merkel spoke before the German Bundestag lower house of parliament in Berlin, delivering her “Europe” speech to let German Lawmakers know what she was planning to do at the December 9th summit of European leaders: the critical summit to save Europe and the euro. During the extreme volatility in the markets, Merkel did not bend to market demands for quick fixes or solutions. She stated, “Joint euro-bonds are also ‘unthinkable’ as long as governments retain national control over budgets.” In the eyes of Merkel, at this critical juncture, “joint European control over revenue and spending” is a necessary intrusive power to be exercised by the governing body if this experiment with the euro has a chance of lasting. They want to insert powers to override national budgets. Accountability and strict controls were the essential tools to use in solving the crisis. She also stated that “The German government has made it clear that the European crisis will not be solved in one fell swoop…It’s a process, and this will take years.” It was now important to do away with major deficiencies in the currency union in order to recapture European Soverign Debt Crisis 149 global trust and reliability of the world’s second largest currency: there was a need for “legally binding regulations.” Heading into the summit, the Germans were opposed to: (1) Al- lowing the ECB to be lender of last resort and to print money in order to monetized debt (2) establishing a so-called euro bond as a solution to the crisis and (3) Allowing the ECB to play a similar role as the Federal Reserve System or the Bank of England. The central bank of America (The Fed) can print money; the ECB had not been given the authority to do this. The Germans are adamantly against this policy of printing money, and Merkel is interested in sealing off the ECB from political pressure, making sure that the organization has no expanded role in the markets. She is seen as being in conflict with the markets which are looking for immediate solutions and measures to end the contagion factor. She does not want to fight the problem of debt with more debt which is what printing money and monetizing debt does, something the Federal Reserve System in America is expert at. Merkel has warned that Germany and Europe does not have unlimited fire power or financial strength; no big bazooka to settle the debt crisis once and for all. The resolution will not happen that way! At the December 9th meeting, Germany and France were planning to push for the following changes: (1) stricter budget enforcement and overhauling the region’s governance (2) closer economic ties between euro zone members (3) implement strict fiscal controls and regulations requiring member states to give up some sovereignty to be a part of the euro zone (4) fiscal union would be limited to the euro zone members and not include all of the 27 members of the European Union (5) the limits and budget controls must now be ad- hered to: debt within 60 percent of gross domestic product (GDP); deficits within 3 percent of GDP. Merkel would push to have any country that violated these limits sued in the European Court of Jus- tice and (6) euro members would face automatic penalties for breaking the rules. They were pushing for a new “fiscal contract” within the EU governing treaties. 150 Global Economic Boom & Bust Cycles

Billed as the most important weekend since 1999 (the birth of the euro) expectations were high that this EU Summit would produce a grand resolution (or at least the beginning of one) for the euro zone crisis. So this was considered to be a very important summit for a lot of reasons. THE EU SUMMIT: DECEMBER 2011 The initial reactions in global markets (prior to the summit) were relatively strong as stocks rallied and European sovereign debt yields moved lower on the belief and hope that the EU would move in the right direction. In the final analysis, after the smoke cleared and everyone had a chance to evaluate the summit in its entirety, to the majority of political and financial analysts around the world, the December EU Summit was a disappointment. There was no dramatic plan to slay the debt beast and save the euro from utter destruction. To one news commentator, the members of the EU were “renewing their vows.” The outcome did not present to the world a commitment to do something big; to provide an ECB backstop with unlimited funds and bond buying capability. This “summit event” was not the game changer that global investors were hoping for. The summit essentially laid the groundwork for a new beginning; a structure for greater controls, austerity, fiscal discipline and fiscal integration. As Merkal and Sarkozy had indicated prior to the summit, this would be a summit to establish a firmer inter-governmental union that would hold all members accountable to strict guidelines and principles designed to avoid future economic catastrophes. The major agreement hammered out by 23 member states sanc- tioned the inter-governmental model for greater fiscal integration and discipline. This was the proposal presented by Germany, France and the EU Commission during the earlier sessions of the summit. Sweden, Hungary and the Czech Republic stated that they were un- decided on the new agreement while the U.K. was decidedly against it. Proposals to increase bailout funds and the financial strength of the IMF were presented and considered, but would not be resolved until early to mid 2012. European Soverign Debt Crisis 151

Prime Minister David Cameron of the U.K. was both praised and denounced for his hard line position of not allowing the sovereignty of the United Kingdom to be compromised in the inter-governmental agreement. He stated that this deal was not in Great Britain’s interest. The U.K. is not a euro zone member and the euro is not its currency, so this decision was the right one. However, some observers began to speak of Great Britain being marginalized in the EU and not considered a strong voice in the union. Thus, as EU leaders went home to their individual countries to discuss the proposals (within their governments and parliaments) agreed to at the summit, the realities of popular dissent against the EU design began to surface. In Denmark, Sweden, Poland, the Czech Republic, Ireland, Fin- land and the Netherlands it was clear that this issue of giving up sovereignty (even a small portion of it) was not well received by all of the political parties and populace of these nations. There was talk of referendums, disagreements with the plan and basic fear of the unknowns when the finalized version would be presented in March of 2012. In addition, opposition parties to current sitting governments were using this EU Summit development as a reason to remove current leaders that agreed to these types of fiscal and political arrangements. An example of how this process can cause delays and derail an important policy is what happened with a critical vote in Slovakia in October 2011. In order to implement a major new procedure or policy for the euro zone, it requires the approval of all 17 countries that use the currency. A critical vote and approval was needed to expand the euro zone bailout fund and it was nearly stopped dead in its tracks due to Slovakia (a small nation of 5.5 million people). The Parlia- ment in this country had to work through their political process to reach a consensus on this matter. The fate of this plan was in sus- pense until this nation gave its yes vote. During periods of volatility and uncertainty, markets will not sit patiently by awaiting confirma- tions on major issues; there will be strong reactions, and in most cases, to the downside! Incidentally, analysts have stated that Slovakia 152 Global Economic Boom & Bust Cycles regrets adopting the euro. There may be other euro zone nations having second thoughts about the euro, and if so, this could present problems at some critical point in the future. Given the fact that treaty changes could take years, working its way methodically through the various member states, with ballot voting, treaty talks, parliament votes, referendums and ratifications; this would pose enormous risks for the euro and euro zone. Devel- opment of a federal system is the long-term goal if currency and economic integration is successful. The grand vision of political and economic integration takes time and Europe is running out of time fast. Now that much of the plan has been derailed, what's next? The markets are impatient and have been anticipating speedier solutions. Continued volatility in the markets could bury Europe at some point in 2012 or beyond. A tighter fiscal union would require each euro zone nation ced- ing some of its sovereignty to a central government entity. They will seek to make treaty changes to enforce rules and regulations on budget constraints and debt limits. This will be a politically sensitive issue in many of these nations. What’s at stake is the preservation of the common currency, the euro. What was painfully clear from all of the evidence is the fact that 2012 was looking more and more like further chaos in the euro zone. A perfect political and economic storm scenario was simmering for the New Year. In the end, by default, global investors will decide the euro zone debt crisis, and unfortunately, it will not be a pretty solution. The collapse will happen fast: think of Lehman in hyper-drive. In 2012, flocks of vultures were circling the euro zone searching for vulnerabilities and easy targets. The speculative attacks will be vicious and pronounced as savvy investors in the bond, stock and currency markets take full advantage of a wounded euro zone. To- day, it’s Greece; tomorrow, it’s Spain, next week, Italy or France. There are many targets and that’s what makes this a very vulnerable situation. The EU clearly needs to build strong defenses to ward off these attacks; however, there are potentially so many points of weakness that it is nearly impossible, particularly in the short-term. As European Soverign Debt Crisis 153 one writer so graphically stated, “the markets are coming for blood in the streets,” and that is precisely the expected outcome once it appears that things are beginning to fall apart. A huge question in the minds of many analysts is: are nations (the people and political parties, not just current leaders) in the euro zone ready to transfer some of their sovereignty to a central euro zone authority that will have the power to raise money, regulate banks and prevent errant fiscal policy? Are the people of Europe ready to transfer some of their sovereignty to Brussels, Belgium: a central government of national governments, creating a United States of Europe? I don't think this question was effectively answered at the December 2011 summit. The U.S. federal government is the central authority over taxing and spending; the Europeans don’t have this central authority mechanism which is what they are trying to put together in some limited version of this power. That is part of the struggle being played out in the European power theater. The German mind-set is central in the resolution process which may be one of the reasons why this process will need to take a much longer time to achieve. Meanwhile, the other major players in this drama were busy making their pronouncements on this matter. The ratings agencies were actively downgrading banks and governments. Moody’s announced that it would be reviewing 87 different banks in 15 countries to determine whether to downgrade subordinated bond issues. S&P cut its debt ratings on Bank of America, Goldman Sachs and Citigroup. And according to Capital Economics (a UK based organization) the euro zone economy is expected to contract by 1 percent in 2012 and 2.5 percent in 2013. A group of 20 leading economists examining the current makeup of the euro zone don’t believe that these countries can survive this crisis in its existing form. The consensus is that a new core group of more stable and solvent nations would be required to manage and lead the euro and a newly revised euro zone. 154 Global Economic Boom & Bust Cycles

EUROPEAN CENTRAL BANK (ECB) The European Central Bank (ECB) has sole responsibility for monetary policy. This is a mandate and a precondition of the creation of the monetary union. The 17-nation euro zone is under a common monetary policy but do not share in the same fiscal policies; each nation manages its own taxing and spending policies, and there are major differences in how each euro zone nation conducts its fiscal policy. That is one of the main structural defects in the ECB system: healthier better managed economies are paying for the short- comings and failures of weaker poorly managed economic systems. The ECB does not have similar powers as the Fed in the U.S.: it does not have the authority, the license, or the independence to quickly inject itself in the markets the way the Fed does. As of late 2011, the ECB had not been authorized to issue so-called euro bonds. In fact, Chancellor Angela Merkel has made it clear that Europe was “a long way from euro bonds” and that they are “extraordinarily inappropriate.” She also indicated that the EU treaty bars the central bank from a role as the lender of last resort. The new ECB president, Mario Draghi, is also opposed to the ECB as lender of last resort and feels that central bank bond buying is inflationary. Germany is firmly against the idea of a joint debt issuance of bonds (the euro bond) largely because it fears that spendthrift nations still do not have the fiscal discipline to participate in this type of offering. In addition, German Economy Minister Philipp Roesler said the ECB simply does not have unlimited firepower. The Germans are very cautious about opening wide the spigot for bailout operations which they doubt would be effective in the long run. However, the ECB does participate in the secondary bond markets and was a major purchaser of Spanish and Italian bonds on the open market during the second half of 2011 in a drive to keep borrowing costs down for those nations. Despite the almost unanimous German opposition to euro bonds, the European Commission presented a study that showed that joint euro bonds are the way to stabilize debt markets. To many analysts observing this unfolding economic drama, in order to avoid conta- European Soverign Debt Crisis 155 gion there would need to be some level of intervention by a central bank. Indeed, there is a chorus of pundits and global institutional investors calling for more intervention by the ECB. Thus, the ECB cannot print money, buy assets from European Union Nations and issue euro bonds as defense or rescue measures in the event of extreme market madness. But some observers and analysts believe that in an extraordinary situation, like in the case of Italy needing a bailout, the ECB may be given temporary powers to print money and monetize debt. Italy is clearly a country that is too big to bail and it cannot be allowed to collapse or default on its sovereign debt. A sudden collapse in Italy would torpedo many large banks in Germany and France. In the over-leveraged global banking system, many institutions could be swallowed in a rapidly moving gigantic debt implosion. A systemic banking system impact would be greater in the EU due to the smaller number of banks (compared to the U.S. with over 7,500 banks) that are tightly embedded into the fabric of the societies of these nations. That is one of the main reasons why there has to be a greater response by the ECB or other central organizational bodies that can stop the contagion once it’s out of the bottle. In response to the potential of a liquidity crisis in the banking system, the ECB launched a pre-emptive strike in December (in preparation for 2012) by offering low-cost three-year loans to EU banks purchasing more sovereign debt. In a move seen more as a temporary measure to keep the banking system flushed with capital, the ECB allocated 489.2 billion euros ($639 billion) to 523 banking institutions at 1 percent interest rates. In this scheme, banks were motivated to purchase new sovereign debt, earning higher yields on their investments. Using sovereign debt bonds as collateral, lenders were essentially given the opportunity to borrow at the ECB benchmark rate of 1 percent. Operating in tight credit markets, banking institutions jumped at the opportunity to acquire these low-cost loans. This program was compared to the TARP (Troubled Asset Relief Program) initiative that was employed during the 2008 meltdown in 156 Global Economic Boom & Bust Cycles the U.S. where toxic assets were removed from the system and the funds provided to the banks were used to buy bonds that funded TARP. The president of the ECB, Mario Draghi, found a way to use an ingenious method to employ what some analysts consider a “backdoor Quantitative Easing (QE)” system. As mentioned in an earlier section, the ECB is forbidden by treaty to engage in the markets as a lender of last resort, print money and buy bonds directly from troubled nations such as Greece, Italy or Spain. However, this new plan, when properly managed, can help to accomplish the goal of keeping the banking system from freezing up and grinding to a halt. EUROPEAN FINANCIAL STABILITY FACILITY (EFSF) Similar to the Troubled Asset Relief Program (TARP) employed during the U.S. 2008 meltdown, the European Financial Stability Facility (EFSF) is a company designed with backup support and powers that extend beyond the limitation of the ECB; in fact it has greater flexibility than the ECB. According to its charter, the main objective of the facility is to “preserve financial stability of Europe’s monetary union by providing temporary financial assistance to euro area Member States if needed.” Brought into existence at a meeting of European leaders in May 2010, this new facility would have the ability to offer credit lines to governments, purchase the troubled debt of euro zone nations, provide aid to banks or finance recapital- izations of financial institutions in the zone, in addition to selling bonds to finance rescue loans. Its initial funding (by governments) was set at 440 billion euro ($604 billion). Several plans have been introduced to boost the financial resources of the EFSF. One such plan has suggested leveraging up the fund from $604 billion to roughly $1.4 trillion. However, with leverage comes additional risk in the system. In the event of failure or collapse of a member state, the extreme high risk will generate a more crushing collapse. Outside of the ECB, this would be a way to generate more firepower and this additional funding would need to European Soverign Debt Crisis 157 be put in place before the onset of the next major euro zone recession. Another aspect of the EFSF is that it insures government bonds (guaranteeing to take the first 20-30% loss on government bonds) similar to CDS contracts. The company also has the ability to create one or more co-investment funds (Special Purpose Vehicles (SPVS)) that could take funding from private investors like pension funds, non-European countries, such as, sovereign wealth funds in Asia and the Middle East, IMF and big banks. NOVEMBER 2011 With a global financial system that is built on trust, confidence and derivative contracts, any deviations or lack of performance can bring about unforeseen consequences. Such was the case in the special arrangements developed for the second Greek bailout package. The crisis that erupted in November was triggered by the Greek Credit Default Swap (CDS) affair. Institutional investors (mainly banks) were asked to voluntarily take a 50% loss on their sovereign debt bond holdings. As stated in an earlier section, this was structured in a way to avoid Greece defaulting on its debt. And since there was no default, CDS contracts were not triggered for payouts. Disruptions and inconsistencies in the system of payouts lead to the assumption of greater risks in the euro zone which translated to higher yields on bond issues. Events moved quickly as many bond investors demanded more risk premium on European debt, forcing sovereign nations to pay more on new bond issues. Inter-bank funding started to freeze up and a systemic liquidity crisis was looming with each passing day. Turmoil had hit the markets and Europe was rapidly running out of time. A European banking crisis had started to take root with bond yields spiking out of control in nation after nation. As the crisis deepened, Credit Default Swaps on Italy, France and Spain began to rise: contagion was spreading rapidly throughout the EU, with the surge in yields on German and French debt, making it clear that the debt crisis had spread from the peripheral countries of Greece and Portugal to the center of the euro zone. The 158 Global Economic Boom & Bust Cycles

December summit had a lot to do with responding to this near brush with complete collapse. After the write down of Greek debt, banks were under pressure from European leaders to raise reserve requirements and they needed to raise capital to build up their liquidity reserves. These actions were deemed necessary in order to boost confidence and maintain strength and stability in the banking system. Lenders need to com- ply with tougher Basel III capital targets. The European Banking Authority required lenders to boost capital by 106 billion euros after marking their government debt to market values in stress tests. As a result of these stringent requirements, in late November, European banks started talking about selling distressed assets on their books to large insurance companies; this would be a fire sale of assets. The buyers would be insurers, reinsurers, hedge funds and private-equity firms. Only the major players would have the financial strength and cash reserves to buy these assets in significant quantities (at the end of 2010, global insurers held about $24.6 trillion in assets). Large insurance companies in Europe such as Allianz SE (the largest insurer in Europe) Zurich Financial Services AG (Switzerland’s biggest insurer) and Axa SA responded and indicated that they were ready to start buying assets. Large insurers in the U.S. also indicated an interest in these assets. However, these major players were in the market for strong properties and good long-term mortgage investments and not the less desirable properties that the banks were looking to initially unload. The banks will move to unload more desirable deals after they get rid of the weaker properties and mortgages. The more risky assets will most likely be acquired by hedge funds and investors with more appetite for risk. This represented a major opportunity for financially strong organizations to purchase, at major discounts, distressed assets in the euro zone crisis. No doubt, this would just be the beginning of what many institutional investors consider the “mother lode” of distressed investing. The lions, hyenas and vultures will be on the prowl. European Soverign Debt Crisis 159

IMF The International Monetary Fund (IMF) is playing a key role in the ongoing European debt crisis. The organization has partnered with the ECB, EU, banks and others to provide rescue bailout funds and structured austerity programs in an effort to manage the crisis. Born out of the ashes of World War II, the IMF has been actively engaged in bailout operations and austerity programs for over 60 years. Representatives from 44 nations gathered at Bretton Woods, New Hampshire in 1944-45 and established the blueprint and working models of the International Monetary Fund (IMF) and the Inter- national Bank for Reconstruction and Development (IBRD, the World Bank). In conjunction with other international programs, such as the Marshall Plan, these organizations would, henceforth, be at the center of major short-term currency stabilization problems, and long- term economic developmental projects for nations requiring substantial aid over long periods of time. Thus, the IMF is a very experienced organization when it comes to dealing with economic and financial plight. The organization is famous for its austerity programs and in its mandates of forcing privatization of state owned assets, increasing taxation, requiring major cuts in services and employment in order for a government in distress to receive funding or a bailout package. In its outlook on the global economy, the IMF has issued some dire warnings. According to its chief economist, Oliver Blanchard, “The global economy has entered a dangerous new phase…the recovery has weakened considerably.” Christine Lagarde, IMF Man- aging Director has also warned that “The world is entering a dangerous phase.” The organization has serious doubts that euro zone nations will be able to contain the debt crisis and keep it from preventing a collapse in the region. The IMF says the euro zone is now the world’s largest economy. It has nearly 5 times more assets than U.S. banks; thus, we are looking at a problem much bigger than most analysts are presenting to the world. The IMF global forecast for 2011-2012 is as follows: The U.S. will grow 1.5 percent in 2011 and 1.8 percent in 2012. The euro 160 Global Economic Boom & Bust Cycles zone is expected to grow 1.6 percent for 2011 and a paltry 1.1 percent for 2012. From their prospective, fear of many uncertainties and unknowns is running high in global markets. In addition, a cycle of slow growth and financial turmoil is feeding each other in the U.S. and Europe. World Bank President, Robert Zoellick, stated that the world may be able to avoid a double dip recession, “but my confidence in that belief is being eroded daily.” Given the massive size and scope of the European sovereign debt crisis, the IMF emergency fund of $384 billion is considered too small to deal with this debt inferno. The IMF has already funded bailouts for Greece, Ireland and Portugal. This reality set the IMF on a course to acquire more economic and financial resources in order to remain active in the rescue operations. And as a major backstop, Christine Lagarde has strongly urged that European banks need urgent recapitalization. By late 2011, the entire world was painfully aware that the EU debt inferno was a global crisis requiring a global response. So the IMF and other organizations started actively calling on the rich developing economies of the world to participate directly in the euro zone plight. The so-called BRICS nations (Brazil, Russia, India, China and South Africa) had become economically vibrant and strong centers of trade and commerce in the world. Their help and financial resources were needed to be enlisted in this global struggle. How- ever, these nations also had their own economic problems to contend with (demands on their financial resources in their home countries, combating poverty and hunger, infrastructure, etc.) and were not jumping into the fray without careful considerations and special benefits in return for their support. The initial response from most of these nations was to not make any strong commitments for direct support to the debt-saddled Eu- ropean nations. The idea of contributing and supporting the IMF as an option had a much stronger appeal. India’s central bank gover- nor, Duvvuri Subbarao stated, “...there is…tension between giving money to a multilateral institution for the purpose of restoring global stability and meeting our own aspirations at home.” Men Jing, European Soverign Debt Crisis 161 chair of European Union-China relations at the Belgium-based Col- lege of Europe, stated in an article, “It is ridiculous that rich Euro- pean nations have their begging bowls out and want money out of the pocket of China, whose per capita income is only about $4,000.” During the third week of December, Christine Lagarde traveled to sub-Saharan Africa on a mission to assess, and perhaps warn, African nations to prepare for a possible slowdown in global economic growth in coming periods. She expressed concern that many of these nations may not be prepared for a major EU crisis. In regards to the meltdown of 2008-2009, Lagarde’s assessment was that African countries were able to cope with the fallout from that crisis. However, this time around, should the developed world fall into a sustained period of economic slowdown, it will have a major impact on African export markets. She commented, “…for many countries in the region, my main worry is that their capacity to absorb further shocks is less than it was three years ago…This would be even greater cause for concern if the global slowdown turns to be more pronounced this time around.” Bottom line, Lagarde was telling the African nations to make sound and strategic preparations for the future and to manage their resources wisely. This was another indication of the need for nations outside of Europe to make serious preparations (not to squander valuable resources and time) for a possible massive slowdown in the global economy. CHINA AND THE EU As the largest global holder of foreign-exchange reserves ($3.2 trillion) special emphasis was placed on China to help prevent a global “domino effect” from occurring in the event of a meltdown in Europe. China was not immune to the idea; however, it was moving cautiously and carefully choosing specific investment targets. It had been burned before on investments in Morgan Stanley and Blackstone. In the case of the latter, China paid $3 billion for a 9.4 percent stake (in 2007) in private equity firm Blackstone. The share values in this firm collapsed in 2008 and produced a significant lost. 162 Global Economic Boom & Bust Cycles

As the world’s fastest growing major economy and exporter, China knew that it had a critical role to play and was thinking in a global context; the question was to find the right formula to fit the select contribution. The EU is China’s largest trading partner so this was a serious matter regarding the health and vibrancy of its export markets. If Europe collapsed, China would not be spared: it has an enormous stake in the EU and several European countries. A deep slump in global trade will bring about a low performance in China’s export markets. Fostering goodwill and taking on the role as a global power broker was of interest to Chinese leaders, but it required a pragmatic approach that would also present benefits and opportunities. What would China get in return for its hard earned financial resources? China, like the other BRICS nations, was not interested in making direct purchases of sovereign debt of the troubled euro zone nations. In addition, the BRICS nations, in choosing the IMF as the preferred platform for aid, were pushing for a louder voice and bigger role in the IMF. The European crisis clearly presented an opportunity for these nations to realize that goal. In the case of China, a plan was approved in 2010 to make this economically vibrant nation the third-strongest voice in the IMF. Global analysts pointed out that China needed two critical things: (1) A greater voice in the IMF and (2) Market economy status which would provide protection from anti-dumping duties on imports from China in the EU. In November, Christine Lagarde traveled to Beijing on a two day visit to discuss China’s contribution to the global crisis. She warned that “the world risked falling into a downward spiral if there was not a global response to the 2-year debt crisis in Europe.” There was a strong call for China to contribute to the fund supporting troubled governments. Klaus Regling (head of the EFSF) had visited Beijing in October on the same mission requesting help. Regling requested a pledge of $100 billion (71 billion euros) and was essentially turned down. China did not commit or agree to the offer. To China and other major investors, the EFSF looked unstable and un- tested in a grossly uncertain debt crisis: there were no clear terms or structure, and there was still unresolved issues regarding leverage and guarantees. On her trip to Russia for financial aid, Lagarde was told that Russia would not invest in the EFSF but would consider the IMF option. Regarding the possible purchase of Eurobonds as a way to respond to the crisis, Russia’s Deputy Finance Minister, Sergei Storchak stated, “Our state procedures do not allow for that. We don’t have a mechanism (for that) not in Russia, not in China, not in India. We all have different ways of making decisions, we cannot syndi- cate our money.” Christine Lagarde, also traveled through Central and South America on the continued mission of acquiring resources for the European crisis. Several nations assured her that “if circumstances require, the G-20 will commit the resources that are necessary for the IMF to play its systemic role.” At the G-20 meeting in mid Octo- ber, the organization promised to ensure that the IMF had enough resources to do its job. In Brazil, Finance Minister Guido Mantega commented: “I believe that European countries do need funds from Brazil to buy bonds…They have to find solutions to the European problem within Europe.” Brazil signaled that it would consider the IMF as a vehicle for aid to euro zone countries. Again, the focus was on supporting the IMF as a main driver in resolving the debt crisis, not euro bonds or other funds or facilities. At the G-20 summit held in Cannes, France during the first week of November, the European debt crisis dominated the discussions at the two-day summit. The call for a global response to a global systemic crisis was made, but the leaders were not motivated or in a position to provide major financial assistance. These leaders were hard pressed fighting many problems at home. And again the IMF was submitted as the organization that could provide greater assistance. Despite the enormity of the potential European meltdown, systemic risk and financial contagion, these nations had to first consider their own unresolved home-base problems before providing resources for the euro zone. One big question being asked is why these countries should pour their financial resources into the euro zone when Germany and others had been reluctant to commit en- 164 Global Economic Boom & Bust Cycles tirely to the ongoing debt crisis? Lack of confidence and gross uncertainty regarding European policies and structural design kept many sitting on the sidelines and promoting the IMF as the savior. MAJOR BANK FAILURES OF 2011 Dexia (with assets of $707 Billion) was the first major Euro- pean bank to receive a bailout in 2011. This French/Belgian banking giant had also been bailed out during the 2008 meltdown. Clearly, Dexia was deemed Too Big To Fail. Three months prior to the collapse of Dexia, European Regulators conducted a stress test on Dexia and the company received a clean bill of health. Analysts stated that the test was inaccurate, and it some cases, a joke. Passing marks were given to banks that did not deserve them. What is clear is that they missed a few things, had faulty assumptions about the future and risk levels. This was a big bank that required bailout assistance from two governments. Both France and Belgium pledged to participate in the rescue effort. Dexia’s problem came down to the firm’s inability to get access to needed funding in the credit markets and essentially got caught in a credit crunch. International lenders began to question the stability of Dexia, as well as, the mass uncertainty in Europe and the euro. This was similar to 2008 as issues of toxic assets, derivatives and liquidity rose to the surface. European banks are holding trillions of dollars in EU sovereign debt and much of it may never be paid. France and Belgium took the position that Dexia would not be allowed to collapse. A plan was quickly put together to provide plenty of liquidity, separate the assets, sell some of the healthier operations and quarantine the toxic assets in a state-supported bad bank. This was a clearly defined plan to prevent a full scale banking crisis and contagion in the euro zone. As of October, some European banks were still piling on debt, leverage and risk; these would be the future casualties in this ongoing crisis. MF GLOBAL Holdings Ltd was the next major financial institution to fail due to the European debt crisis. The company filed for European Soverign Debt Crisis 165

Bankruptcy protection on October 31st and quickly became one of the largest corporate bankruptcies (by assets) in U.S. history. A mandatory regulatory filing revealed that the operation had been making risky investments in the euro zone debt crisis, principally in Italy, Portugal and Spain. The disclosure initiated credit rating downgrades and investors pulling their money out of the company. Not only was the company involved in what many analysts considered reckless bets on the euro zone crisis, but was also grossly over-leveraged to the tune of $40 of liabilities for every $1 of assets. Due to the size of MF Global and the scope of its operations, the collapse was contained and did not generate contagion on a global scale like Lehman in 2008. Some analysts and observers described the downfall of the company as “spectacular recklessness” and gross incompetence by the CEO, Jon Corzine. EURO ZONE DILEMMA The European sovereign debt crisis is a quagmire of toxic waste, CDS contracts, derivatives, broke governments, collapsing banks and over-indebted entities. A conflagration is in the making that could engulf the entire world. Politicians are running hard to find a way out of this nearly four-year old crisis. A stark choice may be that the EU needs to forge deeper macroeconomic integration or risk a total collapse: the euro zone may not last much longer without such a remedy. What has emerged is whether the EU can continue its march towards the grand vision for economic and political union; will the EU continue to integrate and forge a federal system or disintegrate and collapse? On top of all this is the specter of a demise of the euro igniting an era of chaos, civil war or worse. With some countries feeling that joining the euro zone was a mistake and feeling trapped in the euro, discussions have been held suggesting the formation of a new core of euro zone countries that could save the euro; a group of countries that are more committed and economically capable of living within the guidelines of the treaty. Finding a solution to allow a nation to leave the euro zone without 166 Global Economic Boom & Bust Cycles deep economic and financial ramifications is a challenge and will require a much longer time frame to arrive at a solution: creation of a plan and strategy to orchestrate a controlled default of an insolvent government. For any country to suddenly attempt to quit the euro and the euro zone would create massive problems for the global economy and that is the main dilemma of this crisis. The economic plight has also brought to the surface design flaws in the EU organization plan that sought to join together incompat- ible economies in a system that has faltered under the strain of op- posing economic systems. On one hand, you have nations that have over spent and over borrowed without limit which created an opportunity for abuse. On the other hand, there are nations that have walked the line and followed the discipline laid out in the treaty and they have been forced to bail out the weaker economies in order to prevent contagion. What follows is harsh austerity programs in the weaker member states and resentment on all sides. For most of these nations (Greece, Portugal and Spain) austerity programs do more harm than good, driving them to a point of economic life support status (bailouts to survive). When the economic paralysis begins in an uncompetitive country, the course of events is similar; a cycle is set in motion. As a debt expansion swells to a point where credit dries up; a credit crunch leads to a slowing economy and decreased consumption and businesses begin to fail. Banking and other financial institutions will then begin to make credit more difficult to acquire in order to avoid bad credit risks. With less economic activity comes less tax revenues for governments, making it harder to service debt. This set of circumstances leads to larger budget deficits as governments have to borrow more money in order to continue to function. A debt ceiling is reached and a government is either forced into bankruptcy and default or a bailout scenario. In the grand scheme of things, the entire global economy runs on credit. When there is a significant bursting of a debt bubble, things can go completely haywire very fast with bank runs, derivatives un- European Soverign Debt Crisis 167 winding, CDS contact payouts, global money markets freezing up, interbank lending dries up, private and public defaults and social and political instability. Sovereign debt would be dumped like toxic waste matter and investors would fly to whatever is perceived as safe investment havens (precious metals, fire sale real estate deals, cash and other hard assets). In the case of the euro zone, a scenario like this could quickly lead to dissent and a loss of belief in the European Union. Without a quick recovery mechanism, the economic system would grind to a halt, and with it, much of the global economy: dominoes (weak economic and financial entities) will fall all across the globe. WHAT OTHERS ARE SAYING Presented in this section is a brief selection of what other analysts, economists, policymakers, etc. have stated in interviews or presented in articles or books about the euro zone crisis. According to a report put out by UBS, “Under the current structure and with the current membership, the euro does not work… Either the current structure will have to change, or the current membership will have to change.” The UBS report noted that when a collapse of a modern fiat currency monetary union happens, some form of authoritarian, military government or civil war follows. The collapse of a currency is a grave affair and could lead to very dire consequences. UBS recommends: creation of a stability fund and central bank purchases in the bond markets of troubled assets. Former Federal Reserve Chairman, Alan Greenspan, shared his thoughts on America, the European crisis and recession. The prospect of another recession in the U.S. depends on what happens in Europe: “Europe is very critical to the United States in the sense not only do we have a fourth of our experts there, but more importantly, significant proportion of the foreign affiliate profits, in fact half of U.S. corporations are in Europe.” In another interview he warns, “What’s driving the United States at the moment and to a very large extent is Europe…the size of the problem coming from Europe, I don’t think, can be overestimated.”8 168 Global Economic Boom & Bust Cycles

European Commission president Jose Manuel Barroso stated that “This is a fight…for the economic and political future of Europe.” Economist Paul Krugman has these observations on the euro zone plight: “More expansionary fiscal and monetary policies by Europe’s stronger economies is needed to help solve the problem…When the lending boom came to a close and the music stopped, recession and economic decline entered the picture. A brutal recession drove down tax receipts and business activity, increased unemployment and bank bailouts... Harsh austerity programs actually make matters worse...Where do jobs and growth come from in a situation of brutal austerity?” The Economist offers this message: “Next to quelling the crisis, the single most important task facing Europe’s economies is to grow…In order to do that, they need to improve their competiveness. And the best route to improved competiveness is to streamline the public sector and overhaul the markets for labor and services.”9 The Organization for Economic Cooperation and Development (OECD) stated “the euro zone crisis has become the greatest threat to the global economy” and has called on EU leaders for decisive action to end the crisis. Renowned investor, George Soros, stated that the EU needs three things: “a central authority, Eurobonds, and an exit mechanism for failing countries.” He further comments, “This crisis has the potential to be a lot worse than Lehman Brothers.” Super investor John Paulson, President of Paulson & Co. Inc. (a $23 billion hedge fund) made these remarks in his year-end letter sent to the company’s clients: “We believe a Greek payment default could be a greater shock to the system than Lehman’s failure, immediately causing global economies to contract and markets to decline…It seems likely that the pressure to keep the euro together becomes too great and it ultimately falls apart.”10 Observations by Bill Gross, manager of Pimco’s $252 billion Total Return Fund (the largest mutual fund) are informative and shed light on crucial policy issues in the euro zone economic struggle: the focus on austerity measures with “no growth” policies. Euro zone European Soverign Debt Crisis 169 countries are reducing their budget deficits, however, their economies are shrinking. As a major bond investor in the global marketplace, Gross has to make decisions on where to park Pimco’s funds and get a safe and strong return. In an interview, Gross was questioned about purchasing bonds in the euro zone: “We do look at debt levels. It matters. But a bond investor has to look at economic growth, too. If a country can’t grow its way out of a predicament, we won’t go there. That’s why we’ve stayed out of Europe for the most part.” When questioned what it would take to buy bonds in one of the troubled euro zone countries, Gross responded, “It takes economic growth, honestly. And it also takes policies that last longer than one or two months. We haven’t avoided Europe entirely. We invest in Germany and France. But we avoid the bad boys and girls because there doesn’t appear to be a growth solution to these countries’ problems.”11 Growth is a critical factor! In a speech given at the World Economic Forum in China 2011, former U.K. Prime Minister Gordon Brown commented, “The euro cannot survive in its present form. It’s going to have to be reformed dramatically.” This assessment was also reached by a group of former policymakers, independent thinkers and academic scholars, who essentially agreed that a new core of EU countries would be formed out of the crisis: the makeup of the euro zone would have to change and a new requirement would be the removal of Greece. The governor of the Bank of England issued this dire warning, “This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever.” According to Carl Weinberg, chief economist at High Frequency Economics, the debt crisis will lead to “a depression, soaring unemployment, deflation and zero interest rates for some time…The PIIGS nations are sitting on 3 trillion euro debt…The euro could decline to 50 cents in the process… Banks will stop lending…Worse case scenario, banks will fail and no credit at all will be available in these countries. Gold will be the safest haven, also the economies of China, India, and South Korea would benefit from capital flight. There will be no place to hide.” 170 Global Economic Boom & Bust Cycles

Economist Barry Eichengreen refers to a possible collapse of the euro as, “the mother of all financial crises.” In her December visit to the continent of Africa, IMF Managing Director, Christine Lagarde, commented on the December 8-9th EU Summit in Brussels and concerns about 2012: “The December 9 summit wasn't detailed enough on financial terms and too complicated on fundamental principles…It would be useful for Europeans to speak with a single voice and announce a simple and detailed timetable…Investors are waiting for it…Grand principles don’t im- press.” She acknowledged that the summit provided a temporary calm to the markets and that investors were still unsettled about the debt crisis in Europe. She again warned that “The world economy is in a dangerous situation.”12 UP AGAINST A WALL WITH FEW OPTIONS With so much at stake, it is reasonable to assume that the power brokers of the world will do everything within their power to prevent the collapse of the euro. Thus, it’s impossible to predict what could ultimately be the economic trigger event that could bring about a euro collapse or massive euro zone crisis. Versus 2008, Europe of 2012 is now at the epicenter of the global debt crisis with enormous potential for a global meltdown. In the event of an EU collapse, each nation would return to their previous currency prior to 1999. The euro could descend to the 50 cent to 70 cent range in the $4 trillion (daily trading volume) global currency market. Major currency traders will not hesitate in bringing about a rapid decline in the value of the euro; it would represent a prime opportunity to benefit from its decline. No one should underestimate this, when blood is in the streets, the jackals, hyenas, vultures, and lions will come for the kill and the euro will be the feast! Like an earthquake, this is something that is very likely to happen without warning. A sudden collapse would most likely be followed by a declaration of a European bank holiday in order to slow the rapid pace of events. History tells us that in 1933, President Roosevelt declared a bank holiday for an entire week, during which European Soverign Debt Crisis 171 time his administration made preparations to pass new legislation, the Emergency Banking Act. The Federal Reserve System also took that valuable time to recapitalize the banks with fresh currency. As will be discussed in the chapter on natural disasters, a bank holiday was declared after 911, along with the closure of the stock markets. Thus, one scenario envisions a declaration of a bank holiday with a period of one to two weeks of enormous chaos in the markets while governments, banks and global central bankers coordinate a recovery effort. In the end there will probably be massive reforms, sovereign debt defaults and bankruptcies. So, it is wise to hope for the best, but it is also wise to make preparations for what may become a nightmare scenario of global economic collapse. It is better to be prepared and not have something happen than to be unprepared in the face of a sudden economic time bomb that was triggered by some small out-of-the-blue issue. SUMMARY ANALYSIS The basic mission of this chapter was to provide a fundamental analysis of the unfolding nature of the euro zone crisis, and to that end, present a likely scenario of future developments. As a collective body of nations, bound by history, culture and war, the Euro- pean Union may be on the verge of collapse, and this would represent a much larger event than the collapse of the Soviet Union in the early 1990s. For over the past 500 years, Europe has been in the center of many global events and this now appears to be a historic finale, an apex from which the Europeans will either move to consolidate economic power and political will (a federal system of member states) or collapse and revert to nation states with a diminished influence in global affairs. This is what we are witnessing: the birth or collapse of a global empire. After decades of planning and or- chestration, the power brokers and architects in the background are trying to figure out how to make this thing work, how to consolidate this massive power base. 172 Global Economic Boom & Bust Cycles

This analysis has tried to point out the various complications in this process, some glimmers of hope and the enormous risks that are tied into the over-leveraged global economy. There are enormous political, social, economic, financial and technological complications involved in this unfolding drama. Internal and external forces will drive the EU to the brink of further integration or disintegration. And out of this process will be forged a new global reality. In 2012, the PIIGS countries were still caught in a vicious cycle of forced cutbacks, brutal austerity measures, declining economies and growing deficits. And the crisis began (again) spreading from the peripheral nations to the center hitting the Netherlands, Germany and France. The populations in these nations are tired of the endless bailouts, harsh austerity measures and the long-term suffering for the euro. Many people were beginning to question the entire concept and validity of the European Union and the euro. In France, Nicolas Sarkozy was defeated at the polls in his bid for a second term in office, and Greek voters (in their May 6, 2012 election) slammed the brakes on further pain and suffering in their bid to end the economic depression. And when we look at the issue of the EU and globalization, the question arises, how successful will the EU continue to adjust to the persistent internationalization of lower wages in the global labor force? In early 2012, the euro zone unemployment rate was stated as 10.3 percent; however, the rate in Spain was well above 25 percent and higher still elsewhere. And consider the technological advances of robotics, the Internet and other information age improvements (discussed in Chapter One and Chapter Eight) in regards to the impact on the American worker. All developed nations will have to adjust to the technological and economic forces of the new global age. Moving forward, globalization will force Europe and the euro zone to make some tough choices that will collide with the social and political designs of various nations. Since the boundaries of risk, debt and leverage have been stretched beyond capitalistic reason (excessive greed) the proposition of default and collapse may be the European Soverign Debt Crisis 173 sensible way to go in order to establish a foundation for a new recovery period. This chapter also considered the deep economic connections between the EU and the United States. Are the destinies of these economic powers intertwined in a way that a collapse in one power will lead to a direct or indirect decline in the other? In this current crisis, I would argue in the affirmative that the decline in one will lead to some level of decline in the other. Over the past 20 years, the growth and development of the global economy has strengthened the connections and deepened the technological and financial ties. And since the euro and the euro zone is under enormous pressure, the United States and the dollar has benefitted from the crisis as investors seek safe havens in less damaged economies. International investors are continuing to buy (or park their money) in U.S. Treasuries with extremely low yields; how long this will last is very hard to say. However, the chaos in Europe has bought the U.S. some valuable time to get its house in order before the next major meltdown hits global markets. I argued in Chapter One (“America at the Cross- roads”) that, among other things, the U.S. Government and the Fed- eral Reserve System should use this valuable time to solve the housing crisis and to move aggressively ahead with the New Deal En- ergy revolution initiated by the Obama Administration in 2009. Some analysts have attempted to compare the economic collapse and deep recessions of Japan and its impact on America with that of EU crisis. In the chapter on Japan, I go into great detail on the rise and fall of the Japanese juggernaut and the fact that its decline did not have a negative impact on the economic performance of America. Japan’s downturn began in the early 1990s (and would last for nearly two decades) however, by the mid 1990s, America had begun what would be one of the greatest boom and bust eras in economic history: the Dot Com and Internet Era. Thus, there was a de- coupling of Japan’s decline from that of America’s economic stardom. The financial capital of the world moved from Tokyo to New York and smart capital followed in tandem. In a world of financial 174 Global Economic Boom & Bust Cycles choices, America became a safe haven and the center of the next boom era. The issue in 2011-2012 is whether a downturn in the EU would generate a similar de-coupling of the two economic powers, America and the EU. Based on the fundamental issues raised in this chapter, the European crisis would not be de-coupled for the following reasons: (1) the global debt crisis has swelled to an enormous level (2) banks, nations and individuals are over-leveraged and will continue to go through the process of de-leveraging (3) there is the unknown factor of multiple trillions of dollars of derivatives that will unwind in a collapse (4) there are unknown quantities of over-the-counter CDS contracts that will be triggered upon the default of sovereign debt (5) the anticipated negative impact of a collapse of the euro as the second leading reserve currency of the world (6) American export markets will be hit hard by a EU slowdown and recession and (7) a slowdown in American EU bound exports will exacerbate the unemployment problem in the United States. In the short term, the chaos that follows could witness the dollar benefitting from a euro collapse and America viewed as a safe haven. On the other hand, America has its own economic problems which may begin to unravel quickly during a euro zone triggered global economic collapse. This is the complexity of the problem and why there is a strong chance of a global collapse engulfing many nations throughout the world. As the political crisis deepens in Europe with opposition parties drawing the line and circling the wagons on their positions, external forces will enter the battle and influence the economic and political outcomes. The rating agencies (with their new posture of following their guidelines and being impartial) will be watching carefully for any weaknesses and lack of political will to solve difficult problems. They will act to downgrade euro zone countries that fail to tackle the big issues of the day. The markets and investors will also weigh in on this ongoing struggle, and like vultures and opportunists, take full advantage of the situation no matter which direction it flows. Socialist President Francois Hollande and his team will bring European Soverign Debt Crisis 175 a new agenda to the EU table and attempt to persuade Angela Merkel and the Germans to make some radical changes. Some compromise will likely occur, but nothing major. President Hollande will have to contend with some major economic and political realities, which in some cases, will force him to make decisions that are not closely aligned with his political agenda. I agree with the observations of Fredrik Erixon, head of the European Centre for International Po- litical Economy in Brussels, as he pointed out what Hollande will be faced with and what will be the Merkel and German response: “Merkel is just going to lean back and watch Hollande jump into the icy water and try to swim…He’ll soon realize his predicament because financial markets are going to do to France what the French electorate didn’t do. Investors can handle good or bad news, but they hate uncertainty.”13 Finally, what emerged from the elections of May 2012 and other events earlier in the year, was the realization that the European Union was at the crossroads. Similar to the Arab Spring of 2011 which witnessed the symbolic suicide of Mohamed Bouazizi of Tunisia (who set himself on fire in December 2010) the symbolic suicide death of Dimitris Christoulas of Greece (who shot himself in the head in April 2012) may have been the turning point or a defining moment for Greece, and by extension, the euro zone. What has become clear in 2012 is that the distinction between those who support austerity measures and government cut-backs, and those who don’t, had started the political phase of a major transference of power. Po- litical parties that had been fervently against the depression era policies were starting to acquire seats of power. By May 2012, the majority of the people of Greece had reached the tipping point in favor of “anti-austerity measures” and “pro-growth policies.” The unthinkable was clearly on the table; Greece was on a path to leave the euro! However, if Greece leaves the euro, other countries (Spain, Portu- gal, etc.) are likely to follow. This power struggle in the EU will ultimately decide the fate of the euro, and by extension, the fate of the global economy. Nothing and no one will be spared when this crisis finally unfolds. 176 Global Economic Boom & Bust Cycles

NOTES (1) Eva Kuehnen, “Greek haircut was a terrible mistake”: ECB’s Orphanides, Reporting by Michele Kambas, Reuters, December 5, 2011, Online. (2) This was a rigged event that on the surface and in the media, Greece was not originally in default, however it really was in default. In March 2012, Moody's declared that Greece had defaulted on its debt and gave the following reasons for their decision: “This is because (i) the exchange amounts to a diminished financial obligation relative to the original obligation, and (ii) the exchange has the effect of allowing Greece to avoid payment default in the future.” In addition, the ISDA finally declared Greece in default but only after investors had pared down their positions and the final netting of outstanding swaps had been completed. With about $5-$6 billion (principal coverage) left in outstanding claims, CDS holders finally got paid. (3) Erik Kirschbaum, “Suicides have Greeks on edge before election,” Reuters, April 28, 2012. (4) Sharon Smyth, Neil Callanan and Dara Doyle, “Madness in Spain Lingers as Ireland Chases Recovery,” Bloomberg (online), May 2, 2012. (5) Stephen Burgen and Phillip Inman, “Spain faces crisis of huge proportions over unemployment and banks,” Guardian News and Media Limited, April 27, 2012. (6) Raphael Minder, “Spain’s voters turn right in face of debt crisis despair,” The Sacramento Bee, November 21, 2011, pg. A5. (7) Briefing The euro, “Beware of falling masonry,” The Economist, November 26, 2011, pg. 81. (8) “Greenspan: Greek Default Likely as Europe ‘Very Dangerous’,” Interview with Alan Greenspan by CNBC, October 7, 2011, Online. (9) “Destructive creation,” Special Report: Europe And Its Currency, The Econo- mist, November 12th-18th, 2011, pg. 6 (10) Saijel Kishan, “John Paulson Says Greece May Default, Spurring Euro Breakup,” Bloomberg, February 15, 2012 Online 12:28 PM, pg. 1. (11) Matthew Craft, “’Bond king' says cuts alone won’t aid Europe,” Sacra- mento Bee, May 10, 2012, pp. B6-B7. (12) “IMF’s Lagarde warns global economy threatened,” Reuters, December 25, 2011, Online. (13) Leon Mangasarian and Tony Czuczka, “End of Merkozy Leaves Franco- German Gulf as Greek Voters Rebel,” Bloomberg News, May 6, 2012, pp. 2. BOOM AND BUST CYCLES CHAPTER THREE ROARING 20s AND THE GREAT DEPRESSION

“It was a well fed bull market that trotted into 1927; the Coolidge Administration’s loose monetary policy was forcing interest rates down and the money supply up.” Gray Emerson Cardiff “In the 1920s, Wall Street was a world that was really dominated by professional speculators and stock pools. These people had a monopoly over information.” Ron Chernow

n American economic mythology, the 1920s stand out as Ia remarkable decade, a unique period of history characterized by wealth, political power, new technologies, glamour, extravagance and the fulfillment of a nation’s dreams. The bull market that began in late 1924 corresponded with the gradual shifting of the world’s center of financial strength from London to New York. America emerged from World War I (the Great War) with its economic engine fully intact and no major reconstruction problems. She had been successful in capturing many foreign markets during the Great War, and emerged after the war as the leading commercial factor in the world. Strong export markets in Europe, Latin America and Asia led to a favorable balance of trade throughout the decade. A deep recession in 1920-21 plagued the nation, but this proved to be only an economic recess that slowed the forces of inflation. America’s export markets rose 26 percent from 1922 to 1929. Several global forces converged to present major opportunities and strategic advantages for American corporations and its industrial might. America was on a roll, wheeling and dealing, and building a strong economic and political base of power. It was called the Jazz Age, the age of ragtime, rapid technological developments, bootlegging, airplanes, movies, automobiles, and the swinging staccato of free living and endless possibilities. F. Scott Fitzgerald’s book, The Great Gatsby, celebrated and criticized the life-styles of the rich and famous of this period. The 1920s were

178 Roaring 20s and the Great Depression 179 made memorable by Josephine Baker, the international African American superstar who became a major sensation in Paris, France, by the Harlem Renaissance, by filmmaker Oscar Micheaux, and by Duke Ellington, one of America’s most prolific arrangers, writer, performer and producer of the Jazz Age era. The 1920s witnessed the rise of Al Capone and other gangsters, prohibition of alcohol and drug smuggling. The age of the saxo- phone, late night suppers and all night parties, the 1920s were filled with the belief of permanent prosperity in an America with endless opportunities. A feeling of optimism was in the air, a strong sense of America’s destiny in the 20th Century’s world economic order. Warner Brothers introduced the first talking motion picture in 1927 after investing $800,000 on experiments in sound films as a last ditch effort to salvage the future of their declining company. The first Warner Brothers’ sound movie released was entitled the Jazz Singer, which began the era of the talkies. This innovation paid off very well for the Brothers, for their assets increased from $16 million in 1928 to $230 million by 1930. TECHNOLOGICAL REVOLUTION IN THE 1920s Technological breakthroughs in areas of electricity, the internal-combustion engine, the film industry, mass production techniques and systems, chain store developments, aviation and in many other fields, helped to generate and promote one of history’s greatest boom and bust periods. Technological advances made it easier and efficient to mass produce a wide range of products, from toasters to automobiles. As a result of these developments, between 1918 and 1934, large numbers of newly public companies began trading and generated enormous stock market wealth. The 1920s witnessed the listing of such companies as Dupont, Chrysler, Eastern Airlines, Montgomery Ward, TWA, Goodyear, Gillette, RCA and many others. It was a pivotal era for America in the 20th Century. Many of America’s most successful corporations of the 20th Century had their birth during the Roaring 20s era. 180 Global Economic Boom & Bust Cycles

CONSUMERS AND INVESTORS Consumerism went big time with aggressive ad campaigns on all fronts. By some accounts, there was a revolution in mass marketing; the attitude of buy now and pay later becoming popular and institutionalized. Credit sales rose rapidly throughout the mid to late 20s, and by 1929 more than $7 billion of consumer goods were purchased on credit. From the early to late 1920s, consumer borrowings escalated from $2.5 billion to $8.0 billion. Companies expanded their operations and used debt for much of that expansion. They took on higher leverage in an atmosphere of extreme growth. The enormous success of the film industry during the 1920s helped to pave the way for the mass marketing concept. Consumers were enticed to purchase goods on credit by the lure of their film idols who were seen consuming goods in beautiful surroundings, on yachts, in plush apartments and at parties in grandiose mansions. The film industry and its movie stars set the styles and the pace for many of the desires and aspirations of Americans throughout that remarkable decade. The wealthy had yachts, very large mansions and an assortment of other luxury items that the public simply adored. Being wealthy meant that one was on top of the world. In record numbers, people purchased many of the new inventions of this period; the washing machines, refrigerators, toasters, air conditioners, rayon, under arm deodorants and many other innovative items. People simply filled their homes with the latest gadgets and machines. From 1918 to 1928, real wages rose 26 percent, a factor that helped to give a further boost in the consumer buying binge. For those who could afford to spend, it was a time to be extravagant. POLITICAL POWER AND EASY MONEY POLICIES The decade of the 1920s was dominated by three Republican Administrations under Presidents Warren Harding, Calvin Coolidge and Herbert Hoover. Big business and the wealthy thrived in this Roaring 20s and the Great Depression 181 atmosphere, as each administration gave significant support to New York as the center of world economic activity. The Republican Administrations implemented major tax cuts in 1921, 1924, 1926 and 1928. This gave big business and the wealthy greater incentives and more money to build major enterprises. From the mid to late 1920s, the Federal Government pursued an aggressive easy money policy which significantly expanded the money supply. Also, in order to add greater strength and control to the monetary system, in 1923, Congress approved a bill that authorized the Federal Reserve System (which was created in 1914) to undertake open market operations (this would be the beginning of the FOMC discussed in Chapter Seven). Besides making adjustments in the discount rate, the Fed would now be able to place or remove money from the banking system by selling or buying back Treasury bonds. It was a pro-business era, with each administration paving the way for the next. WALL STREET IN THE JAZZ AGE By some historical accounts, Wall Street was dominated by a small group of exceedingly wealthy men. The concentration of wealth and power was enormous, with merger activity running at an all time high. Bigness became the name of the game, as large corporations monopolized and oligopolized entire industries. Of the 25,000 banks in the country, approximately one percent controlled nearly half of the resources. Only three life insurance companies controlled the bulk of the business in that industry, while four tobacco companies held a 94 percent share in their respective market. Just nine Holding companies controlled three-fourths of America's power resources.1 While America was building its economic empire, investment fever ran high in the process. Such men as Will Durant, Jesse Livermore, Charles Mitchell, Michael Meehan, Joseph Kennedy and others were the acknowledged masterminds on Wall Street. By some accounts, Jesse Livermore controlled a fortune valued at over $100 million, while 182 Global Economic Boom & Bust Cycles

Will Durant reportedly managed $2 to $5 billion in wealth, and in those days that was a massive amount of money! Charles Mitchell, who was President of National City Bank, introduced the concept of mass marketing stock ownership to the small investor. The average American, in the pursuit of riches and following the lead of the wealthy, began to buy stock on margin the same way that he or she purchased consumer goods on credit. The introduction of financial trusts (the forerunner of mutual funds) allowed the small investor to invest in professionally managed stock funds at low fees. Low interest rates and the easy money policies of the Fed- eral Reserve and the Treasury helped to promote the speculative frenzy for all Wall Street investors. The 10 percent margin requirement lured many investors, especially in an atmosphere of an exciting bull market with prices continually going up. With the higher share prices, market capitalization went from $27 billion in 1925 to nearly $90 billion in 1929. Radio Corporation of America (RCA) was one of stocks that experienced tremendous growth during this period. In 1921, a share of RCA could be purchased for $1.50, and by 1928 the stock had hit a high of $420 per share! And a month before the crash in 1929, RCA was trading at $505 per share (adjusted for stock splits and dividends). A very popular stock, RCA became the subject of many stock manipulation schemes that were controlled and operated by small groups of wealthy investors. Greed and power were at an all time high, as investment pools manipulated stock values by buying low and selling high while generating a speculative frenzy around pre-selected stock issues. In some cases, millions of dollars were made in just a few days in these investment pools. During the boom cycle of the 1920s, many stocks experienced tremendous valuations. By September 1929, the share price of Gen- eral Motors had soared from $51 to $1,075; Dupont from $106 to $1,617 and General Electric from $168 to $1,612. Mainstream economist Irving Fisher preached the gospel of permanent prosperity, and the speculation continued. The most popular dissenting voice that warned of a coming crash in the markets was Roaring 20s and the Great Depression 183 economist Roger Babson. To the mainstreamers and power brokers, Babson was an intellectual trouble maker, but his theories on the economy would soon bear witness to the Crash of 1929. Long Cycle theorist and Russian agricultural economist, Nikolai Dimitriyerick Kondratieff, began publishing his theories in economic journals during the 1920s, which brought together the central hypothesis and critical ideas of his belief in super-long economic cycles. He based his statistical data on the capitalistic free market system, which eventually got him into trouble with the ruling communist elite of the Soviet Union. He published Long Economic Cycles in 1928. Kondratieff’s theories indicated that a downward wave was in progress during the late 1920s. In addition, in an effort to take some of the steam and speculation out of the markets, the Federal Reserve raised the discount rate three times in 1928. However, many people ignored these maneuvers and the party kept going strong. On October 29, 1929 the party came to an end. The stock market crashed and over $50 billion in paper wealth vanished in thin air. The volume of shares traded that day reached 16.5 million, and the Dow plunged 30.5 points. The Dow collapsed on that fateful day from its peak of 381.17. To the millions of people that were directly and indirectly involved in the stock market, the blow was devastating. Some people gambled all the way up to the last minute and lost everything. Others bailed out early and waited for the crash. Histori- ans tell us that Joseph Kennedy and Bernard Burach had started getting out of the stock market in January of 1928. As the acknowledged bear market strategist, Jesse Livermore shorted the market and made over $100 million in one week. In Robert Sobel’s book, The Great Bull Market, Wall Street in the 1920s, the author provides valuable insight into the events of that period. His comments on the banking system and of the early 1930s bring us closer to understanding some key issues of that era. Sobel recounts the actions taken by Mr. George Harrison (the Gov- ernor of the New York Federal Reserve Bank) during the crisis of the October 1929 stock market crash. When the market fell, Mr. 184 Global Economic Boom & Bust Cycles

Harrison used the Open Market Investment Company to purchase short-term government notes, thus providing badly needed liquidity for the markets. Low interest rates were maintained to provide the economy with low cost capital, keeping banks active. The rediscount rate fell from 4.5 percent to 3.5 percent from November 1929 to March 1930. The New York Fed strategy of easy money and open market operations restored confidence in the system. The banks were saved in the early stages, but this would not last. Sobel’s observation is important as he states, “The key to any financial crash is the banking system. If banks can remain solvent and retain public confidence, then recovery may take place.” In short, a strong banking system is the primary engine that can save the economy from ultimate disaster. However, the lesson of the early 1930s tells us that the system was not saved. Sobel tells us that, “By January 1, 1931 there was no doubt that the nation was in a depression. Corporate profits, which reached $9.6 billion in 1929, fell to $3.3 billion in 1930. American Corporations lost $800 million, and a further decline to a $3 billion loss followed in 1932...President Hoover was convinced as most that there would be no depression.”1 THE GREAT DEPRESSION For those who survived the crash and were not in debt, the 1930s proved to be an excellent buying opportunity, for America fell into a deep depression. The age of excesses and abuses was over. America and the world had to contend with the harsh reality of business contraction and economic collapse. By 1929, the corporate debt pileup in bond issues had reached $77 billion. Within weeks after the crash, thousands of people were unemployed. The crash itself had a direct impact on approximately 20 to 25 million people, which included stockholders and their families. As the following months and years ticked by, millions of people would become unemployed in what would be a steady progression of decline. At the lowest point of the decline, some 20 million people would become unemployed, bringing about enormous hardships. Roaring 20s and the Great Depression 185

By 1930, the situation was further aggravated as the central region of America was ravaged by a severe drought. The early stages of the 1930s Great Depression actually began in rural America, where small towns and farming communities began a steady decline during the latter part of the 1920s. Many farmers lost their farms as hard times swept throughout the farm belt regions. The great drought of the 1930s coincided with the difficult times of the Great Depression. The destructive force of the Dust Bowl swept through the Mid-West of the United States, resulting in an enormous lost of property and productive capacity. Hundreds of thousands suffered financial and economic deprivation as enormous dust storms, floods and droughts ravaged eighteen counties in the states of Oklahoma, Texas, Kansas, Colorado and New Mexico. Waves of disasters came throughout the 1930s in the form of gale-force winds, dirt storms, cloudbursts, hail storms and insect infestations.2 “The year 1933 was the worst year,” wrote author Paul Matthew Bonnifield, “...of that hard decade. Busi- ness conditions were at their lowest point. The crop was virtually a total failure and brought only forty cents per bushel. Government relief programs were promised but did not start until 1934.”3 GLOBAL ECONOMIC RESPONSE America's fall into economic collapse was a significant factor in bringing about the worldwide depression of the 1930s. By the close of the 1920s, America was producing 40 percent of the world’s manufactured goods; this was more than both Britain and Germany combined. When American producers began making drastic cuts in their purchases of raw materials, the impact was devastating to many countries around the world. As the American downturn worsened, spending and loans to the rest of the world dried up. Protectionism dealt a further blow to the fragile world economy, particularly with the introduction of the Smoot-Hawley Tariff Act of 1930 (signed into law on June 17, 1930) which closed American markets to foreign competition. Some 1,028 American economists urged President Hoover to veto the bill, but he refused. What happened after that is history, for the bill set off a chain reaction of 186 Global Economic Boom & Bust Cycles retaliation throughout the world. Economist Charles P. Kindleberger tells us that: “The signing of this bill...made it clear that, in the world economy, no one was in charge.”4 As the leading creditor nation, America did not provide the financial leadership for the world as conditions grew worse. In the final analysis, it was every nation for itself; the international economic order was in turmoil. Each nation had to pursue the best route for survival. The companies and industries that benefited the most from the inflation of the 1920s, suffered the most during the deflationary years of the 1930s. By mid-1932, many stocks had experienced major declines. RCA fell from its lofty high of $505 per share to $18; Gen- eral Electric from $396 to $28; Montgomery Ward from $467 to $4. Decline in commodity prices ultimately drove down business profits and security prices. Banking institutions that had over-lent and were left holding uncollectible loans, were forced to close their doors. A house of dominoes fell; decline in one sector of the economy rapidly affecting another. JOHN MAYNARD KEYNES In the midst of the Great Depression British economist, John Maynard Keynes, published The General Theory of Employment, Interest and Money in 1936. In his book Keynes set forth his prescription for getting the forces of the capitalistic system moving again. A main concern on everyone’s mind was how to regenerate a sluggish world economy. Keynes stepped forward with the first real idea of what had to be done. According to Keynes’ analysis, the classical economics of Adam Smith, J.B. Say and David Ricardo could not alone be expected to resolve the deep contraction in the capitalistic system. The theory of supply and demand (the driving force of classical economics) had broken down and required some type of boost or stimulus, for large numbers of businesses and households were forced to cut back on expenditures and, hence, demand. He recommended that government provide the needed capital to accelerate demand by implement- Roaring 20s and the Great Depression 187 ing a deliberate deficit spending program. By using this procedure - along with tax reduction - the system would begin to regenerate itself. Keynes’ theory advocated that governments run budget deficits during economic downturns and budget surpluses during upswing periods of prosperity. The ideal system envisioned a situation of low growth inflation and a steady flow of output without steady increases in prices. Government intervention would be consistent with the theory and not counter-productive or ill-timed. The Keynesian approach was applied in the United States, Brit- ain, Germany, Japan and other countries in the Western world economic arena. Things began to move, but very slowly. THE 1937 FISCAL AND MONETARY AFFAIR During the period from August 1937 to March of 1938, Mortimer Eccles, Chairman of the Federal Reserve, Henry Morgenthau, Jr., Secretary of Treasury and Franklin Delano Roosevelt (FDR) engineered economic tightening policies that literally derailed the economic recovery that began under the New Deal. After FDR implemented the New Deal in 1933, the economy began a recovery for three years, but was stopped as a result of the Federal Reserve clamping down hard on lending and the government instituting 10 percent cutbacks in Federal government spending. This resulted in economic contraction in 1938 with industrial output plunging 33 percent, share prices dropping by nearly 50 percent and the onset of a new high unemployment rate. In short, it’s very likely the American depression of the 1930s may have ended a lot sooner had it not been for the government’s strategy to balance the budget at a time when the economic engine needed stimulus and continuous growth initiatives. When World War II entered the picture, the deadlock of the 1930s depression ended and a new upswing cycle was initiated through the massive requirements of a war economy. Thus, Keynes’ theories provided a significant insight in resolving the crisis, however, the stimulus needed to be applied consistently throughout the downturn until there was clear evidence that the economy was in a recovery mode. The 1937 episode illustrated what would happen when the Keynesian 188 Global Economic Boom & Bust Cycles prescription was removed prematurely. In the end, it would take the onset of a world war and a massive mobilization of the entire U.S. economy to put the system back into full production mode. After the war, President Truman instituted Keynesian economic policies in order to deal with an impending recession. Following this, fiscal intervention by government during the 1950s provided a steady course of economic stability by utilizing a consistent approach of the Keynesian model. Proper application of the model followed the ebb and flow pattern of governmental deficits and surpluses. By the time the 1960s arrived, a different strategy entered the picture. In retrospect, it can be seen how the boom period of the 1920s led to the bust period of the 1930s. The catalyst was the crash of 1929 and what followed was a deflationary downward spiral of aggregate demand, money supply and asset prices. By 1932, the total market value of the New York Stock Exchange had fallen from a high of $90 billion (in 1929) to $16 billion. GNP plunged 46 percent in just four years; nationwide unemployment reached 25 percent and ordinary Americans were forced onto the streets, fighting for survival. In addition, the money supply shrank by 33 percent as businesses and households drew down bank accounts to pay back loans. As a result of these actions, bank deposits fell by 30 percent, or $17.7 billion in the first four years of the 1930s. For the more than 600,000 stock market investors who had bought stocks on margin during the boom period, the crash initiated the unwinding of their positions. Here again, asset prices had fallen and these investors began the process of paying off their debts. The speculative frenzy, greed, and excesses of the boom years exceeded rational boundaries within the system. According to Charles P. Kindleberger, the boom/bust cycle is characterized by a psychology of manias and panics. In his words: “In the mania phase, people of wealth or credit switch out of money or borrow to buy real or illiquid financial assets. In panic, the reverse movement takes place...in whatever has been the subject of the mania.”5 When the panic phase begins, bonds, stocks, real estate, commodities, options, and other types of real or illiquid investments begin to lose value as Roaring 20s and the Great Depression 189 investors flee into liquidity or cash. It is a clear sign that the speculation fever has ended and the markets are adjusting to a more normal phase of activity. Thus, the economy is purged of maladjustments, miscalculated investments, and the bloated excesses that finally brings about a collapse in the system. But as we know, that is not the end of the story. That was the bust end of a cycle, and a period of transition in preparation for the next boom period. THE BANKING SYSTEM The total number of bank failures in 1929 was 659. In 1930, over 1,300 banks collapsed, leaving the overall banking system in serious trouble. Another 2,300 banks failed in 1931, and in 1932, 1,453 bit the dust. Between 1929 and 1933, 10,000 U.S. banks failed. And in 1933, the entire banking system collapsed in America. The unemployed in 1929 numbered 1,550,000 people and by 1932, the number had swelled to 12,060,000.6 Thus, as banks collapsed and corporations were forced to cut back or close down, unemployment figures skyrocketed. In January of 1933, Adolf Hitler became Chan- cellor of Germany, and Franklin D. Roosevelt became President of the United States of America. Under the Roosevelt Administration, the New Deal policies were instituted, which established major economic reforms atoning for the sins of the deregulated 1920s. New Deal reforms coupled with Keynesian economic principles, struggled to revive the sluggish economy of the 1930s. But it was not until World War II that America began to truly climb out of the pit of depression and into a new period of economic growth and development. She would again emerge from a Great War with no major reconstruction problems and this time as a much greater super power. Most of the financial safety-net programs designed to prevent a major collapse or bank runs were brought into existence during the early 1930s in response to the crippling effects of the Great Depres- sion. The 1933 Banking Act gave us the FDIC, which President Roosevelt and Congress designed as a 100% federal deposit insur- 190 Global Economic Boom & Bust Cycles ance program. The purpose of the program was to safeguard deposits and prevent a breakdown of the financial system. In 1934, Sav- ings and Loans were provided with a similar protection, the Federal Savings and Loan Insurance Corporation (FSLIC). Federal guidelines for the S&Ls restricted their lending to 30-year, fixed-rate home mortgages, and they were not allowed to pay more than a 5-1/2 percent interest rate. The 1930s also witnessed the establishment of the Glass-Steagall Act of 1933 which legislated the division between Commercial Banks and Investment Banks, setting up a FireWall between these entities. It was discovered that during the boom of the 1920s, banks took on too much risk with depositors’ money which involved stock market activities and investments. In addition, Roosevelt signed the Social Security Act in 1935, providing another important base of financial security to the system. THE HOME OWNER’S LOAN CORPORATION (HOLC) Created in 1933 to help stop the mass foreclosure of homes during the Great Depression, the HOLC focused on refinancing mortgages of homeowners in distress. FDR established this agency with the express goal of keeping people in their homes and stemming the tide of wholesale foreclosures during a massive economic downturn. History tells us that between 1933 and 1935, one million people received special refinanced deals and long-term loans (with good interest rates) in order to retain the roof over their heads. FDR clearly understood that if millions of homeowners and their families were forced out of their homes due to the ongoing depression, the kind of economic recovery his administration was seeking would not come to pass: the Roosevelt era went to the root of the problem! In part, New Deal policies focused on bailing out the American homeowner, and this proved to be a very successful long-term strategy. Reformers throughout FDR’s Administration understood what they were dealing with; this was a prolonged economic downturn that required an extraordinary response from the federal government. Roaring 20s and the Great Depression 191

We now know that the 1930s Great Depression was a prolonged Balance Sheet Recession (depression) where households and businesses were locked into paying down debts and cleaning up their balance sheets. This wholesale retrenchment by a vast majority of the population had (in the 1930s) a severe impact on demand for goods and services, which resulted in a massive economic downturn. Since the Meltdown of 2008, America, and by extension, much of the developed world (particularly Europe) has been in a Balance Sheet Recession. The mortgage and foreclosure crisis is the root of our problem and requires an extraordinary response from the federal government and the federal reserve system. The Obama era needs to establish an agency similar to the HOLC to address the devastation of the current foreclosure crisis in America. Economic policies that fail to go to the heart of this matter will not be in the best interest of the American people or an Obama era economic recovery. SUMMARY/ANALYSIS Prior to the 1920s, the last major boom and bust cycle had occurred between the years 1897 to 1907. What historians refer to as the Panic of 1907 was the culmination of a boom cycle and the start of a bust period in America. In the second decade of the 20th Cen- tury, WW I (the Great War 1914-18) brought great death and destruction and left Europe in ruins. America emerged from this war with its economic engine fully intact and eager for its new mission in the 20th Century. It was also a time when the Industrial Revolu- tion was ready to bear an abundance of new innovations that would set the technological stage for a century of incredible discoveries. It’s important to note that the 1920s began with a deep recession in the years 1920-21. Hyperinflation knocked Germany to its knees in 1923, and in 1924 (the year that began the great boom period of the 1920s) there was a gradual shifting of the world’s center of financial strength from London to New York. In reference to the Japanese bubble economy of the 1980s and the bust period of the 1990s, ground breaking research by econo- 192 Global Economic Boom & Bust Cycles mist Richard Koo (2009) is now providing a new economic analysis of the Great Depression of the 1930s.7 In Chapter Five, I examine his theories in detail regarding the strong similarities of Japan’s so- called lost decade of the 1990s and America’s Great Depression years of the 1930s. According to Koo, the initial recession that began in the early 1930s was not an ordinary garden variety recession, but was (what he calls) a Balance Sheet Recession where businesses and households were focused on paying down debts and repairing their balance sheets. For 15 to 20 years, Richard Koo had an opportunity to study and observe this phenomenon during the Great Re- cession years in Japan. His final analysis is that Japan of the 1990s and the U.S. of the 1930s endured the same type of economic depression: an extraordinary boom period followed by a drastic reduction in asset prices, aggregate demand and money supply. When this happens, the private sector is more interested in getting out of debt rather than maximizing profits; which is why monetary policies that provide zero interest rates are not very effective. President Herbert Hoover began his presidency in January 1929, and his administration had to contend with the Crash of 1929 and the onset of the Great Depression. The Hoover Administration had the grave misfortune of having to deal with the end of the massive boom cycle of the 1920s. However, (just as in 2008) no one knew that the U.S. and the world was facing the greatest economic bust cycle in history. Hoover and his economic team thought that they were dealing with a regular garden variety recession (a normal business cycle downturn) but they were wrong. Hoover’s conservative Republican prescription for the bust cycle stressed a business-oriented approach which consisted of: (1) minimal governmental interference in the economy (2) maintaining a balanced federal budget (in the face of a massive economic downturn) in order to restore confidence in the business community of the soundness of the U.S. economy (3) supporting protective tariffs to protect U.S. businessmen from foreign competition (his support of the 1930 Smoot-Hawley Tariff Act led to an international trade war and the loss of millions of jobs) (4) most of his policies and pro- Roaring 20s and the Great Depression 193 grams, such as the Reconstruction Finance Corporation (RFC) were focused on helping big business and banks. There was very limited focus on helping the average American with loans, temporary financial support, refinancing mortgages, etc. and (5) a limited understanding of how to deal with deflation and the use of stimulus and government deficits to jumpstart an economy dead in the water. Bot- tom line, the Hoover Administration’s approach did not work, and proof of that assertion is the results of what happened when these economic policies were applied during the first three years of the depression. By 1933, the banking system in America had collapsed and the unemployment rate was 25 percent. This is clear empirical evidence of the failure of this brand of Republican economic policies during a major economic bust cycle. In 1932, the American people voted for change and FDR and the Democrats came into power in January of 1933. The New Deal policies of the Roosevelt era began to uplift and regenerate the Ameri- can economic landscape: millions of Americans (not just a few big banks and businesses) experienced the benefits of this new economic approach. In the election year of 2012, Americans were looking at a very similar situation: the second phase of a Great Depression (no one would dare use the D-word to describe our current crisis) and the choice between two economic philosophies and structural approaches to some very difficult problems. Based on the historical records and empirical evidence from Japan of the 1990s and America’s Great Depression years of the 1930s, the Keynesian approach, economic stimulus and doing what it takes to help the average American, is the best strategy for a long-term recovery. A final observation about the bust period of the 1930s that is central to our understanding of the current era (2012) is the significance of reforms and economic stimulus programs. In 1937, the Roosevelt Administration and the Fed implemented policies designed to reduce stimulus and promote austerity measures; this turned out to be a disaster. The end result of the economic tightening policies of 1937 was contraction and decline, and this proved detrimental to an economic system in the midst of a slow but steady recovery. This 194 Global Economic Boom & Bust Cycles is a very important lesson from the 1930s experience that must not be repeated in the current era. Chapter Five will provide a deeper understanding of this issue when we look at similar tightening policies that were implemented in Japan in 1997. In addition, America’s “Fiscal Cliff 2013” (discussed in Chapter One) presented the same difficult economic challenge. History has clearly demonstrated that fiscal budgetary policies that cut too deep and too fast will derail any economic recovery (and anemic recoveries are most vulnerable) that’s in progress, especially during balance-sheet recessions where consumers and business entities are paying down their debts and repairing balance sheets. Like the decade of the 1980s (in Japan) the 1920s witnessed a period of great innovations in various industries, supported by hordes of entrepreneurs and developers establishing new companies. Many of these companies went public as money poured into the markets. And like the rampant speculation and the huge population of investors that gravitated to the markets in the 1980s, the Roaring 20s would be founded on great optimism, enormous wealth, a culture of investors and a period of easy money policies by the Fed. The great boom cycle of the 1920s lasted for roughly five years, from late 1924 to late 1929. Similarly, the great boom period of the 1980s in Japan would last for roughly four to five years, from 1985 to 1989. Another point to keep in mind is the fact that the Fed had started raising the discount rate in 1928 and the Bank of Japan conducted a similar operation beginning in 1989, the year prior to the great crash of 1990. This is an activity that occurs prior to most major periods of decline in the markets, an event that the pros pay very close attention to. Roaring 20s and the Great Depression 195

NOTES (1) Robert Sobel, The Great Bull Market, (New York: W.W. Norton & Com- pany, Inc., 1968) pp. 38-39. (2) Paul Matthew Bonnifield, The Dust Bowl, (Albuquerque: University of New Mexico Press, 1979) p. 65. (3) IBID, p. 113. (4) Charles P. Kindleberger, The World In Depression 1929-1939, (Berkeley: University of California press, Berkeley, 1986) p.26. (5) IBID, p. 5. (6) Charles P. Kindleberger, Manias, Panics, and Crashes, (New York: Basic Books Inc. Publishers, 1978) p. 5. (7) Richard Koo, The Holy Grail of Macro Economics: Lessons From Japan's Great Recession, (John Wiley & Sons (Asia) Plc. Ltd., 2009) p. 85. CHAPTER FOUR BOOMING 80s and CRASH of ‘87

“Booms and busts are not symmetrical because, at the inception of a boom, both the volume of credit and the value of the collateral are at a minimum; at the time of the bust, both are at a maximum.” George Soros

he Booming 80s (1980s) was a remarkable decade, one that Twitnessed the creation of enormous wealth, greed, power and boldness at its best. It was a period of world revolution, of political and economic collapse of global powers, of technological revolution on a massive scale; setting the transitional stage for the Glo- bal Age of the 1990s and beyond. Future generations of historians and myth-makers will write about the Booming 80s with a rare fascination of the major accomplishments and paradigm shifts that deeply altered the status of political and economic power in the world. It was a decade of enormous change, and by 1990, America was positioned as the world’s only mega-superpower and dominant leader of the Information Age Revolution. The triumph of capitalism, the free enterprise system and the technological revolution ushered in a bold new era that was destined to reshape the foundation of global civilization. The Booming 80s (as this publication defines that decade) was a pivotal point in the 20th Century; a defining moment in preparation for the new millennium. THE AMERICAN CENTURY During the 1960s and early 70s, America spent hundreds of billions of dollars on the Vietnam War and the Great Society programs, and deficit spending went beyond the limits. For the American dollar, it was a major turning point. This critical period weakened the dollar in world markets, despite the fact that America was also experiencing its longest economic expansion in history. The Bretton Woods agreement, negotiated in 1944 by the allied powers, had placed America in the prestigious position of having a global reserve cur-

196 Booming 80s and Crash of ‘87 197 rency and as the world’s ruling financial superpower. The 1960s would be the beginning of a steady erosion of that arrangement. Enormous deficit spending simply abused the dollar and lead to an unprecedented inflation rate, and in 1971, America came off the gold standard. During the 1980s, eight years of Reaganomics produced $1.8 trillion in defense expenditures. It was the largest and most rapid military buildup in the history of this country (all during peacetime) financed by deficit spending. It was a heavy price to pay, but the strategy worked. America had spent nearly $10 trillion over a four decade period (1945-1991) defeating the Soviets in the bi-polar era. The end result was that America won the cold war while the Soviet Union and its global empire collapsed. RURAL AMERICA While America’s metropolitan areas were steam-rolling ahead in the 1980s, rural America had been in a state of steady decline for nearly a decade. During the 1970s, many rural towns and cities experienced a kind of economic rebirth and made great progress in several industries. The 1980s reversed this trend, bringing with it extreme international competition, the recession of 1980-82, technological innovation and a reshaping of global priorities. The wave of merger mania and leverage buyout acquisitions (LBO’s) during the Booming 80s generated further ruin for rural America by forcing many large corporations to sell off or close down subsidiary or branch operations in smaller towns and cities, in most cases, to lower mounting debt. Further decline in the rural economy could be seen in America’s farming industry, as international competition and weather patterns created a period of hard times. During 1988, farmers and ranchers were hit by the worst drought in 50 years. River beds, wells and creeks dried up. Much of the Missouri and Mississippi river valleys recorded less than 75% of normal rainfall. The Mississippi River reached its lowest level in recorded history, and California farmers experienced severe water shortages.1 United States House and Sen- ate bills in July of 1988 provided nearly $6 billion in disaster relief. 198 Global Economic Boom & Bust Cycles

This emergency relief package cushioned the blow and kept many farmers from going under. However, the bankruptcy of many small farmers and rural banks opened the door for large regional banks and corporate farmers to take over the industry. As a result, during this period and beyond, America would lose most of its small farmers. During 1988, dust storms (reminiscent of the Dust Bowl of the 1930s) wreaked havoc on farming communities throughout the farm belt states. Hurricanes, tornadoes and droughts caused enormous damage and hardships during the period 1988 to 1992. Hurricane Andrew struck Florida, parts of Louisiana and the Bahamas in Au- gust of 1992, and went on record as the costliest natural disaster in U.S. history. In 1992, California entered its seventh year of drought, with reservoirs at their lowest levels in 15 years. Cities and farmers were faced with some tough choices as an ever growing population competed for the scarce resources. INDUSTRIAL AMERICA America’s energy, steel, mining, timber and manufacturing industries experienced great economic hardships during the 1970s and 1980s. Plants and facilities were either closed or large numbers of people were laid off, never to be recalled again. In the case of the steel industry, the job attrition was 40 percent during the recession of 1980-1982. Even as the economy recovered, steel producing jobs continued to be lost due to the highly competitive and more efficient industries from abroad. The American steel industry had fallen behind in technological change and in the development of modern facilities and techniques. The Japanese, Koreans, Mexicans, and others had captured the world markets and were able to operate with cheaper labor costs and more efficient facilities.2 With the rapid advancement of the global economy, many corporations went abroad in search of cheaper labor costs, which meant fewer jobs for Americans in those industries. Downsizing and stream- lining business operations became a necessary strategy for many corporate entities that were intent on effectively competing in this Booming 80s and Crash of ‘87 199 new (tough and mean) global environment. America’s blue-collar workers were up against stiff competition in the internationalization of labor costs. As this new economy became more entrenched and acceptable in world affairs, more dramatic changes would take place for millions of assembly line and routine production workers in America. Wealthier Americans responded to this challenge by investing in the new global future. The 1980s increased the momentum for technological innovation. Computerized manufacturing facilities, robotics, CAD-CAM systems, and new custom-designed automated systems revolutionized whole industries in the space of one decade. Many types of job functions and routine tasks were automated, wiping out thousands of jobs in the process. Many American workers experienced job displacement and problems of retraining which became critical for both rural and metropolitan America. The unmanned and totally automated factories - run by computers and robots - was a major global trend of the future. The American oil industry was devastated as world oil prices fell in the 1980s. Oil producing states such as Texas, Arkansas, Loui- siana, and Oklahoma fell into semi-depression. In the case of Texas, a domino effect shook industries throughout its economy. During the oil-boom years of the 1970s, many people invested millions of dollars in the Houston market and other major cities throughout the state. When OPEC fell in the early eighties, Texas came tumbling down, bursting bubbles left and right in several of its markets. In- vestors pulled out of Texas, and the savings and loan, banking, and real estate industries began a period of steady decline which was still very much in progress as the world entered the 1990s. There were 200 bank failures in America in 1987, and most of them occurred in the oil depressed states. BOOMING 80s ERA Alcohol prohibition and boot-legging were significant social problems during the Roaring 20s. Along the same lines, during the Booming 80s, America was bombarded with every kind of chemical 200 Global Economic Boom & Bust Cycles drug and drug addiction known to man, creating billionaires out of drug lords all over the world. And like the 1920s, the 1980s were loose, sexy, extravagant, adventurous, and wild. People wanted instant gratification and risk-taking infected all levels of society. The promiscuous life-style was acceptable and moral standards were lowered to accommodate the freedom of choice and actions. The Booming 80s was the decade of the wealthy, of massive political, social, and technological changes. The AID’s epidemic, rampant drug abuse, merger manias, Reaganomics, Mandela-mania, Gorbachev-mania, rapid rise of billionaires, hi-tech revolutions and the greenhouse effect swept across the globe, creating a swirling fast paced kaleidoscope of events, driving the world towards unchartered experiences and territories. It appeared that time itself was moving faster: there was an urgency in the air and no one could stop it. The wealthy set the pace of developments, created the images, styles, fashions and the assortment of other creature desires that society simply mimics. Unlike the 1920s, the 1980s were equipped with an expanded array of media sources to bombard the consumer with massive doses of advertising and marketing information. The electronic message reached the consumer through network television, cablevision, the VCR, theaters, satellite dishes, radio and microcomputers. Through TV shows such as Dynasty and Lifestyles of the Rich and Famous, Americans were taught the virtues of wealth and the benefits that derive from it. Many people looked for ways to become wealthy overnight, in an atmosphere that celebrated the glamour and prestige of the rich and famous. Consumer credit skyrocketed as millions of people went deep into debt buying the vast array of consumer items in an attempt to live the fashionable life-style. It was an atmosphere that celebrated the glamour and prestige of the rich and famous. The movers and shakers of international finance were calling the shots, with America serving as the central driving force of world developments. A frantic pace of corporate developments swept through America during the 1980s and generated a vortex of deal- Booming 80s and Crash of ‘87 201 making that created the dynamics for the era of the billionaire, with the opportunity (worldwide) for successful power brokers to become exceedingly wealthy. In the July 1989 issue of Forbes magazine, the cover read “THE WORLD’S BILLIONAIRES,” with a graphic depiction of an earth made of gold.3 Forbes chronicled the personal histories and rise to prominence of 89 men, three women and 52 family groups that were worth $1 billion or more. America topped the list with 55 individuals and 27 families identified as billionaires. Japan came in second with 41, followed by 20 billionaires in West Germany. The cover story pointed out that the billionaire had worldwide influence, with vast and widely diffused financial and economic empires. The Booming 80s atmosphere helped to create both a larger base of billionaires with stronger, more dynamic centers of power. Like the 1920s, an enormous amount of wealth and power would be concentrated in a few hands, however, this time the power base was much more global in its design and much more capable of expanding its influence to all corners of the world. The TV show “Lifestyles of the Rich and Famous” glamorized on a weekly basis - the image and luxurious lifestyles of the wealthy. It was sensationalism at its best, particularly in America where the dream of becoming wealthy was perceived by millions as a remote possibility. The movie Wall Street (released in 1987) portrayed the excesses and greed of Wall Street financial architects, and the expensive lifestyles of the successful players. In this, The Age of Mate- rialism, the concept was easily sold in an atmosphere where value systems are based on acquisition and economic development. Ideals and personal philosophies of the rich and famous dominated the thinking and actions of much of America. It was an era to get rich, and for those who had mastered the game, the riches grew exponentially. MERGER MANIA After the grueling 1981-82 recession, the stage was set for a new beginning. Reaganomics and the Republicans deregulated many industries, poured government money into the financial systems 202 Global Economic Boom & Bust Cycles

(through deficit spending) and gave free enterprise the green light to pursue its destiny. Corporate America seized the opportunity in a thousand different ways: Wall Street, Main Street, banks, and the Federal Reserve created the money to make it all happen. Thus, the economic environment was prepared for the new opportunities of the decade. The explosion of corporate mergers and acquisitions during the 1980s radically altered the deal-making apparatus in America. New strategies, tactics, instruments, and schemes were utilized in the struggle for profits and power. It was corporate warfare at its best and only the strong, the well connected and the very clever survived. Fueled by Reaganomics, massive borrowings, and a raging bull stock market, the merger and acquisition game began skyrocketing by the mid-1980s. Big banks, insurance companies, pension funds and savings and loan associations provided billions of dollars for massive mergers and takeovers as America’s corporations took on a huge amount of debt throughout the decade. From 1980 to 1989, the debt level swelled from $829 billion to over $2 trillion.4 According to Mergers & Acquisitions magazine, during 1986 (a record year in the 1980s for completed merger transactions) merger activity totaled $220 billion. In 1987, the year of the devastating stock market crash that wiped out nearly $1 trillion in personal wealth, merger transactions totaled some $176.5 billion. Even after the massive crash, by November 1988, $172.9 billion worth of deals were put together! The feeding frenzy continued as global players took advantage of significant factors that kept the borrowing and buyout binge in full swing. This orgy of deal-making was reminiscent of the 1920s corporate borrowing binge that preceded the Great Depression of the 1930s. But this time, the playing field was wider and more global in scope, and the financial nerve center of the world was not New York but Tokyo. Financial fires kept right on burning, due largely to the Tokyo Connection and the cheap oil prices of the 1980s. PERIOD OF TECH SLOWDOWN: 1984-86 Economists identified a 29-month period of technology and eco- Booming 80s and Crash of ‘87 203 nomic slowdown between the years 1984-86. It was an economic transition period that accommodated lower oil prices throughout the country, the impact of global competition and overcapacity in various technology sectors. Many fields had become very crowded with too many competitors fighting for market share. The microcomputer revolution of the 1980s was the central character in this drama. By 1985, nearly 30 personal computer clone makers and over 70 disk drive companies had saturated the commercial markets with far too many products. It was the case of too much inventory chasing too few buyers, with the majority of weak competitors finally forced out of business. Strong competitors from abroad, particularly from Japan, captured significant market share from Intel Corp. and Motorola Inc. in the microchip business arena. Software shops and contract manufacturers got hit hard when IT spending fell from around 15 percent in the early 1980s to 7 percent in 1985-86. Even though the slowdown cast a deep shadow on the future promises of new technology, it was clear to insiders and analysts that a new wave of entrepreneurs and the Information Age Revolu- tion was just getting started. This is a clear example of what types of new developments were brewing in the 1980s downturn. During this downturn, many under-employed and unemployed engineers and software developers decided to go to work on their own ideas (which is something that has also happened in previous downturns and bust periods). In this particular slump, such companies as Microsoft, Cisco, Adobe Systems and Oracle began their operations. Microsoft, Oracle and Adobe Systems had major IPOs in 1986. All of these companies became multi-billion dollar corporations in the 1990s. Downturns and bust periods always set the stage for new boom periods. CRASH OF ‘87 The stock market crash of 1987 was one of the most astounding events of the 1980s. Wall Street was swept by a wave of sudden and unexpected panic, by a mob mentality to abandon the market for safer investment havens. Worldwide, people were overwhelmed on 204 Global Economic Boom & Bust Cycles that frenzied day of trading that saw nearly $1 trillion in paper wealth disappear. What happened on October 19, 1987 was an enormous correction in a market that had gone beyond its limits. The Crash of ‘87 marked the end of the mini-boom and bust cycle of the 1980s in America. The Tokyo stock market collapse that occurred during the first three months of 1990 turned out to be the most significant crash emerging out of the Booming 80s Era. THE BOOMING 80s BULL MARKET When the expansion got started in November of 1982, the Dow Jones Industrial average was just under 800 points. By August 25, 1987, the Dow peaked at 2,722.42 points, a more than 250 percent gain over the five year bull market. For long-term investors, this represented a very prosperous period. Investor optimism and speculative fever ran high when the year 1987 began. The so-called January Effect was in full swing at the start of the New Year. The Dow jumped 44 points on January 5th, 51 points on January 22nd, and 43 points on January 27th. Market gu- rus were predicting another fabulous year and investors were completely captivated by the news. One of the predictions floating around speculated that the Dow could go as high as 3,600 points, a level that promised tremendous profits for many. Some people bought stock on rumors, and if the rumors were valid, they made money. The thought of investing into another Genentech was a tempt- ing proposition. At the start of the 1980s, Genentech was the first biotechnology company to go public. On October 14, 1980, Genentech Inc. hit the markets at $35 per share and in just twenty minutes the value had increased to $89 per share! This went on record as the fastest price increase (at that point) in Wall Street history. Those who had owned substantial blocks of shares in this company were literally made millionaires in less than half an hour. This kind of success story helped to make the first 10 months of 1987 a period of euphoria in stock market activity. Between January and October, Booming 80s and Crash of ‘87 205 the Dow rose 800 points, a clear indication that the market was very hot. Fueling the speculative frenzy was an expanding U.S. money supply, which had experienced unprecedented increases during 1985- 86. In 1985, the money supply grew 12 percent and in 1986, 15 percent. In part, the 1987 stock market increases could be attributed to the enormous increases in the money supply in December 1986, which totaled $18 billion. Merger mania was rampant as rumors of takeover stocks and other corporate developments attracted investors from all over the world. The takeover boom was red hot, as skyrocketing values of company shares kept the fires burning. The total value of corporate takeovers between July and September of 1987 was $94.9 billion, and this generated a lot of excitement. Foreigners accounted for nearly ten percent of the value of shares traded on the New York stock exchange: foreign investment money poured into the markets, particularly from Japan. Large banks, savings and loans, and corporations got into the arbitrage business, pumping some $15 billion into the feverish markets. The credit spigot was wide open and investors, takeover artists, and financiers of every sort pursued the dream of quick profits and instant wealth. Large pension funds, endowment funds, insurance companies and other institutional investors kept the momentum building with their tremendous ability to orchestrate huge trading transactions on a global basis. With the new technological and financial innovations of the 1980s, large institutions were operating with huge networks of computers, telecommunication systems and sophisticated trading strategies. This concentration of financial power in the hands of big institutions generated greater volatility in the markets. With the advent of Program Trading, huge blocks of stocks were traded very quickly and the large players operated in several markets simultaneously. The reliance on pre-programmed strategies, with computers deciding the fate of the markets, was one of the major causes of the enormous drops in the stock market during the month of October. 206 Global Economic Boom & Bust Cycles

GLOBAL TRADING One of the major revelations of the Crash of ‘87 was the close interconnection of the world stock and financial markets. The emerging global economy and the power and speed of telecommunication systems gave birth to closely knit global stock market systems. A worldwide connection of stock, bond, and currency markets increased not only the opportunity for profitable investments, but also the level of volatility in market activity. In this hi-tech environment, panic and euphoria could travel very fast worldwide. Stock markets in New York, Hong Kong, Tokyo, London, Frankfurt, Amsterdam and other market centers quickly reacted to the events on Wall Street during the crash; a domino effect spreading throughout the world. In New York, the five year bull market created a financial boom period. Confidence ran high, six figure salaries were common in most brokerage firms, and money poured into the city from all over the world. Many American stocks traded on other exchanges, with American stocks representing approximately 36 percent of total stocks traded in the world. Leading economic indicators in nine major industrial nations revealed signs of strong growth rates. By the third quarter, America’s annual growth rate was estimated to be 3.8 percent. This was a favorable sign and the Fed responded by releasing another $10 billion into the system by late summer. TOKYO CONNECTION In 1987, the Tokyo stock exchange surpassed American exchanges in overall stock market value. Many Japanese stocks were selling at 60 times earnings, a condition that most analysts viewed as a case of overvaluation. Some observers expected the Tokyo market to take the initial plunge that year due to the much higher speculative bubbles developing feverishly in its stock and real estate markets. For the most part, the world's financial capitol had moved from New York to Tokyo, where profits and speculation were even more dramatic than in America. History has revealed that whenever the Booming 80s and Crash of ‘87 207 capitalistic central market force moves to a new location, a speculative bubble forms. The last major move of this type happened in the 1920s, when the central force shifted from London to New York; the result of that move was the crash of 1929. America depended on Japanese investments in the Treasury bond markets, which helped to finance the growing budget deficit. Japa- nese investments in Treasury bonds and notes totaled about $45 billion in 1985 and $70 billion in 1986. During the first half of 1987, individual Japanese investors pumped approximately $60 billion into the system. However, the falling dollar made investors question the wisdom of this strategy. Most Japanese investors began to pull away from the bond market during the second half of 1987, and this had a significant impact on the stock market. It was the Japanese central bank that eventually stepped in and filled the gap left by the more pragmatic institutional and individual investors. Japanese and other foreign investors absorbed huge currency losses on their investments with the Treasury due to an ongoing decline in the dollar. Growing concern of the continuing slump in the dollar affected the export companies of Japan. Many felt that their potential earnings would be eroded as Japanese exports to America became more expensive. The investment atmosphere became more intense as the fourth quarter of 1987 grew near. AMERICAN INVESTOR WORRIES In February of 1987, Brazil declared a moratorium on some $67 billion it owed to creditor banks in America and elsewhere. This was a bad omen for the banking community, as investors began to worry about a potential default of the South American giant. The heated debate surrounding the Iran-Contra affair began to erode public confidence in the leadership of the Reagan Administration; it was a political bomb that threatened to unravel some undesirable issues in big government. With the continued fall of the dollar, high interest rates, worsening trade and budget deficits, doubt and fear of the Japanese economic strength and the growing concern of instability on the inter- 208 Global Economic Boom & Bust Cycles national front, investor euphoria began to fade and a new reality surfaced. The real world began to influence investor psychology. To some observers, Wall Street had simply been out of touch with Main Street. THE CRASH When the Dow reached the 2,700 mark, the markets were anticipating a steady flow of good news. The peak was reached on August 25, 1987 when the Dow closed at 2,722.42. From that point onward, a period of uncertainty prevailed. The Dow experienced a series of drops the week prior to the crash. That week’s trade deficit report, a worsening of the Persian Gulf crisis, and growing concern over American and international capital markets, triggered the final descent into the zone of market fear and uncertainty. Major drops on the Dow for the second week of October were as follows:

PRE-CRASH POINT LOSS

Day Date Point Loss

Wednesday Oct. 14, 1987 95 Thursday Oct. 15, 1987 58 Friday Oct. 16, 1987 108

Table 4

The final stage of the corrections began during this week, with the Dow having fallen 17 percent from its August 25th peak. Over the weekend, investors got an opportunity to re-examine their goals and reflect on economic and world affairs. It was a weekend when Booming 80s and Crash of ‘87 209 news stories hammered away at the fragile condition of the world’s capital markets. On Sunday, October 18, Treasury Secretary James Baker, in a dispute with West Germany over a cut in interest rates, reportedly indicated that he would continue to let the dollar fall if a coordinated effort was not established. Well, you could imagine how the Japa- nese and other foreign investors felt about that statement. When Monday came around, the world's Capitol markets were ablaze with sell orders. On October 19, 1987, news that American forces had reportedly attacked an Iranian oil platform, sent additional shock waves through the markets. The Dow fell 183 points by 10:00 am. Some of the greatest losses occurred between 11:00 am and 2:00 pm., as many investors hoped for a rebound in the markets. In the last hour of trading, the Dow Jones went into a free fall, dropping another 200 points. The total collapse was 508 points, with the Dow closing at 1,738.44. A total of 604.33 million shares were traded with an estimated $500 billion in value wiped out. The bubble had burst and to most observers at that moment in history, the bull market of the 1980s was over. Nearly $1 trillion in stock value vanished after the market peaked on August 25, 1987. According to the Employee Benefit Research Institute, private pension funds lost $135 billion in the crash. The international impact was so heavy that the Hong Kong exchange had to close its doors for an entire week. In the week of the crash, the Fed, under Chairman Alan Greenspan’s direction, eased monetary policy by lowering interest rates and injecting massive liquidity into the economy to forestall a possible collapse in the banking system. Interest rates began to tumble in the credit markets, with rates falling 1.5 percentage points within days. Fortunately for America and the world, the plan worked. Had the Fed pursued a tight money policy at that point, the entire world would have been driven into a recession in a matter of months. In- stead, the markets recovered with the Dow ending 1987 at 1,938.83. 210 Global Economic Boom & Bust Cycles

The net result of the Crash of ‘87 was that it did not cripple America and the world economy, nor did it spread like a virus throughout the entire American business and financial communities. The Fed injection of liquidity kept the credit markets in business and the economy on stable ground. The actual losses did not affect the majority of Americans. Only about 20 percent of the population (at that time) were direct owners of stocks or stock mutual funds. Perhaps one to three percent had portfolios above $50,000. It was estimated that these investors had only about seven percent of their net worth in stock related assets. The rest of their financial assets were clearly in other types of investments. Thus, for most individual investors, the actual losses did not mean financial ruin; it was not the end of the world. Most people kept their heads together and went on with their lives. For many, diversification in investment strategy saved the day. 1988 - ELECTION YEAR In the aftermath of the great crash, the Dow continued to go through wild swings in nervous trading. Table 5 illustrates some of the gains and losses that occurred in the weeks ending the month of October. For the majority of individual investors, the attitude was to retrench and take to the sidelines.

POST-CRASH DOW JONES VOLATILITY

Date Gain/(Loss) Close % Chg.

Oct. 20, 1987 102.27 1,841.01 5.88 % Oct. 21, 1987 186.84 2,027.85 10.00 % Oct. 27, 1987 156.83 1,793.93 8.00 % Oct. 29, 1987 91.57 1,938.33 4.96%

Table 5 Booming 80s and Crash of ‘87 211

With the beginning of 1988, America entered its sixth year of peacetime expansion. With the Presidential election coming in No- vember, many observers and analysts felt that the Republican Party would do all it could to maintain strength in the expansion and insure a steady recovery throughout 1988. Competition for the White House heated up, with Democratic aspirations running high for a chance to regain control of the government. Republicans hoped that the economy would remain stable before the election, improving their chances for a new Bush Adminis- tration. Democratic hopefuls, Michael Dukakis and Jesse Jackson were among a group of leading front runners in the race for their party’s nomination. Dukakis was the final winner at the Democratic Convention, dashing the hopes of the charismatic Jackson in his bid to become the first Black president of the United States. Meanwhile, Chairman Greenspan and the Feds were involved in an intense battle of their own. During the first quarter of 1988, the Fed began to reverse its policy on liquidity and started to raise interest rates in a battle against inflation. The brief period of liquidity and lower interest rates had put pressure on the inflationary spiral to start moving up again. Chairman Greenspan initiated a program of steady but slow increases in interest rates for the remainder of 1988. Merger mania continued throughout 1988, culminating in some of the most spectacular billion dollar deals of the century. Consumer spending continued at a steady pace, with no major signs of retrenchment. In November, the Democratic Party failed to convince the American people that it had a unified front and a solid agenda; George H. W. Bush and the Republicans won the election and the White House. Foreign investors welcomed the continuation of a Republican Administration in America and the basic Reaganomics agenda which the new Bush Administration would continue to implement. As the inauguration approached, the Republican Party and the American people made their preparations for the New Year. All the predictions about a recession in 1988 were off the mark. Economists and analysts updated their forecasts for a recession in 212 Global Economic Boom & Bust Cycles

1989 or 1990, since no recession occurred in 1988. In fact, the Dow ended 1988 at 2,168.57, up about 12 percent for the year. AFTERMATH OF THE CRASH OF ‘87 Within months of the Crash of ‘87, many American corporations scrambled to restructure, liquidate assets and refinance shaky capitol structures. The major declines in stock values, the American dollar and interest rates made many American companies attractive investment opportunities, particularly for cash-rich investors of foreign countries. According to Information Services Inc. (IDD) during the first three months of 1988, approximately $32 billion worth of mergers and acquisitions were completed. As the lender of last resort, Japan’s role in stabilizing world markets and keeping America out of a recession in 1988 was a significant factor in keeping the boom period alive. Many corporations began to repurchase their stocks in an unprecedented move to restore confidence in their companies and the stock market. Falling interest rates and liquidity kept the real economy struggling along, shaking off the effects of the enormous plunge in stock prices. Many economists predicted a recession in six months, and most felt that it would be months before anyone could tell what real effects the crash had on the economy, consumers and industries. A main concern was that consumer spending would decline significantly after the Christmas season. By late December, economic reports indicated that the economy’s basic foundation was intact, with the expansion still in progress. Corporate America received large numbers of orders, the Christmas season was profitable for most retailers and export markets made significant gains due to the falling dollar. There were record improvements in employment, inventories, prices and production for the month of December. Global bargain hunters with strong cash positions saw a grand opportunity to buy competitive market positions in America after the Crash of ‘87. Strong foreign currencies versus the dollar provided an added incentive, particularly for Japanese and European Booming 80s and Crash of ‘87 213 investors. As devastating as the Crash of ‘87 appeared, it would not be the main event, but a prelude and a warning of events to come. For the deal makers, it was great news, for it bought them valuable time to put together more multi-billion dollar deals. DEAL OF THE CENTURY Record breaking deals throughout 1988 dominated business news. Each deal got larger in value and the predators grew bolder and more willing to go after larger prey. The most sensational deal of the century occurred during the last quarter of 1988; the bidding war and leverage buyout deal for RJR Nabisco. As the 19th largest conglomerate in America, with over 120,000 employees, RJR represented a predator’s dream. A tobacco and food company with well known brands such as Planter’s Peanuts, Sugar Honey Grahams, Shredded Wheat, Oreo Cookies, Del Monte Foods, Baby Ruth and Butterfinger Candy Bars, as well as, Camel, Salem and Winston cigarettes, the company reported earnings of $1.2 billion on sales of $15.8 billion in 1987. During the first quarter of 1987 its stock sold for around $34 a share and had roughly 112,000 shareholders. By late October 1988, the price per share was hovering around $56, the time in which the struggle for RJR began. The corporate battle began when the CEO of RJR Nabisco, Mr. H. Ross Johnson, proposed taking the company private through a leveraged buyout, financed largely by borrowed money. His plan was for Shearson Lehman Hutton and a group of RJR Nabisco corporate managers to buy out the existing public shareholders. The bidding started at $75 per share, and by the end of six weeks (and with the inclusion of financially strong bidding competitors) the price escalated to $109 a share. Thus, the value of the company increased by $12 billion in six weeks due to the bidding war. Mr. Johnson and company were ultimately defeated by Kohlberg Kravis Roberts & Co., the undisputed leader (during the Booming 80s) in buying companies with borrowed money. The final price tag, roughly $25 billion, would saddle the company with an enormous debt load of over $15 billion.5 214 Global Economic Boom & Bust Cycles

Several firms were paid enormous fees for working on the negotiations and packaging of the deal. Investment bankers, public relations people, bankers, lawyers, printers and others received approximately $1 billion in fees for their services. It was an incredible display of capitalistic greed, which aroused deep concern in Wash- ington. Something had to be done about the leverage buyout business. However, with the final approval given for the RJR deal, analysts and speculators began to predict takeovers in the future valued at $40 to $50 billion. By the end of 1988, dozens of equity capitol pools loaded up their war chests with leverage buyout (LBO) funds valued at $15 to $20 billion. For the banks that were collecting up to $170 million in up-front loan commitment fees on the RJR deal, a continuation of the LBO game would definitely increase future profits. The RJR deal was concluded in February 1989 amid the clamor on Capitol Hill that the LBO business was unhealthy for the economy, and that greed and avarice had become unrestrained. A headline at the end of 1988 read: TREASURY MAY CHANGE TAX LAWS TO CURB LBO’S This and other headlines signaled a possibility of major changes to stop the rampage of merger mania. In January 1989, Fed Chair- man Alan Greenspan testified before the Senate Finance Committee and recommended doing very little in the way of introducing legislation to bring the merger juggernaut under control. Additional congressional meetings and hearings held in February and March failed to produce a change. There was simply no leadership on the part of the Bush Administration, the Treasury or Congress to change the tax laws or introduce any type of legislation designed to slow the pace of merger activity. Most lawmakers feared that any major changes would have caused a stock market crash similar to or worst than the Crash of ‘87. Merger mania in 1988 had kept the markets up and alive, and no one wanted to tamper with that arrangement. The dealers and specialists stayed on the sidelines while the nine Congres- Booming 80s and Crash of ‘87 215 sional Committees were conducting their meetings. When it became clear that nothing would be done, the players went back on the prowl. FALL OF THE HOUSE OF JUNK The leverage buyout strategy that became popular during the Booming 80s was one of taking a company private by borrowing heavily to finance the purchasing price. With as little as 10 percent of the buyout price in cash, a buyer would then arrange to finance the balance in borrowed funds - break up the company by selling off certain assets to pay down the debt, and use the remaining cash flow to cover interest payments. Down the road (perhaps two to three years or longer) when the company is leaner and stronger, it would then be taken public again, bringing enormous profits to its owners.6 Interest payments made on the acquired debt were fully tax de- ductible. Opponents argued that the U.S. tax codes were encouraging corporations to transform their capital structures to favor more debt rather than equity. This was the cornerstone of most of the debates that were held on Capitol Hill during early 1989. Most of the LBO artists were in the game to make quick profits, which meant, in many cases, massive layoffs, plant closings, financial and social disruptions in many communities. The majority of these deals were put together under rosy scenarios about the company’s and the economy’s future. Profits were expected to increase, and the national economy would continue to grow, avoiding any major recession. However, there would be little room for error with an enormous debt load, and if a serious slump came in a company’s earnings, the impact was devastating. The phenomenon that galvanized the LBO specialists and investors alike was the lure of junk bonds, the high risk, high income yielding securities. These bonds were principally used as takeover instruments and as a source of capital for small firms who lacked investment grade credit ratings and access to the equity markets. From 1980 to 1989, the junk bond market grew from $2 billion to over a $200 billion industry. With yields of 11 to 17 percent, these bonds financed hundreds of deals throughout the 1980s. 216 Global Economic Boom & Bust Cycles

Wall Street’s Drexel Burnham Lambert Inc. was the leading underwriter of the high-risk junk bond market. Its junk bond department was headed by Mr. Michael Milken, one of the most colorful figures of the Booming 80s. Milken was an expert salesman, dealmaker and strategist, who financial journalists describe as the most powerful financier since J.P. Morgan. With his network of mutual funds, savings & loan associations, insurance companies, and private investors, Milken drove the 152 year old Drexel to the top in its industry, making it the most feared firm on Wall Street. Junk bonds attracted investors from all segments of the financial community in America and abroad. Table 6 illustrates an industry analysis produced by Drexel Burnham Lambert of investor market shares for 1988.

JUNK BOND INDUSTRY ANALYSIS

Industry Grouping Percent of Market

Mutual Fund and Money Managers 30% Insurance Companies 30% Pension Funds 15% Foreign Investors 9% Savings & Loans 7% Corporations 3% Individuals 5% Securities 1% Table 6

Source: Adapted from data presented by Drexel in 1988 stating the percentage ownership of junk bonds by each category of investors.

In 1987, Michael Milken reportedly earned $550 million, a figure that astounded many industry observers. Business was booming for Milken and Drexel even as the Crash of ‘87 slowed overall mar- Booming 80s and Crash of ‘87 217 ket activity. However, a major crisis came in late 1988 when Drexel agreed to pay $650 million in fines for securities fraud and other charges. In March of 1990, Michael Milken was indicted on 98 counts of criminal racketeering, securities fraud and various other charges. In the wake of these disturbing events, the junk bond market began to unravel. During the summer of 1989, the overall junk bond market or the House of Junk began to decline. Some of the events that marked the decline were as follows:

♦June 1989: Integrated Resources reported a default on its bond issues. ♦September 1989: Industry reports indicated that retail industry giant Campeau Corp. was faced with a serious liquidity crisis. ♦October 1989: UAL Corp.(UAL) buyout financing of $6.79 billion, which included junk bonds, began to fall apart and was reported to have been a major reason for the stock market collapse on October 13th when the Dow fell 191 points. Specu- lators loss an estimated $700 million!

There was a growing exodus of investors from the junk bond market as bad news continued to hit the media wires. On January 15, 1990, Campeau Corp. filed for bankruptcy protection and reorganization under Chapter 11 of the U.S. Bankruptcy Code. It was the largest bankruptcy in American history of a major retailer. Campeau’s losses for 1989 had totaled $1.7 billion, with the company seriously overburdened by $7.7 billion in takeover debts, much of it included junk bonds. In the wake of this monumental collapse, Senator Howard Metzenbaum (D-Ohio) commented that: “Campeau represents the merger mania of the 80s, when companies were more interested in devouring one another rather than producing a better product.” On February 13, 1990, the Drexel Era came to an end. Prior to that ominous day, the company had been forced to reduce its large portfolio of junk bonds due to declining values during 1989. Unable 218 Global Economic Boom & Bust Cycles to meet payments of $200 million on commercial paper and other obligations, Drexel was politely advised by New York Federal Re- serve Bank President Gerald Corrigan and SEC Chairman Richard Breeden to voluntarily go into a Chapter 11 Bankruptcy proceeding. Mr. Fred Joseph, CEO of Drexel, complied with the request, and Drexel became the most visible casualty of the high finance decade of the 1980s. Federal Government officials, including Fed Chair- man Alan Greenspan, decided to let Drexel fail. They concluded in the end that American financial markets could survive the Drexel collapse. In November, Michael Milken was sentenced to 10 years in prison and three years of fulltime community service on securities related charges.7 By the end of 1990, most major firms on Wall Street were shutting down their junk bond departments. Drexel’s demise signaled that the Booming 80s had come to an end and that the economic expansion was in serious trouble. After the fall of Drexel, many industry analysts and experts began predicting sharp increases in junk bond defaults for 1990 and beyond. With a recession clearly in progress at the end of 1990 and the specter of a war in the Middle East, most observers concluded that we had only seen the tip of the iceberg in reference to the potential defaults of future periods. In 1989, 68,112 American firms filed for bankruptcy. Their assets totaled nearly $67 billion. In 1990, the bankruptcies were getting larger and economically more painful. In addition to Campeau Corp. and Drexel, Continental Airlines filed for bankruptcy protection in December 1990. And in January 1991, Eastern Airlines, which began its operation in 1926 (during the Roaring 20s) shut down its operation due to mounting debts, militant unions and the oil crisis. This represented the beginning of a major bust period that swept throughout the airline industry during the next few years. By late 1992, over 200 passenger aircraft were parked in the Mojave Desert, prime examples of the raw impact of the slowdown. Thus, the Mojave became an airline graveyard and another sign of the times of miscalculated business deals and over optimistic projections. Booming 80s and Crash of ‘87 219

SAVINGS AND LOAN CRISIS The S&L crisis had been going on for most of the 1980s before the government finally decided to push for a massive reconstruction of the system. The center of the problem was tied dramatically to the interest rate structure and the system of federally insured deposits. Prior to the 1980s, banks and S&Ls offered no more than 5 1/4 to 5 1/2 percent on their savings deposits. This federal restriction had been in place since the early 1930s. As long as market interest rates on low risk investments did not far exceed these industry restrictions, banks and thrifts could effectively compete for funds. But the long-term trend of upward moving interest rates ultimately produced some serious problems. When higher rates were offered in the markets (for instance, on low-risk treasury bills) money would leave these institutions and seek out higher returns. To protect the banks and S&L’s, the government would put in place interest rate ceilings to keep the economy from contracting. The massive inflation of the 1970s broke the back of this strategy and the government needed a solution for the ailing banking and S&L industries. The prelude came in October 1979, when the Federal Reserve Board allowed interest rates to rise above any pre- determined level as a defense against inflation. From 1980 to 1982, the Reagan and Carter Administrations and Congress deregulated the banking and S&L industries. Interest rate ceilings were removed, laws were passed approving deposit insurance for up to $100,000, and savings and loans were allowed to invest in real estate and make commercial loans. The FDIC hikes were key factors initiating the S&L problem. With this new found liberation, banks and S&Ls would play significant roles in helping to bankroll the excesses of the Booming 80s. Many S&L operators were a lot less conservative and more flamboyant in their activities than their banking counterparts. They invested in high-risk real estate developments, expensive artworks, luxury car dealerships, junk bonds, shopping centers in the desert, grandiose new cities and a host of other investments that either made 220 Global Economic Boom & Bust Cycles no money or were simply playthings for their owners. Backed by the federal insurance program, these operators ran their companies into the ground. CRISIS LEGISLATION AND RECOVERY President Bush signed the Financial Institutions Reform, Re- covery and Enhancement Act on August 9, 1989. This was the largest financial aid rescue in the nation’s history and the most important legislation to date organized to clean up the S&L industry. Dur- ing 1988, the FSLIC was busy staging rescue operations for S&L’s that were collapsing throughout America. They closed or merged 205 S&Ls and moved to stabilize some 18 other institutions by changing management and providing technical assistance. Special guarantees and very lucrative deals were offered potential buyers in an effort to unload, as quickly as possible, the sick S&Ls. This turned out to be a patchwork job and saddled the government with even greater expenses. Guarantees on top of guarantees were simply com- pounding the financial obligations. Hence, in 1989 the alarm went off as the FSLIC went broke. The August bill started out with a $166 billion, 10-year price tag that committed the government to $50 billion in direct borrowing in the market (long-term government bonds). Original estimates allocated $39 billion for the institutions that were to be closed over the next three years, and the rest of the funds would deal with interest costs and any additional thrifts that bit the dust in future periods. As the months went by, these estimates would prove to be dead wrong. Bailout figures of rescuing roughly 500 thrifts quickly shot up to 800 to 1,000 by the end of 1989. Tough new industry standards, such as higher capital reserve requirements, placed more pressure on the nation’s 2,934 thrifts to compete more effectively in highly competitive capital markets. Regulators discovered that S&Ls held more than $14 billion in junk bonds, or about seven percent of that $200 billion high-risk market. Under the new laws, thrifts had five years to either unload these bonds or to set up separately capitalized subsidiaries to hold Booming 80s and Crash of ‘87 221 their junk bond portfolios. This problem was aggravated by the collapse of the junk bond market during the first quarter of 1990. De- pressed real estate prices in most regions of America and a steady stream of depositor withdrawals further increased the number of thrifts that were falling on hard times. Depositors withdrew nearly $28 billion from S&Ls during the first quarter of 1989, and during roughly the same period, money market mutual funds gained $27.6 billion in assets. Money was leaving the industry for better returns and safer investment vehicles. Under the direction of William Seidman, the Resolution Trust Corporation (RTC) was created to sell off an estimated $500 billion in assets of the failed S&Ls. As economic conditions changed, Seidman’s problems would escalate. Maintaining working capital would be a constant problem. The deeper the RTC got into its job of managing the industry clean up, more S&Ls would be discovered as candidates for Fed takeover. By November 1989, the RTC had seized 283 institutions with $112 billion in assets. The portfolios contained some 200,000 pieces of property, from single family homes to large shopping centers. With the close of 1989, it was clear that the RTC needed more money. In December, President Bush declared that the S&L problem was a “whale of a mess.” With the reformation of the accounting and regulatory rules, the S&L industry was placed under the control of the Treasury Depart- ment and FDIC. The insolvent FSLIC was dismantled and replaced by the FDIC. One depository system would now service both industries, which continued to fully obligate taxpayers. Also, for the first time in American history, banks were permitted to buy healthy S&Ls. To some observers, this meant the beginning of the takeover of the S&L industry by large banks. If the banks themselves could remain solvent, this trend might lead to a larger wave of merger and acquisitions in the financial industry. In July 1990, William Seidman appeared before the House Bank- ing Committee and stated that the RTC needed an additional $100 billion in financing from taxpayers in 1991. The $50 billion allocated in 1989 was practically gone. The RTC had seized 450 S&Ls, 222 Global Economic Boom & Bust Cycles and of that number 211 had been closed. Future projections showed that 800 to 1,000 S&Ls would eventually require federal takeover. Seidman commented that, “We are making good on the government’s commitment to thousands and thousands of depositors...and that is the reason for the need for these funds.” As depositors, the public was receiving economic justice from the disaster, but as taxpayers, they found the bill was becoming a nightmare. In testimony before the Senate Banking Committee in April 1990, Charles A. Bowsher, comptroller general of the General Accounting Office, stated that, “The rescue will be bigger than all the bailouts of New York City, Chrysler, and Lockheed put together.” Thus, in the Booming 80s, America had stumbled badly in its regulation of the credit system; it failed to properly control the S&L industry. RECESSION OF THE EARLY 1990s In the fall of 1990 the economic expansion that began in De- cember 1982 was rapidly winding down. For some analysts and observers, America was in a recession, while for others the economic data had not specified that a major downturn was in progress. Con- sumer spending, which represents two-thirds of all economic activity and considered the last major element keeping the economy in motion, began to show signs of retrenching. Analysts and economic planners began to explore the impact of a recession on the American and international economies. Economic conferences, boardroom discussions, and governmental think tanks all over the world were spotlighting the American economic and financial problems that threaten - in an unpredictable fashion - to unravel together in a massive downturn. SIGNS OF THE TIMES By the end of 1990, it was clear to even the most conservative of mainstream economists, that we were in a full scale recession. Mr. Michael J. Boskin, President Bush’s chief economic adviser, reluctantly stated in a televised interview that the American economy, “probably has entered a recession.” Future projections by him and other mainstreamers indicated that this recession would be short and Booming 80s and Crash of ‘87 223 shallow, with the economy beginning to recover by the summer of 1991. Meanwhile, the economy began to unravel as one industry after another started coming apart. During the first and second quarters of 1991 and early 1992, the head lines were ablaze with business failures and record breaking quarter losses. The following is a brief analysis of some of the events that illustrated the worsening conditions:

♦In 1990, bankruptcies totaled $12 billion as compared to $3 billion for all of 1989. ♦The Bank of New England collapsed in January of 1991 and was forced to file for Chapter 11 bankruptcy protection. ♦On January 8, 1991, Pan Am Corp. filed for Chapter 11 bankruptcy protection in the midst of a continuing consolidation in the airline industry. By October of this same year, Pan Am had been delisted from the New York Stock Exchange and its stock was selling for around 10 cents a share. ♦General Motors Corp. reported a fourth quarter loss of $1.6 billion for 1990 followed by a $1.2 billion loss in the first quarter of 1991. These were massive losses for the auto giant. During the first quarter of 1992, General Mo- tors announced plans that it would be closing 25 plants by 1995 and cutting away 74,000 jobs, a 19 percent cut in its work force. Ford Motor Co. suffered a similar fate. Fourth quarter 1990 losses totaled $519 million while the first quarter of 1991 registered a loss of $884.4 million. Chrysler Corp. reported in July of 1991 that it had a $212 million loss in the second quarter of that year, and as announced, its worst in 11 years. The weakening performance by the Big Three auto giants was a reflection not only in the sluggish American economy, but also in a slowing global economy. 224 Global Economic Boom & Bust Cycles

♦In late March of 1991, IBM announced that it would be cutting its worldwide work force for the year by 14,200 people. A first quarter earnings decline and weakening sales were cited as part of the need for the large layoffs. By December of 1992, IBM had fallen to the status of a global dinosaur. Global competition and major structural changes altered the technological focus of the computer industry. ♦In December 1990, the Federal Reserve’s “Beige Book” assessment reported that both retail sales and construction activity was weak in all of the central bank’s 12 districts. ♦A report put out by Merrill Lynch & Company indicated that American households were carrying an above average debt load. Most of this debt was concentrated on the real estate market, which was in a deflationary decline in most parts of the country. ♦Day to day headlines were spotlighting more layoffs, plant closings and business failures throughout the economy. ♦In January of 1992, R.H. Macy & Co. filed for a Chapter 11 bankruptcy, citing mounting debts and the recessionary slump in retail sales as its primary problems. The debt overhang of the Booming 80s had claimed yet another victim. ♦Throughout 1993, downsizing, restructuring and layoffs continued within various industries in the American economy.

In addition, the forces that had driven up real estate prices throughout the 1970s and 1980s would now drive them down. Op- erations directed by the Resolution Trust Corporation were set to unload some $400 billion worth of properties in 1991 in depressed real estate markets nationwide. By October of 1991, California, the “Golden State,” began to experience deep pains from the on-going recession. In the Los An- geles area, commercial real estate became particularly vulnerable in the downturn. Sharp reductions in Federal defense spending resulted in a significant number of lost jobs for all of Southern California. During the second quarter of 1992, civil unrest in Los Angeles dealt Booming 80s and Crash of ‘87 225 another major blow to the fragile economy. The aftermath of the Rodney King verdict resulted in massive protests, looting, and the burning of Los Angeles. And as a forewarning to the rest of the nation, California functioned without an official 1992-93 budget for 63 days, issuing state IOU’s to cover its bills. Governor Wilson, Assembly Speaker Willie Brown and legislative officials were locked in a heated debate over the state’s $53.5 billion budget. As a microcosm of the United States and as the sixth largest economy in the world, the California crisis represented the next phase in the continuing economic slowdown. Taxes were increased as the recession began, which dealt another blow to the American people. During 1991 and 1992, state and local governments were forced to raise their taxes in order to keep functioning and providing needed services. Rising taxes were one of the main reasons cited for prolonging the misery of the Great Depression of the 1930s. By April of 1991, eight million people were unemployed in America and the numbers were increasing. With the rise in the ranks of the unemployed, tax receipts were lower and the unemployment compensation bill steadily increased. As the media revealed the hard facts and real issues of a declining American prosperity, the psychological and sociological dimensions of economics began to bring about a lack of confidence and despair in the average American citizen. With the start of 1992, Americans increasingly grew more pessimistic about the future. Many of the jobs that were being lost would not be replaced even when a full-scale recovery finally arrived. A January 1992 issue of Time magazine clearly addressed the downward mood sweeping the land. The cover design featured a 1990’s American worker selling an apple to a 1930’s businessman. The pictorial implication was whether the American economy had reached a point similar to the conditions of the early 1930s. The cover story pointed out that: “The slump is the longest if not the deepest, since the Great Depression...Traumatized by layoffs that have cost more than 1.2 million jobs...U.S. consumers have fallen into their deepest funk in years.” 226 Global Economic Boom & Bust Cycles

INTERNAL COLLAPSE OF THE SOVIET EMPIRE The progressive worldwide collapse of communism that began in the fall of 1989 created a fabulous opportunity for America to cut back on its heavy commitments in the international military arena. The aborted coup attempt (on Premier Mikhail Gorbachev) in the Soviet Union during the last quarter of 1991, was the key event which began the internal collapse of this enormous global empire. This event and its aftermath magnified the power and prestige of America, President George Bush and the economic prospects of a future worldwide free enterprise system. Suddenly, the world was presented with a grand opportunity to scale down the threat of a nuclear holocaust. Disarmament appeared to be an achievable goal: the arms race of the 20th Century, which had absorbed trillions of dollars of valuable resources and brain power over several decades, could now be significantly scaled back. With the decline of communism in Eastern Europe, the Soviet Union and elsewhere, a serious debate began in Washington regarding the need to reduce the $300 billion military budget in future fiscal periods. Lawmakers began talking about a Peace Dividend that would result from the cessation of hostilities between the world’s two superpowers. Gorbachev made it perfectly clear that he wanted to end the Cold War. America needed to reduce its budget deficit, and a smaller Pentagon budget would surely help in that regard. In November 1989, Defense Secretary Dick Cheney ordered the nation’s armed services to draw up plans to cut $190 billion in projected military spending over the next four fiscal years. The cutbacks would include troop reductions, cancellations of weapon contracts and base closings. This would be a feasible plan, with the military threat from the Warsaw Pact fully diminished. On November 7, 1989, Congress had to approve legislation to raise the total gross national debt limit from $2.8 trillion to more than $3.1 trillion in order to keep the government from defaulting on its debts. It was a technical matter, but it still illustrated the grow- Booming 80s and Crash of ‘87 227 ing menace of the national debt problem (by August of 1992 the gross national debt had grown to nearly $4 trillion). This was yet another indication of the need to reduce national expenditures. In August, President Bush signed into law the new savings and loan bill that allocated $50 billion to clean up that industry. In addition, President Bush’s campaign pledge of read my lips, no new taxes, obligated his administration to avoid raising taxes, particularly in the midst of an economic downturn. Thus, the Peace Dividend would be the best alternative in a period of few choices. In June of 1990, President Mikhail Gorbachev came to the United States and officially assured the American public that the Cold War was over and that a new era had begun. The $10 trillion spent in America over the previous four decades had finally defeated the enemy on the grounds of who could spend the most and stay afloat the longest. The new global reality that had emerged after World War II and lasted from 1945 to 1991 (the bipolar era in which history’s deadliest nuclear arsenal was built) would now have to be replaced with a new dynamic system of power. The East/West confrontation was clearly over, with various parts of a struggling former Soviet Union being reincorporated into the full body of Western Civiliza- tion. America’s victory was complete: the United States of America now stood as the greatest military power in the world, the world’s only mega-superpower. However, coming on the heels of this victory was another war in the Middle East. In August 1990, President Saddam Hussein of Iraq ordered his army to invade neighboring Kuwait. This war became the main factor initiating the recession of the early 1990s. 1992 - ELECTION YEAR The Roaring 20s and the first two years of the 1930s were dominated by three Republican administrations. Along parallel lines, the Booming 80s and the first two years of the 1990s in America were also dominated by the Republican Party. An economic depression sealed the fate of the Republican Party in the early 1930s and ush- 228 Global Economic Boom & Bust Cycles ered in an era of massive reforms and New Deal policies. Economic hard times would play a similar role during the struggle for the White House in 1992. During the turbulent four-year term of the Bush Administration, the popularity of the presidency went from one extreme to the other. After the brief war with Iraq during the first quarter of 1991, Presi- dent Bush was rated by Americans as one of the most popular presidents in recent history. He rode that wave both nationally and internationally, but by mid-1992 the “Bush euphoria” had faded. A deepening recession and a harsh economic environment began to paint an entirely different picture of the Reaganomics’ era and Republican policies. Democratic contender Governor Bill Clinton orchestrated a brilliant campaign against the Bush Administration. Supported by worsening economic conditions, Governor Clinton hammered away at the failure of trickle-down economics and the domestic problems facing the average American. Third party candidate, billionaire Ross Perot, whose campaign was both colorful and imaginative, delivered a series of hard-hitting lessons to the American public on the enormous debt buildup in the federal government. Mr. Perot ultimately spent $60 million of his personal wealth, campaigning to stop the runaway debt explosion that threatened to destroy the Ameri- can dream. In this way, the American people began to learn about trickle-down economics, the $4 trillion gross national debt, and the economic paralysis that had derailed the period of prosperity. It was a very tough campaign and one that will be remembered as a critical turning point in American political history. When Americans went to the polls, their choice to lead the nation for the next four years was Governor Bill Clinton and the Demo- cratic Party. As they did in the early 1930s, Americans voted the Republican Party out of the White House and set the stage for a new beginning. JAPAN’S BOOM AND BUST CYCLE The Booming 80s would also witness Japan reaching the apex Booming 80s and Crash of ‘87 229 of a super-long bubble economy. From 1986 to 1989, Japan soared to incredible financial and economic heights before experiencing the Heisei Bubble Collapse of 1990. Japan had been at the center of one of the greatest bubble economies in recorded history, amassing enormous wealth and global economic power. It was one of history’s great reversals of economic fortunes, and an economic lesson of profound importance for the modern world. In Chapter Five we will explore the significance of the “Japanese Connection.” SUMMARY/ANALYSIS Despite all of the super-critical events of the Booming 80s era, it appears that America was destined to rise above those obstacles and continue on course as the dominant superpower in the world. Sup- ported by the towering economic, financial and technological strength of Japan, America was able to weather the severe storms of the 1980s. Tokyo was the financial Capitol of the world (See Japanese Connec- tion) throughout the 1980s and a central factor in leading the Infor- mation Age Revolution. However, many Americans (not all) were profoundly shaken by the growing power and massive presence of Japan during most of the Booming 80s era. But the massive power of Japan would soon fade with the coming of the Heisei Bubble Collapse of 1990. In that fateful year, Japan began a period of a bust cycle unlike anything that had been witnessed since the Great De- pression of the 1930s. Japan’s lost decade of the 1990s is one of history’s greatest economic reversals that should be examined and studied in great detail in regards to the power and economic force of boom and bust cycles. Enormous wealth was lost and as discussed in Chapter Five, Japan’s epic battle with their Great Recession (what author Richard Koo describes as a Balance-Sheet Recession) was (and will continue to be in 2012 and beyond) a lesson of profound importance for the entire capitalistic world. This nation went through a bust cycle of massive de-leveraging at every level of society: its bubble collapse has essentially been a long drawn out deflationary depression. Yet despite it’s sudden and rapid descent, Japan still remained the sec- 230 Global Economic Boom & Bust Cycles ond largest economy in the world throughout the 1990s. This was clear testimony of the enormous amount of wealth that was acquired during its extraordinary boom cycle. The titanic struggle to reverse the collapse witnessed the lowering of interest rates to zero and the implementation of various forms of quantitative easing programs. Fed Chairman Ben Bernanke has learned a lot from the unprecedented developments in Japan’s struggle, particularly the lessons of zero and near-zero interest rates and the use of quantitative easing. The empirical evidence has shown that these policies can continue in operation for many years without complete destruction of the economic system. After two decades of economic stagnation, Japan was able manage its collapse in a way that allowed the nation to remain stable and functioning at levels that were at times very anemic. This is the central message Richard Koo brings to us from his close observation of this crisis: the dynamics of de-leveraging during a balance-sheet recession, and the importance of maintaining government stimulus programs until the economic patient is back on its feet. However, the cost to maintain this stability has been high: according to the IMF, Japan’s debt to GDP ratio in 2012 is 238.8 percent, the highest of any industrialized nation. Debt service (alone) now accounts for nearly 43 percent of all government revenue, and this figure is very likely to continue rising in the foreseeable future. With the fall of the Soviet Union and the collapse of its global empire (particularly in Eastern Europe) America won the Cold War of the bipolar era and could begin to cut back on its massive military expenditures. In the Iraq Affair, America was successful in bringing together a political and military alliance to halt the potential of a global oil crisis. The brief war clearly tested the political resolve of the so-called mega-superpower to lead a major global coalition. The Iraq Affair sealed the fate of Japan’s bubble markets and was a factor in edging America into the recession of the early 1990s. And through it all, the global markets were rocking and reeling on the vast uncertainties of the future. While Japan’s stardom faded in the Booming 80s and Crash of ‘87 231

1990s, by the mid 1990s, America’s stardom rose to great prominence and was the center of the world’s next greatest boom cycle. The impact of the Crash of ‘87, the S&L crisis, and the fall of Drexel and the junk bond market, did not derail the American economic behemoth. As investors and analysts, it’s important to observe (and understand) that throughout all of the chaos of the Boom- ing 80s, great companies were born and the Information Age Revo- lution kept right on track for the explosive developments of the 1990s. Microsoft was selling at $1.50 in 1988, the year after the great crash. Other equally strong companies were on the rise (Intel, Oracle, Dell and others) during the uncertain years of the late 1980s. Again, as in previous eras, great companies emerge and quietly develop, test and build out their business strategies during periods of economic slowdowns or painful recessions. This process is unlikely to change as we proceed through the vast uncertainties of the 21st century: the best time to buy shares in great companies is during the bust periods. As one popular investment strategy reminds us, “Sell on the trumpets and Buy when blood runs in the streets.” Stock market history has proven this point over and over again! 232 Global Economic Boom & Bust Cycles

NOTES (1) The U.S. Agriculture Department Crop report announced in 1988 that corn production fell 34% in 1988 from its 1987 level, while the wheat crop experienced a 50% decline. (2) Adam Smith, The Roaring ‘80s,(New York: Summit Books, 1988) p. 49. (3) Harold Seneker, “A wealth of Billionaires,” Forbes, July 24, 1989, pp. 117- 212. (4) Thomas McCarroll, “Carry That Weight,” Time, November 19, 1990, pp. 79- 81. (5) During the first quarter of 1991, RJR Nabisco started issuing common stock to the public in order to retire the junk bonds acquired during 1988. The success of its initial stock offerings indicated that it would be one of the few companies to break the strangle hold of the junk bond market collapse. Ten months into the start of the July 1990 recession RJR had reduced its debt load significantly with the help of $7.6 billion in recapitalization and stock offering funds. (6) IBID., p. 49. (7) After serving roughly two years in prison, Michael Milken was released on good behavior during the first quarter of 1993. At the time of his release, most of the case that had been built against him had been successfully defeated. (8) The Gramm-Rudman-Hollings Act was passed by Congress in December of 1985 and mandated that federal budget deficits be reduced by $36 billion per year over the following five years. This was a law, and it specified that the budget deficit would be zero by 1991. Instead, the actual budget deficit in 1991 was $269 billion: the five year Gramm-Rudman law was clearly a failure. CHAPTER FIVE THE JAPANESE CONNECTION

“If it can be shown that the Great Depression was, as was the Japanese recession, a balance sheet recession, and that this was why monetary policy was powerless to fight it, conventional economic theory will have to undergo some major changes.” Richard Koo

apan’s economic and technological rise in the 20th century Jwas a remarkable achievement that surpassed even their own expectations of what was possible in such a short period of time. Returning to the world stage, like the mythical Egyptian Phoenix, consumed in fire and rising out of the ashes of World War II, Japan emerged renewed with a messianic technological mission for the 21st century. Many of the enormous changes that took place in both communist and capitalistic societies in the world of the 20th century, were influenced by the rapid advancements of the Japanese juggernaut. Global restructuring, political and economic realignments, as well as the formation of large regional economic trading communities in Europe, North and South America, and elsewhere have been motivated either directly or indirectly by the Japanese commercial success story. The Carthage1 of this era, Japan was well organized so- cially, politically and economically to chart the seas of commercial and technological advancements in the 20th Century. As a nation, the Japanese people are on a deep mission to master the science and technology of the Information Age Revolution, with the express goal of being a complete scientific leader of the 21st century. Preoccupied with its economic and commercial success, Japan has been reluctant to lead the world community in any major capacity. In fact, it has benefitted and enjoyed the status of being a number two or number three economic power. However, in the 21st century, Japan will be called upon to adjust to a greater role in world economic affairs. We can expect its voice to grow stronger in the Inter- national Monetary Fund (IMF), the World Bank and the United Na-

233 234 Global Economic Boom & Bust Cycles tions: a nation maturing to the level of broader political, economic and cultural significance. HISTORICAL ASCENT In 1853, Commodore Matthew C. Perry sailed into the Bay of Tokyo (then known as Edo) and awakened the Japanese to a new era. The Medieval era of the samurai with the lightning fast sword was transformed; Japan began to concentrate on the technological advancements of the West. Previous centuries spent in relative iso- lation as an island nation, with warring clans fighting each other in endless power struggles, was abandoned. Japanese rulers knew that they had to become a modern cohesive nation, and quickly moved to make the transformation. Following the example of the European expansionist powers, the Japanese put together a modern army and navy, and began the process of industrialization. In 1868, the Meiji Restoration2 started the Japanese nation on the road toward industrial and modern economic development. The express goal, as expounded by this movement, was to reach and surpass the level of industrialized nations in the West; a goal that remained unchanged for over a century. The Meiji Restoration also brought about greater change with respect to political/imperial power. Emperor Meiji (who was the grandfather of Emperor Hirohito of World War II fame) demanded absolute power and total reverence for the Emperor in Japanese society. The Shogun era was over; the emperor would now control the entire nation. In 1889, a new constitution clearly set forth the expanded powers of the emperor. Article one of the new constitution stated that, “The Empire of Japan shall be reigned over and governed by a line of Emperors unbroken for ages eternal. The Emperor, who is Supreme Commander of the Army and Navy, declares war, makes peace, and concludes treaties.”3 The rapid industrialization of Japan ushered in the period of economic expansion, establishing a greater need for raw materials and a wider sphere of influence. At the dawn of the 20th Century, Japan was fast becoming an international power. It had successfully The Japanese Connection 235 avoided the colonization process that was predominant during the second half of the 19th Century, and would carve out its own empire in the Far East. European nations had been immensely successful in colonizing much of the known world. For those nations that had gone through the industrialization process at the right moment in history, the 20th Century would be their century, for they held the technological supremacy to control the future course of events. It was a competitive period and a mad scramble for territories. Japan, which has little or no natural resources, joined the empire building game, and flexed its muscles. In the war with Russia that ended in 1905, the Japanese walked away with some prized territories. A peace settlement gave them Korea, Port Arthur, the Kwantung Peninsula and various transportation rights in southern Manchuria.4 On July 29, 1912, Emperor Meiji died and Crown Prince Yoshito (the father of Hirohito) ascended to the throne. Under the name of Taisho (“Great Correctness”) the new Emperor would lead his nation through the First World War. Emperor Taisho aligned his nation with France and Britain and came out of this war with the German islands in the Pacific. Japan took on a new status in the world, it became one of the Big Five nations in international power brokering.5 By the 1930s, Emperor Hirohito was rising in power and the West had fallen into a depression. The Emperor, the military, and the Zaibatsu (a group of twelve very powerful economic/industrial families) saw an opportunity to expand during this period. Successful campaigns in Manchuria and China in 1931-32, began the process. By the time World War II began, Japan had a well defined strategy for an international empire. Hitler and the Third Reich, along with Mussolini, were fighting to carve out an empire that consisted of Western Europe and all of its colonial possessions, Eastern Eu- rope, and the massive continental empire of Russia. Japan’s Far East- ern empire was set to expand further into the South Pacific. The rest is history; Pearl Harbor was bombed on December 7, 1941 and America entered the war. 236 Global Economic Boom & Bust Cycles

The massive defeat of Germany and Japan resulted in the birth of a new age: the Atomic Age. America ended the war as the mighti- est nation on earth. Japan’s devastating defeat by technological supremacy proved to be a very expensive and humiliating lesson. Per- haps the most painful awakening of the national Japanese soul toward greater development, were the atomic bombings of Hiroshima and Nagasaki (August 6, 1945 and August 9, 1945 respectfully) during the closing moments of World War II. This incredible display of scientific knowledge and power set the Japanese people on the path to complete mastery of the scientific and technological achievements of this era. After the war, the administration of Japan was placed in the hands of General Douglas MacArthur. MacArthur established a democratic form of government and a Peace Constitution as the basis of a newly organized Japanese society. With nearly ten million workers unemployed and a devastated economy, Japanese corporations were virtually ordered to hire and retrain millions of workers to put people back to work and to get the economy moving again. This pattern of imposed employment set the stage for the so-called lifetime employment character of the Japanese economy. Japan’s restructured economy excluded all war related heavy industries, with the military permanently retired from political life. The Peace Constitution made war illegal for Japan. Its focus from that point onward has been to pursue a policy of almost complete concentration on the development of commercial and financial enterprises. In reality, the Japanese people were given the opportunity to develop a complete mercantilist society. During the years 1949 to 1952, the United Nations pumped more than $3 billion dollars into a sluggish Japanese economy. This would be a major turning point for Japan. Political justification for this move centered around the growing threat of communism in mainland China and North Korea: Western democracies decided that the reindustrialization of Japan would be a good strategic plan for maintaining democracy and free-enterprise in this region of the Asian world. The Japanese Connection 237

During the early 1950s, Japanese corporations concentrated on rebuilding the economy with light industry. The industrial sectors of textiles, toy manufacturing, small machinery, and similar small production enterprises got the ball rolling for the export markets. How- ever, during this period, products labeled MADE IN JAPAN were looked upon as poorly constructed merchandise by many people in the West. Thus, the Japanese went back to the drawing board. A period of intensive research, planning, education and hard work continued the march forward to improve the Japanese product. The signing of a peace treaty in San Francisco in September of 1951, laid the foundation for ending the official American war and related occupation and paved the way to restoring Japan’s sovereignty. However, the treaty (which was ratified in April of 1952) required Japan to submit to a new form of political arrangements: an economic and military alliance with America.6 Thus, under its new independent status and the external military umbrella provided by America, by the late 1950s, Japan restructured itself for massive development in the heavy commercial industries. With the new reality of self-rule, the Japanese elite established strong alliances between businessmen, bureaucrats, and bankers. From this base of organization and capital, Japan would begin a new era of growth and development. MINISTRY OF INTERNATIONAL TRADE AND INDUSTRY (MITI) MITI is largely recognized as the central force behind the economic rise of Japan. This extremely powerful governmental organization was created during the early 1950s with the express mandate of planning the economic, financial and technological development of Japan. In the beginning, MITI’s World Visions (as they are widely known) were published in five year periods. Since the sixties, the trend has been decade long economic plans and predictions. A multitude of ideas, strategic planning and research, and critical assess- ments were brought together to form the primary vision for each period. Once a consensus was reached and the vision completely 238 Global Economic Boom & Bust Cycles clarified; capital, manpower, students, tax breaks, loans, and other resources flowed into the sectors of the business and industrial complex that was designated as the prime mover of the decade. In 1958, the “Long-Term Economic Program” was adopted and Japan simply exploded with activity. The rapid pace of development and economic activity over the next few years simply out-performed everyone’s expectations and forecasts. This period became known as the Iwato Boom period and was characterized by massive investments into plants and equipment in heavy industries. A growing and prosperous middle class came into being, generating a strong domestic demand for goods and services, and creating a large capital pool for investments through savings programs. It was during this period that Mr. Taikichiro Mori (in mid-1990, the world’s second richest individual) made a serious move to establish his real estate empire. A former economics professor, Mr. Mori envisioned a very bright future for Japan and (he also must have studied carefully the MITI World Vision report) in particular, the rising Tokyo real estate market. With 100,000 sq. feet of land left to him by his father, Mr. Mori parlayed this asset into an $18 billion dollar business empire in less than 30 years.7 This will probably go down in capitalistic history as one of the smartest (or luckiest) financial investments ever made by an individual. Japan Inc. was beginning to take off and Mr. Mori knew it! The 1960s proved to be the next significant period of the Japa- nese commercial expansion. In 1961 Prime Minister Ikeda and MITI instituted the popular Double Your Income program, a successful ten-year plan that paved the way for Japan to enter, in full force, the international export markets. During this period, Japan’s automobile industry made a tremendous leap into world markets. The island nation had reached the point where it could produce a car that competed successfully in the international marketplace. By the mid-1960s, Japan had become a serious contender in this field. This period became known as The Izanagi Boom, or the second boom period that brought enormous advances in Japan’s technological position in the world. The Japanese Connection 239

In 1968, MITI decided that it was time to conduct a major campaign on the largest consumer market in the world, the United States of America. For the automobile industry, the timing could not have been better; the early 1970s brought the OPEC oil crisis and the demise of the dollar/gold standard in the United States.8 To a nation that imports roughly 99 percent of its oil, this was a very difficult period. Japan was hit with its first major recession (some Japanese analysts refer to this period as a depression) after World War II, and an inflation rate that rose to over 30 percent. Domestic automobile demand fell considerably, but the export market kept right on growing. By 1976, Japan was exporting 50 percent of its car production. MITI established a world vision of energy conservation in response to the OPEC oil shock of 1973. Japan, with virtually no natural resources, was compelled to adopt a plan to reduce its overall dependency on oil. In the process, the Japanese got the jump on the rest of the world by creating energy efficient products, specifically, small energy efficient automobiles. Adoption of this same strategy took place in the production of everything from televisions to complete factories. It was a very important move on their part, and quite literally translated into huge savings in energy costs at home and billions of dollars of export earnings abroad. By the time the second oil crisis hit in 1979, the Japanese were well entrenched in a new operating mode, producing a wide range of new, energy efficient technologies. By making these critically strategic adjustments, the Japanese were able to create multi-billion dollar export markets, while at the same time preparing the nation for a new high-tech future. In 1980, MITI issued its next major report setting forth its vision for the most dynamic industries of the 80s. The Industrial Age was fading; the Information Age was emerging; energy efficient technologies were providing a new basic foundation, and the world stage was set for a new dynamic high-tech future in electronics. The Shogun of OZ had spoken and the Japanese industrial complex began to act on this information. 240 Global Economic Boom & Bust Cycles

With the 21st century in sight, the country’s industrial and financial giants provided new meaning and growth to the areas of telecommunication, computers, artificial intelligence, robotics, automation, bio-engineering, optical disk technology, superconductivity and semiconductors. By the end of the 1980s, the Japanese had captured most of the worldwide markets for semiconductors, and had developed the largest and most sophisticated base of robots and robotic applications on the planet. Similar advances were made in other areas as Japanese companies began to dominate entire industries on a global basis. The 1960s, 70s, and 80s had proven to be explosive growth periods for this hard working, successful nation. Now, MADE IN JA- PAN had become synonymous with good quality, precision tested, and the best that money could buy. As Japan entered the 1990s, MITI’s vision for this decade spoke more to the need of Japan developing a better image of itself in the world community, and of harmony and peaceful co-existence with its trading partners. In an article in The Wall Street Journal, Jacob M. Schlesinger informs us that Japan would work to establish “an industrial Age of Aquarius.” Concepts such as the promotion of a “mellow society,” “the sharing of technology on a global basis,” and “harmonization of trade ties” were cited as being essential requirements for Japan’s future in the world community.9 In part, the Japanese success story had come at the expense of other nations. Huge trade surpluses with Western Europe and the United States caused a strain in its relationship with the West. Ja- pan-bashing had been going on in America for over a decade, as many industry leaders and politicians complained of unfair trade practices and of the extreme difficulty of doing business in that country. To the Japanese leaders that put together the MITI vision of the 1990s (MITI specialists, over 300 leaders in various fields and professions, which included professors in economics, law, and literature) the Japan of the future would need to make critical adjustments to survive. A totally self-centered approach would not work in the developing new world order. Thus, Japan began a period of transi- The Japanese Connection 241 tion by opening up its markets to greater consumption of imported products from around the world. HIGH-TECH 21ST CENTURY Over the past five decades, billions of dollars have poured into research laboratories in corporations and major universities throughout the world in an all-out effort to create and expand on the technologies of the Information Age. Japan has been deeply involved in this movement, and in certain areas had taken the lead. The extent of Japan’s commitment and drive goes beyond the primary subject of this book. However, it’s important to understand some of the advances and trends that were established prior to 1990, and the prob- able impact that they will have on world economic development in the 21st century. The Japanese commitment to master the science and technology of this age is not a philosophical statement, but a highly significant world event with far-reaching implications for the future. An entire generation of Japanese scientists, engineers and technocrats have been educated to concentrate on commercial applications of scientific knowledge. This is one of the most important reasons why Japan has been able to achieve its high level of commercial success: the country has not been involved in any major wars in nearly 70 years and the primary focus of its scientific endeavors and financial resources has not been the military objective. Japan’s strategic technological shift in the 1970s was one of the 20th century’s major innovative periods, similar to the birth of television or the telecommunication era. Japan seized the historical moment and dramatically shifted gears for the advent of the Informa- tion Age and the 21st century. During the 1970s, Japanese thinkers and writers flooded the general public with books, newspaper and magazine articles, television programs and other media sources, proudly proclaiming the promises and benefits of the coming new age. Japan’s decision-makers and business leaders embraced the concept of the end of the smokestack industrialism age, and gave total support and resources to move their society to the forefront of a 242 Global Economic Boom & Bust Cycles global technological revolution. As a result of Japan’s intense focus on the 21st century, they were able to collectively build a large population of sophisticated robots and manufacturing systems that were heavily dependent on computers and information. Superior products were produced, along with major production and economic efficiencies. America was slow to respond to the Japanese global shift. With the start of the 1980s, the technological push to develop high-level intelligent machines took a dramatic shift in world affairs. In 1981, Japan announced its intention to formerly initiate the development of the Fifth Generation of Computers. The so-called Fifth Generation Project grew to encompass the basic mission of Artificial Intelligence (AI) research, which includes expert systems, image processing, speech and other types of knowledge-based computer applications and systems. Fifth generation scientists dreamed of producing machines that could learn from their mistakes; developing complex systems capable of processing information in concepts, images and ideas, building machines with vast repositories of knowledge that would be able to solve highly complex problems; and computers that design and program other computers. This was the early 1980s and the robot was fast becoming a major fixture in the manufacturing and production arenas in both Japan and America. The 1980s increased the momentum for technological innovation. Computerized manufacturing facilities, robotics, CADCAM systems and new custom-designed automotive systems revolutionized whole industries in the space of one decade. As we moved into the later 1990s, we could readily observe how all of this came together by the year 2000. The technological vision of the Fifth Generation rapidly became a reality. Computer science and technology took a bold leap into the future, and in the 1990s we witnessed the results of the extraordinary developments that led us to the birth of an era of truly intelligent machines. Given the advances of science and technology that emerged prior to the year 2000, we can clearly predict that robotic mechanisms that incorporate high-level AI systems will be a permanent part of our 21st The Japanese Connection 243 century world. Much of what has previously been considered science fiction, will soon become part of our basic reality. Listed below are some of the advances that were pioneered by the Japanese prior the 1990s. These highlights point to the significant contributions the Japanese made prior to the explosive developments of the new era:

ROBOTICS: The Japanese are heavily involved in the science of robotics. During the 1980s, Japan’s technocrats and engineers were instrumental in establishing the robot factory and assembly line system for global economic development. A Toyota Motor Company plant located in Toyohashi, Japan, represented a prime example of this new system. This plant operated 640 intricately designed robots with a computer system capable of producing 100 variations of three models of their cars. The Victor Company of Japan (JVC) employed 64 robots at one of its plants. These robots could fully assemble a camcorder. They performed 150 assembly and inspection tasks that prior to 1987 required 150 people. Robots were (and still are) involved in the production of everything from VCRs to customized computer chips, and during the 1980s the Japanese became the acknowledged experts in utilizing robots in solving practical problems in everyday life. Robotic technology has become synonymous with lower labor costs, around the clock operation, precision and speed and the most reliable work force on the planet. By 1988, Ja- pan used two-thirds of all robots in the industrialized world. The goal for the 21st century is to rapidly expand this horizon by having one or more robots in the home. Rapid advances in Artificial Intelli- gence (AI) customized semiconductors, optical disk technology and other related fields has produced an economic boom in this area. Future synergistic combinations of various technologies will no doubt produce some very remarkable robotic mechanisms. There is an enormous array of scientific possibilities in this area, and Japan has been on the cutting edge of this movement. America was the first to in- vent the industrial robot, and began licensing this technology to Ja- pan in the 1960s. 244 Global Economic Boom & Bust Cycles

SEMICONDUCTORS: Advances in the semiconductor industry have produced microprocessors that are more complex, faster and increasingly more intelligent than their predecessors. These chips are the fundamental building blocks of the electronic industry. The basic foundation of the chip is the transistor, invented by an Ameri- can in 1948. Integrated circuits hit the scene in 1959, and since that time, progress in this field has been measured by the number of switches that can be placed on a square centimeter of silicon. The invention of microprocessors, that incorporates all of the elements of a computer on a silicon chip, revolutionized the industry, and the world of electronics took an incredible journey into deep dimensions of space and time. Japanese firms such as Nippon Electric, Toshiba, Hitachi, Fujitsu and others established a firm foothold in this industry during the 1980s boom period and maintained research and development budgets consisting of billions of dollars.

INFORMATION NETWORK SYSTEMS: The basic goal of an Information Network System is to provide a total communication digital network for an entire society that integrates computer data, telephone, telex, video systems, optical disk media, and other related media sources. During the 1980s, the estimated cost of a system for an entire society was approximately $150 billion. Japan began working on a project in the mid-1980s, utilizing the Mitaka sub- urb of Tokyo as a test model.10 At a cost of $100 million, covering 2,000 homes, the project’s success meant that the government could start a design for all of Japan. Individual homes plugged into the system took advantage of a large array of high-tech services, from videophones and videotext to pictorial tours of various countries around the world. The possibilities were endless, and Japan was actively pursuing a practical and highly useful system for the 21st century. This was Japan’s initial efforts of providing an Internet-type of system for the entire country. The Japanese Connection 245

SUPERCONDUCTIVITY: A superconductor is a material that allows transmission of electric current without any loss of power, while ordinary conducting materials, such as wire and copper, will experience some loss of power due to resistance. Some commercial applications include the development of compact super computers, advanced medical imaging equipment and levitated trains. The Japan Foundation for Shipbuilding Advancement announced in April of 1990, that they were working on the world’s first water vessel powered by superconducting magnets: the Yamato I, a 100 foot boat. The initial investment of $31 million indicated that this project had gone beyond the blueprint stage.

SPACE EXPLORATION: In January 1990, Japan launched its first lunar probe, the MUSES-A satellite, and became the third nation on earth to enter the race for space exploration. According to Mr. Masato Yamano, president of the National Space Development Agency of Japan, his country was building an infrastructure to accommodate manned space flights in the 1990s and beyond. Japan invested $2 billion in a space lab, with plans by both the government and private industry to develop moon bases and other types of space structures. Some of these projects were envisioned to be joint ventures with America or other industrialized nations, an indication that Japan realized that the drive for outer space was an enormously expensive enterprise with high risks. Japan is now considered a major player in this field and companies such as the giant Mitsubishi Corporation and Ohbayashi Corp. were planning exciting things for the future.

The Japanese are also actively engaged in the search for new sources of energy. In the early 1990s, a venture known as the Sun- shine Project was working to develop sources of geothermal, solar, hydrogen, biofuels, and coal liquefication forms of energy. Another program, the Moonlight Project, was focused on the development of fuel cells and superconducting for electrical power. The new hi-tech environment of the 21st century will alter the basic foundational pillars of the world’s advanced economic societ- 246 Global Economic Boom & Bust Cycles ies. Prior to the bust cycle of the 1990s, the Japanese juggernaut was setting the pace for rapid implementation of new scientific breakthroughs with a systematic plan for the acquisition of knowledge and techniques that it either created, acquired in joint ventures, or in outright purchase of companies with innovative products and services. The big question of whether the Japanese could create or would continue to imitate, was answered in the 1980s. Japan reached a point in its scientific evolution where it established itself as a nation capable of major breakthroughs in many areas of technological and scientific endeavors. In 1988, Japanese inventors received 21 percent of the 77,924 patents issued in America. Also, Japan established major research and development centers where thousands of engineers and scientists actively pursue the process of systematic innovation and new product design. They absorbed the criticism of being a nation of copiers and made the necessary adjustments to become more creative, and let us hope, more environmentally conscious in developing new products and services for the 21st century! EDUCATION AND THE BRAIN INTENSIVE ERA A major key to the success of the Japanese push for technological supremacy is its educational system. In the journey towards the 21st century, brain intensive industries dominated the economic scene, and the Japanese will assure their place in this future by maintaining high standards in their educational system. As one of the most successfully organized nations in modern history, their plan to continue this high level of performance is very likely to succeed. The Japanese nation holds a very high degree of reverence for the educational process. They place supreme importance on establishing high standards and procedures in their extremely competitive educational system. Cultural respect and a deep appreciation for the educational process is embodied in most Asian societies. However, with Japan, this reverence takes on an added dimension: the struggle to survive. Having virtually no natural resources, the national priority has been to develop the full potential of its people The Japanese Connection 247 through higher education and advanced training. Keeping on course with its historical goals since the Meiji Restoration and the rude awakening of the atomic bomb, Japan has systematically applied the imperative of educational excellence for the survival and prosperity of the nation and its people. From pre-school to the university, the Japanese individual is disciplined and motivated to develop his or her full potential. As a result, Japan has the highest literacy rate in the world, nearly 100 percent! Prior to the 1990s, this nation was producing more engineers, scientists, and mathematicians than any other nation on the planet. Japanese schools averaged 60 more school days per year than most Western societies, and the problems of adolescent drinking and drug use are very minimal among its student population. The educational system is rigid, inflexible, demanding and loaded with plenty of discipline and academic rigor. Modeled along the same lines as the American version, the system includes kindergarten, six years of elementary school, three years of junior high, three years of high school, and four years training at a university. To get into the prestigious high schools and universities, students are required to pass difficult entrance examinations and the competition is tough. The basic road to success is to get into the top schools which lead to a good job in one of Japan’s major corporations. In Japan, as in most other Asian societies, the cultural pinnacle is to get a proper education and a proper job. ECONOMIC POWERHOUSE In the ten-year period between 1976 and 1986, Japan succeeded in developing a very powerful economy capable of promoting the world’s largest banks and laying the foundation for the world’s largest stock market. Driven by enormous trade surpluses and an escalating currency (yen) the Japanese economy quickly became the world’s premier example of a mercantile success story. With the advent of the Booming 80s, Japan stood ready to take full advantage of all of the economic forces at work that created a raging bull market over a seven to eight year period. Preparation and a shrewd eco- 248 Global Economic Boom & Bust Cycles nomic strategy propelled this nation on a course of accelerating growth in all sectors of its international and domestic markets. By the second quarter of 1987, the Nikkei stock market index surpassed the American stock market in value, and became the world’s largest exchange. The total market value of its shares exceeded $2.7 trillion. By 1989, a seat on the Tokyo Stock Exchange would cost $8 million, twelve times the cost of the New York Stock Exchange equivalent. Some major American corporations and securities firms willingly paid this price to be part of the largest speculative market of the 20th Century. By the end of 1987, the Japanese stock market had absorbed its losses from the Crash of ‘87 and stood ready for a rapid recovery in 1988.

WORLD’S TEN LARGEST BANKS (billions$):1990

Bank Nation Billions $

1) Dai-Ichi Kangyo Japan 428.20 2) Sumitomo Bank Japan 409.20 3) Mitsu-Taiyo Kobe Japan 408.80 4) Sanwa Bank Japan 402.70 5) FUJI Bank Japan 399.50 6) Mitsubishi Bank Japan 391.50 7) Credit Agricole Mutsuel France 305.20 8) Banque Nationale de Paris France 291.80 9) Industrial Bank of Japan Japan 290.10 10) Credit Lyonnais France 287.30

Table 7

Source: Adapted from data presented by the American Banker in 1990. The Japanese Connection 249

Total domestic savings for 1987 amounted to an astounding $5.1 trillion, and residential real estate rose 69 percent during the same period. With an economy flush with cash and low interest rates, the speculative frenzy simply rebuilt itself quickly as optimism for a successful recovery spread across the entire nation. The Japanese, as a nation, were determined to make the final years of the 1980s a period of enormous prosperity. By 1990, Japan was clearly the richest nation on earth, the modern Atlantis. For three straight years (1988-90) the majority of the world’s ten largest banks were Japanese. In April of 1990, two of Japan’s largest banks, Mitsu Bank and Taiyo Kobe Bank, merged to become another powerhouse bank in the world. Table 7 illustrates the largest banks in 1990 according to American Banker. Behind the preeminent rise of Japan’s financial power stood the strength and durability of its export markets. These markets gave rise to the land speculation frenzy, which in turn, fueled the speculation in the stock markets and led to other financial booms, such as the international Japanese investor. According to the Long-Term Credit Bank of Japan, as of 1988, the total value of land in Japan was estimated at $15 trillion, a value greater than all of the land in America. Japan’s land mass is roughly the size of California, or about 1/20th the size of America: world economics had certainly gone through an enormous change. Out of the top 100 income earners in Japan, 77 of these individuals earned their wealth in real estate. Five of the top ten billionaires in the world were Japanese, and of these five, the majority were involved in real estate. Clearly, the speculative land boom made instant riches for those individuals in the right place at right time, it had also generated a massive raging bull stock market. TOKYO During the Booming 80s, Tokyo became the richest and most expensive city in the world. With a population of approximately 14 million people (roughly half of the population of the entire state of California) and about the size of San Francisco, this city became the 250 Global Economic Boom & Bust Cycles center of world commerce, finance, and information. Tokyo is the rising sun of Japan, the central focus of its culture and economic power. The government, major corporations, mass media, financial and cultural institutions, and all of Japan’s most prestigious institutions of learning are concentrated there. Tokyo is the absolute power in Japan, with the Imperial Palace serving as the symbolic representative of that power and the seat of its national soul. Serving as the seventh capital of Japan, Tokyo has been the seat of the government since 1869. The city has been destroyed twice in its history; once during a devastating earthquake in 1923 and the other during the massive bombings in 1945 that ended World War II. The Japanese people rebuilt their capital after each destructive period and it stands today as a testament to the strength and spirit of the nation. Japan’s general scarcity of land had a significant impact on To- kyo, where the price of real estate skyrocketed to dizzying levels during the second half of the 1980s. Frenzied speculation drove the price of prime real estate to over $10,000 per square ft., with the most valued pieces of property selling at $200,000 a square meter.11 One acre of some properties were valued at $6.6 billion! An 800 square ft. house or a small two-bedroom apartment could run upwards to $1 million. The price of leasing floor space in Tokyo’s famous Ginza district could cost more than $650 per square foot. These economic conditions created one of the most dramatic land speculation bubbles in the history of finance. Land sales in Tokyo had become so hot that some foreign governments began selling their ambassadorial residences and surrounding acreage. These prime locations sat on some of the most expensive land in the world and presented unique selling opportunities. For instance, the Australian government sold its 88,000 square ft. embassy grounds in central Tokyo for $576 million. The Chinese government sold part of its embassy for $140 million. In an article in the Wall Street Journal during March of 1990, the authors stated that Japan’s big banks were sitting on over $300 billion in real estate loans, money that had been borrowed against The Japanese Connection 251 the inflated values of real property.12 Nearly all of Japan’s 1.3 million millionaires had made their fortunes in real estate, the same real estate market that fueled the enormous growth in Japan’s stock market and its overseas investments. INVESTMENTS Increasingly, Tokyo became the major financial capital of the world and the chief financier of America’s federal budget deficits. American Governors, Mayors, Senators, corporate executives, and financiers flew to Japan and established The Tokyo Connection, and Tokyo listened and wrapped up deal after deal in an effort to invest in an expanded version of Japan’s future. With some major and minor adjustments, Japan’s export-led economy continued on a steady path of growth throughout the 1980s. Perhaps the most serious problem addressed was the 1985 Plaza Accord. The accord represented another milestone in Japan’s economic history. Major industrialized nations of the West agreed to a coordinated effort to devalue the dollar in an attempt to boost America's export markets. The Japanese yen increased in value, but the expected result of reducing Japan’s trade surpluses with its trading partners did not pan out. Faced with a stronger currency, Japanese economic flexibility responded with a huge restructuring program that kept the economic ship on course and forced its industrial complex to set up business enterprises abroad. In further response to pressures from its trading partners, the Japanese government provided the stimulus to generate strong demand in its domestic markets by introducing tax incentives, low interest rates and aggressive marketing programs. The world was demanding that Japanese consumers spend more money, particularly on imported goods and services. All of these measures were aimed at one goal; to slow down the Japanese juggernaut and reverse the negative trend it was promoting in its international trade relationships. With escalating costs at home, Japanese corporations went abroad in search for cheaper labor costs in various countries around the 252 Global Economic Boom & Bust Cycles world. More companies began adopting the concept of a global market, utilizing Japan as the base operation. Labor costs were cut, but unemployment reached a high of 3.2 percent. By August 19, 1988, the yen was up a cumulative 82 percent against the dollar, but Japan was not completely derailed. Despite the losses in profits and sales, and a steady erosion of its competitiveness, Japan found ways to benefit and profit from an escalating currency. Some of the opportunities and benefits included the following:

(1) Raw material imports were cheaper as a result of a stronger yen. (2) Japanese investments in corporate acquisitions, commercial real estate, and various luxury items became cheaper and were regarded as great long-term purchases. (3) The relative high value of the yen generated a higher per capita income for the Japanese worker, which multiplied his or her purchasing power in an open market economy that promoted the free movement of cheap imports. (4) Many companies and individuals began to use a system called Zaitech (a financing technique) that essentially enabled them to borrow money at low rates in Japan and invest the capital in high yielding stocks and bonds (at home) and similar investments overseas, where the returns were higher (6 to 9 percent on American Treasury Bills and Notes.)

Although the Japanese found creative ways to adjust to the requirements of the 1985 Plaza Accord, history tells us that in the end this international accord/agreement was a major factor in bringing about the decline of Japan’s bubble economy. Its high-flying export- led economy eventually took a major hit and began a slow but steady descent back to earth. By 1989, the consumer spending binge was in its third year. During 1988, the economy grew at its fastest pace in 15 years, an impressive 5.7 percent. Many Japan watchers observed that the The Japanese Connection 253 amount of disposal cash available during this period was mind boggling, and cash-rich Japanese were clearly on a spending spree. Sales of luxury cars, paintings, custom-built kitchens, hi-tech bathrooms, big screen televisions, imported furniture, VCRs, jewelry and many other consumer items soared throughout the greater Tokyo metropolitan area. A new category of rich Japanese grew out of this trend, catering to a highly prosperous Japanese public. Real estate developers, architects, financiers, stock brokers, investment bankers and various other professionals were selling services and reaping huge profits from the domestic boom. However, what many Japanese consumers could not purchase was a home, and this led many to seek alternatives outside of Tokyo and its surrounding sub- urbs. INTERNATIONAL INVESTMENT FEVER Japan’s domestic consumption rose to an annual rate of 10 percent by 1989. Deregulation and loosening of the tax laws allowed for a major trend to develop for heavy investments overseas. As a result, more investment capital began chasing goods and services abroad. Big insurance and investment companies led the way; individual investors followed. And in 1990, the Pension Funds were allowed to invest up to 20 percent of their funds abroad as opposed to 3 percent in previous periods. As a result of these developments and other activities, Japan became the world’s number one creditor nation, with huge investments in various private and governmental loan programs, securities, foreign base corporations and real estate. Overall investments abroad totaled $727.3 billion in 1986. In 1987, this figure reached $1.07 trillion and continued to grow at a rapid pace. Hawaii represented a prime example of this investment movement, with a Japanese buying frenzy driving real estate prices into the stratosphere. After the choice properties and deal-making had peaked in Tokyo, Hawaii became a target for many large and small investors. Japanese investors purchased three of the four major hotels on Honolulu’s Waikiki beach. In February of 1987, a French 254 Global Economic Boom & Bust Cycles colonial mansion called Casa Blanca del Mar sold for $21 million. Of particular interest regarding this transaction is that the appraised value of this property two years earlier was $2.6 million! But to Japanese investors who had been accustomed to the frenzied Tokyo market and an escalating currency, $21 million was no problem. As the 1980s came to a close, Japanese investors substantially increased their drive to acquire more assets abroad. The strength of this new source of wealth which consisted of investments in factories, stocks, bonds, small companies, hard currencies and real estate would continue to expand the commercial power of the Japanese economy abroad. In America, where small leading-edge technology companies were searching for venture capital, a number of large Japanese companies stepped forward and bought a piece of the action. According to the Japan Economic Institute, an organization based in Washington D.C., direct investments by Japanese corporations in U.S. manufacturing totaled approximately $53.4 billion in 1988. The institute also indicated that by the end of 1988, Japanese corporations either wholly owned or had part ownership of 890 American companies.13 A large percentage of Japan’s foreign capital flowed into computer related firms and real estate, and it’s estimated by some experts that half of these funds were earmarked for California, the West Coast state considered by many to be a symbolic part of the Pacific Rim. By 1990, the Japanese had bought a large percentage of properties in downtown Los Angeles. In San Francisco, large hotels such as the Mark Hopkins, Meridian, Sheraton Palace, Bellevue, Shan- non Court, NIKKO, Miyako and Portman became Japanese owned properties. In other California purchases, Japanese companies acquired five golf courses during the 1989-90 period. Some of the most controversial acquisitions included the Fountaingrove Coun- try Club of Santa Rosa by Futsu Golf Club Company, Ltd. in March of 1990, and the fabulous Pebble Beach golf resort, a 5,300 acre Monterey Peninsula property which includes world class golf courses, luxury hotels, and the scenic 17-mile Drive. Pebble Beach golf re- sorts was purchased by Mr. Minoru Isutani's Cosmo World Corp. for The Japanese Connection 255 nearly $842 million in September of 1990 (a price that within two years proved to be outrageously high. Mr. Isutani was forced to sell the property for $500 million when his company was unable to manage its loan payments. In essence, this constituted a $342 million loss)! Probably the most controversial purchase of real property in America came in October of 1989 when Mitsubishi Estate Co., one of the world’s largest real estate developers, purchased a 51 percent interest in the Rockefellar Group which controls the 22 acre Rockerfellar Center located in Manhattan. The price paid was $846 million. But as one commentator observed; if these same 22 acres were located in downtown Tokyo (at that time) this property would have been worth approximately $21.7 billion; an extraordinary difference in value, due in part to the strengthening of the yen and Japan’s speculation fever. The 1985 Plaza Accord and America’s budget and trade deficits of the 1980s played a significant role in creating the towering strength of Japan. Sony picked up Columbia Pictures for $3.4 billion in Septem- ber of 1989, and Americans began to feel that they were losing their most treasured assets. In late 1990, Matsushita Electric Industrial Co. bought MCA Inc. - one of America’s prized entertainment conglomerates - for approximately $6.8 billion. To the American public, it appeared that Japan was slowly taking over, but to the individual American businessman working these deals, the windfall was fabulous. As capitalists, they saw an opportunity to make enormous profits from cash-rich Japanese investors. These were prime examples of the global business deal, and these activities became more of the norm rather than the exception, as billionaire investors, the world over, played global monopoly. PRECIOUS METALS With a stronger yen and lower precious metals prices during the second half of the 1980s, Japan increased its imports of these commodities. In 1987, approximately 260 to 280 tons of gold flowed into Japan. Platinum jewelry soared in Japan due to the changing 256 Global Economic Boom & Bust Cycles fashion attitudes of Japanese women. Platinum jewelry has an 80 percent popularity rating with the Japanese due to the metal’s aes- thetic qualities that are preferred over gold. During the 1980s, the Japanese played a very important role in establishing platinum as an investment metal and monetary asset. Some investors store platinum in small bars and coins similar to gold and silver. The general scarcity of platinum in world markets make an interesting case in support of a systematic rise in its value. Japan’s love of platinum was highlighted when its most popular professional wrestler, Antonio Inoki, wore his genuine platinum robe (valued at $424,320) to commemorate his 25th year in wrestling. This display symbolized the unique position that platinum holds in the Japanese society. ART WORKS/PAINTINGS During the Booming 80s, the Japanese became the second largest force in the art world, as cash rich millionaires purchased many valuable art pieces. In one of the world’s most notoriously inflated markets of that era, the Japanese investor, in many instances, over- bided the actual value of these art works and generated an even greater inflationary push on prices. Countless millions of dollars were spent on paintings by American and European artists, some of which were painted in the 20th Century! Perhaps, the deal that most astounded the art world was the purchase by Mr. Ryoei Saito, a Japanese industrialist, who purchased a painting by Renoir called the “Au Moulin de la Galette” for $78.1 million, and a painting by Vincent Van Gogh entitled the “Portrait of Dr. Gachet” for $82.5 million. The grand total, a whopping $160.6 million for two paintings! According to Mr. Saito, this was “no big deal.” Perhaps he was right, but I could not help wondering whether he or any other rich Japanese investors would ever pay that much money for any Japanese works of art?14 TRADE SURPLUS AND THE WORLD During the 1980s, Japan's share of world trade rapidly approached the 40 percent level, as deeply entrenched Japanese mar- The Japanese Connection 257 ket forces moved steadily through Western economies. The world’s appetite for Japanese products continued at a strong pace, and it appeared that an economic global slowdown would be the only event that could reduce the demand. The Group of Five Accord of 1985 (and the Group of Seven Accord of 1987) forced Japan to deal with the devaluation of the dollar and the subsequent strengthening of the yen. The impact on the Japanese economy was significant, as each round of the falling dollar resulted in increasing diversification in the Japanese industrial complex. As mentioned earlier, new plants were built overseas, unprofitable lines of business were closed or discontinued, and workers were laid off or semi-retired. The United States economy performed a similar operation during the 1970s, as high labor costs, operating expenses, and a strong dollar forced a movement abroad. However, in many instances, Japanese businessmen did not raise the price of their products in foreign countries due to an escalating yen. Instead, many absorbed the losses in an effort to maintain market share. Many American companies did not respond to this challenge with lower prices to recapture market shares, instead, they maintained price levels with their Japanese competitors. Some historical observers have noted that this was a grand opportunity missed by the American Auto Industry; Americans went toe to toe with the Japanese and lost significant market shares. This same economic script was played out in other industries, as American companies attempted to stay even with their Japanese competitors, rather than cut prices and win back market shares. According to Mr. Nobuaki Takakushi, an economist at the Ja- pan Development Bank, many Japanese companies were prepared to absorb the exchange rate fluctuations even at levels as low as 100 yen to the dollar. He also estimated that the break-even exchange rate for the manufacturing industry was set at 118 yen to the dollar, and for the electrical equipment manufacturers, the rate was 103.6 yen to the dollar. So, the Japanese were well prepared to sacrifice a great deal of their profit margins in order to hold on to those precious market shares. The absorption of price increases, by cutting 258 Global Economic Boom & Bust Cycles profit margins and reducing the work force, was coupled with the Zaitech system of currency hedging and interest rate spreading as an overall strategy for maintaining corporate profitability. With respect to interest rate spreads, Japanese corporations were borrowing funds at low rates in Japan (3.375 percent in 1988-89) and loaning these same funds out at higher rates in America and Europe. During the first quarter of 1989, some American policy makers declared that the devaluation of the dollar had not worked. As the dollar went lower, the actual trade surplus with Japan widened. In the EEC, a similar set of circumstances prevailed. In 1987, the EEC generated a trade surplus with America of $18 billion, but had a trade deficit with Japan of $22 billion. Western economies were struggling to reverse this trend. In 1977, America held a world market share of 60.8 percent, but by 1987, this share had fallen to 36.1 percent! In ten years, the world had gone through some dramatic changes and Japan had become a dominant force. With the American economy running on borrowed money, Ja- pan as a strategic ally became its primary supplier of funds. As a nation, Japan had an enormous stake in the American economy, particularly in regard to its export markets. By 1990, the two tightly joined economies had long passed the point where there could be any kind of a major split without producing disastrous results. America’s large sophisticated consumer economy gave Japan enormous wealth during the 1980s, and Japan reciprocated by helping to finance our huge budget deficits, forestalling the day of reckoning for our economy. Neither Japan or America could afford a major collapse in these arrangements. Thus, this day of reckoning was prolonged to the strategic advantage of both nations. But, America was shell-shocked by Japanese trade surpluses throughout the second half of the 1980s. The trend had been steady advances, with 1989 registering nearly $50 billion. These imbalances could not go on indefinitely; major events were leading up to an undesirable finale. The Japanese Connection 259

THE JAPANESE BUBBLE: CRASH OF 1990 The Tokyo Stock Exchange became one of the greatest speculative bubbles of the 20th Century. Coupled with the skyrocketing land boom, it became apparent that perhaps Japan had the most sensational financial markets of all time. At its height, popular stock issues were selling at 60 to 70 times earnings (in the U.S., the norm was 14 to 20 times earnings in the 1980s) as the speculative fever and high liquidity drove the markets to stratospheric levels. Nippon Telegraph & Telephone Company of Japan (a mega- corporation) was valued at more than the entire West German Stock Market at the close of 1989. During the first quarter of 1987 one share of this company traded as high as $19,000! The world’s largest securities firm, Nomura Securities, grew by leaps and bounds during the Booming 80s. With nearly five million customers, over 141 domestic and overseas offices and $400 billion plus in customer accounts, Nomura truly became a household word in Japan and a giant on the international scene during the boom period. The fever spread outside of Japan, as the international community joined in on the big financial party that the Japanese were host- ing. Over 90 or more foreign companies became listed members on the Tokyo Stock Exchange, some 70 of them American. Despite its high volatility and extreme financial excesses, this market continued to attract investors and companies from around the world. The risks were great, but the financial rewards appeared to be worth it. The Japanese experience was reminiscent of the period in America prior to the 1929 stock market crash. The extreme euphoria, high-flying life style, and the planning of grand enterprises which enormous wealth makes possible were just some of the characteristics of the speculative mentality. In 1929, the Empire State Building was under construction, a monument designed to become the tallest building in the world. It symbolized America’s greatness, wealth and prosperity. In 1990, Japanese industrialists were in the design stages and planning of a monument that would be the grandest sky- scraper ever built in modern civilization: AEROPOLIS 2001, the eighth wonder of the world. The grand enterprise was estimated to 260 Global Economic Boom & Bust Cycles cost $326 billion and take 25 years to complete. According to the Ohbayashi Corporation, its chief designer, the 500-story building would accommodate 300,000 people and consist of residential units, hotels, office space, convention centers, a hospital and plenty of parking space. The monument was scheduled to be located in To- kyo, the center of world international finance, symbolizing the Boom- ing 80s greatest economic power. During the 1920s, America invested nearly $100 billion in new capital equipment and revolutionized the way it mass produced, distributed and marketed products for world commerce. It was an established leader in many fields, from cellophane to the mass production of automobiles.15 In the 1980s, Japan was the heavy player, investing well over $1 trillion in capital improvement projects. By 1990, Japan would exceed American investment in new factories and equipment by $60 billion alone. In the 1980s, the technology of robotics would revolutionize the assembly line and establish the Japa- nese as the acknowledged experts in this field. The Japanese led the way during the 1980s in the area of mass marketing, achieving record breaking trade surpluses in world markets. The 1920s witnessed the blossoming of America’s economic might, however, it was Britain’s currency (the pound sterling) and political prowess that dominated international affairs. Similarly, the 1980s would bear witness to the economic might of Japan and the strengthening of its currency, but the American dollar and its political might dominated the international community. These and other events lead to one general conclusion: a major world financial crisis and subsequent revision of economic relationships. Prior to 1990, Japan had faced only one major recession in 40 years. Its stock markets climbed steadily for over 20 years, exhibit- ing great resilience during difficult periods. In the wake of the Crash of ‘87, the Tokyo Stock Exchange proved that it had the ability and the means to overcome significant financial shocks to its system. The cohesive group mentality of the Japanese culture remained optimistic and supportive of its economic thrust. The Japanese Connection 261

EMPEROR HIROHITO AND THE SHOWA ERA On September 19, 1988, Emperor Hirohito of Japan, suffering from a long standing illness, became bedridden. Prior to his death on January 7, 1989, the Japanese people paid special observance to their Emperor’s condition. There was a slowdown of speculation and business activities, with many year-end parties and weddings being canceled. The bull market continued, but at a slower pace. With the passing of the great emperor, the Showa Era came to an end. A new era was declared, the Heisei Era, which means "the Achievement of Universal Peace or Striving for Universal Peace." This new beginning brought with it a new optimism and a renewed commitment for a stronger, more dynamic Japanese economy. By the first week of February, the Nikkei climbed above the 32,000 level for the first time. Interest rates were slowly rising as the Bank of Japan struggled in a battle against rising inflation, particularly asset inflation. The land boom still moved ahead strongly, with price increases of 40 to 90 percent annually between the years 1985 to 1989. To many market analysts, popular shares with price earnings ratios in the 60 to 70 range were simply out of touch with reality. Moreover, the market price of many shares were a reflection of a company’s assets that included, among other things, high price stocks and overvalued real estate. Rather than judge a stock by its actual performance, investors (large and small) perpetuated a system of asset inflation. A major force behind this movement was the large cross-ownership of corporate shares by major institutions, corporations, and governmental organizations. Some 60 percent of all stocks held in Japan were tied up in this type of ownership pattern. Their primary objective was concentrated on capital gains, not dividends or short term profits based on price increases. Thus, a rise in interest rates were used to slow down the inflationary pressures in the overheated system and to keep the Japanese markets competitive with the international community. The discount rate in May of 1989 stood at 2.5 percent, by February of 1990, it had risen to 4.5 percent. 262 Global Economic Boom & Bust Cycles

The psychology of the great speculation still remained strong as the Nikkei was fast approaching the 40,000 level by the end of 1989. The Nikkei stood at 30,243.66 in January of 1989 and closed the year out at 38,915.87, registering over 8,000 points for the twelve month period. This was an impressive performance. However, it was also a sign of things to come. THE CRASH OF 1990 For Japan, 1990 was a very memorable year. The Booming 80s had come to a close and with the start of a new decade the event that many analysts had predicted began to happen: the Tokyo Stock Mar- ket started to unravel. It did not collapse all at once (the circuit break- ers in the system prevented that) it came down in bits and lumps, in a slow but dramatic display of financial turmoil. It was a three month descent that shook Japan like an earthquake, with many investors fleeing the markets. By the time it was over, $1 trillion in wealth had been lost, resulting in a 28 percent drop in the 225 stock Nikkei index. The market bottomed out at 28,002.07 on April 2, 1990, ending a very turbulent period for Japanese investors and the world community. According to an analysis presented by The Wall Street Journal in July of 1990, the rise in interest rates was the main culprit that started the market uneasiness. Nervousness eased into a wave of panic as investors saw the hand of fate tipping the scales in the financial markets. No one knew whether this was the main event, the collapse that would unravel all markets worldwide. Uncertainty filled the air not only in Japan, but also throughout the world. As 1990 began, optimistic soothsayers were predicting that the Nikkei would reach the 45,000 level by the end of the year. Japan’s economy was expected to grow four to five percent during the next fiscal period, beginning on April 1st. A new decade had begun with Eastern Europe marching rapidly towards democracy and free enterprise. These were positive trends, but there were still so many problems left unresolved. Would Gorbachev and perestroika (restructure and reform of the Soviet economy and political system) succeed in The Japanese Connection 263 the Soviet Union? And there was the S&L problem in America, the trade talks and the general rise in worldwide interest rates and inflation. Plenty of problems were around to spook the Japanese stock market; one had only to look at the world of reality, a world in a state of enormous change. On January 5, 1990, the Nikkei fell 600 points. Newspaper reports blamed the fall on the fear that the Gorbachev reforms would not succeed. On January 16th, the market fell 666.41 points with the Nikkei closing at 36,850.36. At that point, the momentum started to build; a psychology of market retreat began to move investors. The first major shocks in January and February shook Wall Street, but then something interesting happened: the Americans had begun to reason that the problems in the Tokyo market were unique to those markets and not a worldwide event. Many analysts began writing about a de-coupling theory, which stated that American markets could operate independently and not be taken down by the Tokyo exchanges. Smart money managers and institutional investors in America did not panic; they decided to wait the storm out. There were fluctuations in the Dow, but no heavy losses. The dollar began to strengthen against the yen, and by March 20th, stood at 153.65. Table 8 illustrates significant point drops on the Nikkei during this period.

CRASH OF 1990: NIKKEI DECLINES

DATE POINT LOSS NIKKEI CLOSE

Feb. 21st 1,161.19 35,734.33 Feb. 26th 1,569.10 33,321.87 Mar. 21st 963.85 29,843.34 Mar. 30th 1,045.71 29,981.45

Table 8 264 Global Economic Boom & Bust Cycles

By February 26th, $400 billion had been lost in stock value, and investors were clearly shaken. On March 20th, the Bank of Tokyo raised the discount rate one full percentage point to 5.25 percent in a bid to strengthen the yen; but conditions still got worse. The stock value of Nippon Telephone and Telegraph hit a record low of $6,503 per share. As mentioned earlier, this stock at one point sold between $19,000 to $20,000 per share in 1987. This was a clear sign that the collapse had generated real damage. At the Group of Seven meeting in April of that year, Japan appealed for greater assistance in curtailing the problems it was having in its markets. Japan was told that the solution could be found by raising domestic interest rates to higher levels. Market interventions in the currency markets was having very little impact on stabilizing the yen. For the Japanese economy, the easy money party was over.16 Time magazine reported that the total market capitalization of the Tokyo Stock Exchange fell to $2.9 trillion during the great crash.17 In the wake of this historic event, several analysts and investment strategists were predicting the occurrence of a much greater collapse during the fall of 1990 or early 1991. Barton M. Biggs, a managing director at Morgan Stanley & Co., indicated in his analysis that the Nikkei could fall to a level of 17,000 or 18,000 in coming periods.18 One of his basic premises was that, in general, it is not unusual for a super-long bull market to lose 40 to 50 percent of its value in a major crash. It has happen before, and as this analysis reveals, it happened again. By July, Japan was back to normal and the Nikkei was managing a rebound - closing at 33,172.28 on July 17th. With their confidence restored, the Japanese people were feeling happy and very excited about their prospects for the future. Consumer spending re- sumed and the psychology of the boom period was revived. In short, the resilient Japanese had bounced back again. OIL EMBARGO 1990 The invasion of Kuwait by Iraqi forces during the first week of August in 1990 created a perceived energy crisis for the industrial- The Japanese Connection 265 ized world. The American and the United Nations-led worldwide embargo of the importation of Iraqi and Kuwaiti oil placed a heavy burden on Japan. For this island nation with virtually no natural resources, the oil embargo presented a serious threat to the continuation of its boom period. Recuperation from the first quarter collapse was short lived and this next crisis was falling upon the Japanese economy at a very critical moment. Investor psychology reversed again as markets began another round of steady declines. From the start of the Mid-East tension in late July, to the end of the first week in August (the period after the invasion) the Nikkei dropped over 5,200 points, as fears of a major confrontation grew surrounding the crisis. Uncertainty dominated the markets, regardless of the fact that Japan was prepared to deal with the situation. Statistics revealed by the Ministry of International Trade and Industry indicated that Japan had two petroleum reserves that could cover the nation’s needs for 142 days. Despite the fact that Japan imports nearly 99 percent of its petroleum requirements, the nation had become much more energy efficient since the oil shocks of 1973 and 1979. Also, its sources of oil had become more diversified, even to the point of where 13 percent of the country’s needs were linked to strong Japanese equity (ownership) interests in oil producing companies. Kuwait and Iraq accounted for roughly 12 percent of Japan’s oil imports, whereas Saudi Arabia and the United Arab Emirates were responsible for 37.5 percent of the 3.8 million barrels of oil imported daily. Additional sources of oil from Indonesia, Mexico, China and elsewhere would certainly help to avert any major collapse in its industries. But the bulk of its oil requirements had been met by the Middle East, with Saudi Arabia as a major supplier. With rising inflation, the prospect of higher oil prices, and the threat of recession in America, Britain, and Spain; Japan braced itself for operating in a grossly uncertain global economy. The complexity and pervasiveness of oil in the industrialized world, signaled that a major crisis was at hand which could produce enormous economic ramifications. With the announcement of the Kuwaiti annex- ation, the Nikkei fell 893.41 points. This time the Nikkei reacted to 266 Global Economic Boom & Bust Cycles problems much deeper than rising interest rates or an unstable currency: a major energy crisis was developing, a crisis that affects currencies, interest rates, inflation, consumer psychology and the prospect of a global recession. As inflationary pressures continued to rise, the Bank of Japan announced on August 30th that it was raising the discount rate from 5.25 percent to 6 percent, providing further evidence that Japan was taking an aggressive stance against inflation. Volatility in the stock markets generated greater anxiety in the Japanese investor who began to realize that Japan’s bubble period was over. The Middle East crisis simply signaled that the party was over. Stock prices fell and interest rates rose as Japan began a period of tight monetary policies. Large Japanese banks that held sizable stock portfolios were hard hit by the crisis due to falling stock prices. From the start of 1990 to September, the Nikkei had fallen over 14,000 points. More than $1.5 trillion in stock value had vanished. With such a high concentration of wealth under the control of a few institutions and individuals, the Japanese financial world was at the crossroads, with the stage set for a grand collapse in both its real estate and stock markets. Having made substantial real estate loans during the Booming 80s, many large Japanese banks entered 1991 confronted with falling property values throughout Japan. However, the most notable declines would occur in Tokyo where Japanese corporations created the largest speculative real estate bubble in the 20th Century. Glo- bal economic forces helped to create this incredible land value in Japan and consequently created the conditions to reverse it. The Iraqi Affair dealt the last major blow to the Japanese bull market. There would be temporary recoveries, but the long-term trend for the early 1990s would be downward. During 1991, revelations of stock market and political scandals began to surface, causing many small Japanese investors to lose further faith in their system. Reports revealed that some of Tokyo’s large institutional brokerage houses had been involved in some shady The Japanese Connection 267 deals that favored wealthy investors and in some cases, mobsters. This was not an unusual characteristic of a system based on extreme speculation. The greed syndrome during a super-long bull market generates this type of activity. It had reached its height during the Booming 80s and was still in progress as the world entered the 1990s. With the start of 1992, it was clear that the Japanese economy was in the beginning phase of a full blown recession. The boom period had faded and massive foreign investment had slowed to a trickle. By the end of the first quarter and the start of the new Japa- nese fiscal period (March 31st) the Nikkei Stock Average stood at approximately 18,560, a clear indication that optimism was not in the air. The collapse of its stock markets and real estate markets, along with a steady progression of a reversal in its export-led economy, brought about a fundamental change in Japan. During the first half of 1992, many of Japan’s major industries had fallen on hard times. Steel companies, auto manufacturers, banks, airlines, brokerage houses and department stores fell into a slump. Real estate prices had fallen 30% in Tokyo and nearly 40% in other parts of Japan. Banks were left holding over $425 billion in real estate loans based on the depreciated values. By June of 1992, the Nikkei had fallen below the 16,000 level; it was in full retreat. In March of 1993, Business Week magazine reported the following: “The crash in stock and land prices has deflated financial aset values by a staggering $8.5 trillion...A huge 8.6% of the banking industry’s $6 trillion in outstanding loans now may be...on shaky ground.”19 In order to restore some stability to this enormous problem, Japan’s Finance Ministry resorted to pouring billions of dollars of government-controlled savings into the stock market; a calculated move to keep stock prices from falling to super critical levels. In addition to cutting the discount rate to 2.5% in 1993, the Japa- nese government began making preparations for an enormous economic stimulus package designed to jump-start the sluggish economy. In April, the ruling Liberal Democratic Party (LDP) announced that the package would total $13.2 trillion yen or roughly $117 billion in 268 Global Economic Boom & Bust Cycles spending programs; a grand strategy to halt the deepening effects of the three year recession. However, these measures could not stop the economic fallout of the bust cycle. Pouring money into maintaining high values in real estate and stock prices ultimately lead to nowhere but further losses. The deflationary forces that swept across the entire world had to be allowed to work their will throughout the entire Japanese economy. This basic economic reality would not be understood until years after the fact. Japan was at the crossroads entering the last decade of the 20th Century. Its mission, at that moment in history, was to adjust to a massive shakeout in its financial market during the early 1990s. However, this economic cleansing was not undertaken and, instead, the nation went through the 1990s in a state of paralysis. Old-line politics and entrenched interests held the country hostage to strategies that simply did not work! DECLINE OF THE LIBERAL DEMOCRATIC PARTY By June of 1993, the political landscape in Japan was in turmoil. The Liberal Democratic Party (LDP) the dominant political force in Japan for nearly four decades, began to collapse. A no confidence vote in the government of Prime Minister Miyazawa signaled the start of a prolonged political crisis that continued throughout the 1990s. The LDP had been in power since 1955 and represented a stable and cohesive force in helping to direct Japan’s rise out of the ashes of World War II. But, the season for change had arrived: Japan’s economic, financial, and political problems could no longer be managed in total agreement by its rulers. Revelations of scandals, corruption, links to organized crime and a deepening economic recession shook the foundation of the LDP. The high-flying Booming 80s that took Japan to the zenith of financial and economic power, collapsed with the start of 1990 when the bubble period began to unravel. Japanese investors lost trillions of dollars in wealth and a different mood began to slowly penetrate certain segments of the society. The Japanese Connection 269

This new wave of thinking was evidenced by the sudden popularity of a book entitled Honest Poverty by Koji Nakano. Nakano’s book put forth a strong case against materialism and blind acquisi- tiveness, a concern that Japanese society had become greedy and self-indulgent. Part of his theme is certainly reminiscent of Ravi Batra’s (author of The Great Depression of 1990) thesis of the age of the acquisitors; a period of history when acquiring wealth is the dominant force in the political and economic life of a nation. By June of 1993, more than 600,000 copies of Honest Poverty had been sold, and Japan was in the beginning stages of a period of massive soci- etal reforms and economic restructuring. The reform and transformation of Japan’s political order was a clear indication that it was not immune to the political crisis sweeping across the entire world since the formal ending of the Cold War. The slow but steady collapse of apartheid in South Africa, the demise of the Soviet Union, the fall of Eastern Europe, governmental turmoil in Italy, Colombia and various governments throughout Af- rica and elsewhere, were clear signs of a disintegrating world order that had been the dominant force for much of the 20th Century. Ja- pan would be no exception; some very painful adjustments were required to regenerate the fallen juggernaut. Despite the slowdown that resulted from the Crash of 1990, Ja- pan continued at an almost fanatical pace, pressing hard for its place as a technological powerhouse in the next century. In 1990 alone, the Japanese invested nearly $675 billion into fixed investments. Many major multinational Japanese corporations continued their investments in research and development and overseas facilities. Even as adversity derailed the overall economy, many corporations ( in various industry sectors) with well-entrenched global strategies and resources, continued on course in building their global empires. For those with strong market shares in America and the European Com- munity, the decade of the l990s proved to be very profitable. 270 Global Economic Boom & Bust Cycles

THE LONG BEAR MARKET AND THE LOST DECADE Prior to the bust period of the 1990s, Japan’s economic engine had been on a roll for nearly 40 years with total growth in its stock market reaching 25,000 percent. During the decade of the 1980s alone, Japan’s stock market grew six-fold. In 1988, the year after the Crash of ‘87, the Nikkei had soared 40 percent, and in 1989, recorded a 29 percent increase. At the height of the boom period, Japan’s export markets were raking in $61 billion in annual earnings. Addi- tionally, throughout the Booming 80s, Japan financed approximately one-third of U.S. budget deficits with its massive bond purchases. As mentioned earlier, some observers and analysts were expecting the Nikkei to soar to over 45,000 by the end of 1990. That never happened. As typical in most boom periods, stock prices broke loose from their underlining fundamentals and began to float at unsustainable higher levels. The euphoria was that the bull market was never- ending. Also typical in most boom periods are the monetary activities of the Central Bank Reserve System. Tight monetary policies by the Bank of Japan was a key factor in derailing the boom period. Cer- tainly the intent was not to cause major damage, but to slow things down. Regulators were extremely concerned about inflationary pressures and did not want to see asset prices keep rising at an extraordinary pace. It was felt that the combination of double-digit stock and real estate gains could possibly spin out of control and ultimately undermine the general price stability in the economy. In short, the Bank of Japan wanted to release some steam out of the so-called bubble economy of Japan. However, what started out as a fine-tun- ing process, turned into a landslide. Like the “Dot-Com Collapse of 2000,” prices came tumbling down very quickly. After the market fell in the early 1990s, 90 percent of mutual fund money was with- drawn from stocks. Thus, Japan entered the 1990s with a number of factors moving to bring about a downturn in its markets. It turned out to be a decade The Japanese Connection 271 of painful economic stagnation with the general economy mired in a host of crippling financial and economic issues. The decade witnessed a state of political paralysis accompanied by a rapid succession of over nine prime ministers struggling to bring about a closure to the crisis. The Nikkei zigzagged throughout the decade in a continuing downward spiral. Consumer and investor confidence remained at an all-time low, while the all-powerful banking system never crawled out of the mountains of debt and bad loans that kept creeping back into the system. By the end of the 1990s, Japan was still considered the second largest economy in the world (which was a very interesting statement considering the length and degree of its contraction) and the Japanese government had taken on nearly $5.5 trillion in debt. De- flationary forces were clearly on the loose throughout the economy, and Japan was no longer a country at the crossroads, but a country that now had to contend with building a new road to navigate the enormous uncertainties and opportunities of the 21st century. THE BANKING SYSTEM CRISIS At the root of the banking crisis stood the Crash of 1990, which destroyed the real estate and stock market bubble economy. Banks were sitting in the center of this enormous speculation. By the mid- 1980s, they got involved in taking on riskier loan deals, particularly in the commercial real estate and construction industries. As mentioned in an earlier section, at the height of the real estate bubble, Japan’s real estate value was twice that of all the land value in America. This was clearly a market saturated with extreme valuations. This previously valuable land/property was offered as collateral on loan packages. When property values fell and debtors could no longer make their loan payments, banks were left holding less valuable collateral. In addition, small credit associations and unions eventually got caught up in many of these speculative development deals. The other major factor that prolonged the banking crisis is the fact that banks were some of Japan’s largest shareholders and inves- 272 Global Economic Boom & Bust Cycles tors in the markets. In fact, hidden reserve funds of many of these banks were based on the valuation of stock portfolio investments. In some cases, when the crash hit in full force, the hidden reserves of some banks were totally wiped out. By the first quarter of 1994, the long-term value of commercial property had fallen by 70 percent from its high in 1989. Billions of dollars of taxpayer’s money was spent trying to stabilize prices in the markets, but the deflationary forces continued at a torrid pace. In Robert Sobel’s book, The Great Bull Market, Wall Street in the 1920s, he informs us that, “The key to any financial crash is the banking system. If banks can remain solvent and retain public confidence, then recovery may take place.” I think Japanese regulators may have missed this point. Old-line politics and outdated business alliances did not quickly adjust to the new realities of the busted 1990s. It was a slow drawn out affair that witnessed multiple billions of dollars wasted on ill-conceived strategies. In the 1990s, a tremendous amount of half-measures and tinkering did not get at the root of the banking crisis. When an economy enters a bust period, swift and direct actions must be taken by regulators to purge the system of maladjustments, miscalculated investments, bad loans and inefficient business models and businesses. These major activities are required in order to restore confidence in the system. Japanese leaders were unwilling or unable - in the early stages to quickly clean the slate (American-style, brutal and bloody, and accept your losses .i.e. the S&L crisis) and rid their economic system of inefficient banks, bad loans and unproductive enterprises. Old-line politicians, bureaucrats and businessmen struggled throughout the l990s to hold on to their power and fortunes while Japan wallowed in the mud and became a question mark to the world. Ul- timately, shareholders in the fallen banks and enterprises would have to face up to their losses. Fortunately, for Japan and the world, their economy did not fall into a deep depression with soup lines and raging unemployment. But this story is not over, for Japan is still struggling with some of these problems as of this writing. The Japanese Connection 273

REFORM MEASURES Various stimulus packages and reforms initiated throughout the l990s, illustrate how deeply the crisis had engulfed the Japanese economy. As a lesson for future reference, it’s important to study the impact of these measures in order to understand more clearly what did not work as solutions in this bust cycle. The following are some of the main reforms, stimulus efforts and the significant developments that took place during the l990s:

♦ As mentioned elsewhere, during the early years following the Crash of 1990, the government attempted to support prices in the stock and real estate markets by repeated interventions into the system in order to maintain high valuations and price stability. The Wall Street Journal reported in a June 1995 article that the Japanese government used three government controlled funds to conduct these operations: “a huge postal savings system; a postal life-insurance plan; and the national pension scheme...there funds hold total assets of nearly $4.61 trillion...Since 1992, each national budget allowed for some of these assets to be used to support stocks.”20 From Au- gust 1992 to January 1994, the government spent $300 billion on stimulation efforts. Public money was essentially used to support a an upward movement in the markets. The government got involved in unsustainable market rallies. This strategy ultimately lead to nowhere but further losses. These forays into the markets simply made it possible for speculators to ride the rally and sell at the end of a government buying spree. Smart short-term investors in Japan (or international players) probably employed that strategy. ♦ Bank failures were essentially not allowed during the first five years of the bear market. ♦ Multiple billions of dollars of bad loans written off many lender’s books, were subsequently replaced by new bad loans. This is one of the main reasons why the banking system could not revive itself in full force: in many cases weaker borrowers were kept alive in order to avoid taking the heavier write-offs. This strategy meant that valuable financial assets were not put to the best use. 274 Global Economic Boom & Bust Cycles

♦ For the most part, the average Japanese stayed on the-sidelines on many fronts throughout the decade. In the age of consumer sovereignty, this strategy by the Japanese consumer certainty played a role in the continuation of the downturn: until consumers start spending, the downturn will continue. Analysts repeatedly warned that consumer demand had to be stimulated and confidence restored. Con- fidence remained low, particularly as deflationary forces began to sweep throughout the system. Spending was low and by 1998, the Japanese savings rate had shot up to 30 percent of disposable income. Savers were hoarding some $9 trillion in wealth. There was essentially no confidence or faith in Japan’s political, economic and financial systems. Many were tired of the scandals and of a decade of economic mismanagement. Most people remained risk-averse and stayed on the sidelines. ♦ Deflationary forces or price destruction (as the Japanese referred to it) was promoted by lack of consumer demand. As Japanese consumers continued to delay major purchases, with expectations of further reductions in prices, lower prices continued on a downward spiral throughout the decade. Another factor contributing to this phenomenon was the global allocation of Japanese corporate investments in new plant and manufacturing facilities. By 1994, most new investments went to China (mainland China absorbed close to one- fifth of Japanese high-tech and component plants) North America and other developing economies in Asia. Relocation of these new facilities provided access to cheaper labor costs, allowing multinational corporations to remain competitive in the global arena. Lower cost products produced abroad eventually translated into lower prices in Japan. By the year 2000, domestic wholesale prices had fallen by 9 percent since 1991. Price cuts were evident in several sectors; from 55-cent burgers from McDonald’s to $82 suits made in China. In addition, the Japanese version of an American Dollar Store (the “Only Store”) began offering every item in its stores for 99 yen or roughly 82 cents. ♦ While the Japanese economy remained mired in a decade-long recession, some of its major corporations such as Toyota, Honda, The Japanese Connection 275

Sony and other multinational firms did well and remained profitable and competitive throughout the decade. After the Crash of 1990, these firms increased efficiencies across the board in relocation, currency tactics and other strategies. In the year 2000, Japan imported more from Asia than from North America and Western Europe combined. In response to the crisis in Japanese leadership, Mr. Norio Ohga, CEO of Sony Inc., stated in an April 1998 interview that, “The thinking of political leaders is really domestic thinking only...too insular.”21 Along the same lines, former U.S. Ambassador Walter Mondale expressed concern about Japanese leaders during late 1998. He stated that, “They are still a long ways away from adopting an open western system.” To the outside world, Japan was not making the right decisions as the second largest economic power in the world. ♦ During the boom and bust period of 1995-2000 that was centered in America, a new class of entrepreneurs and business leaders emerged in Japan. Perhaps the most successful businessman in this group, was Masayoshi Son, founder of Softbank Corp. Mr. Son was instrumental in helping Yahoo! get started on the Internet, and at the height of the Dot-Com Era, he was estimated to be worth $60 billion on paper. The emergence of this new class of business leaders represented a clear challenge to the old guard. ♦ For the fiscal year ending March 31, 1998, Japan recorded 17,300 corporate bankruptcies. In February of that same year the heads of three small firms that supplied parts to Japan’s large automakers, hanged themselves in response to their inability to save their business enterprises from going under. ♦ The so-called “Big Bang Reforms” economic plan was introduced in Japan during the first quarter of 1998. The 10-pound, 2,132 page document spelled out a carefully orchestrated plan to restructure and modernize the Japanese economy. The plan included across the board deregulation of its industries and markets, opening up Japan’s financial institutions and commerce to foreigners, a $75- $90 billion stimulus package, $50 billion in tax cuts and additional public works spending. 276 Global Economic Boom & Bust Cycles

♦ Interest rates fell throughout the 1990s in an effort to ignite a recovery. At some points during the decade, rates fell to zero or near zero levels, in an effort to combat the deflationary forces and other economic problems. ♦ During the Crash of ‘98 and the Russian meltdown, Japan’s banking and political problems were again given a spotlight on the global stage. Foreign investors fled Japan for the safe havens of the U.S. and European markets. Investors were still disappointed with the government’s inability to correct the banking problems. There was great frustration within the ranks of America’s leadership regarding Japan. Clinton Administration officials urged Japanese leaders to move quickly to stimulate their economy with tax cuts, and take drastic measures to clean up the banking crisis. ♦ A law enacted by Parliament in October 1998, gave the government powers to essentially seize large, failing banks to either na- tionalize, liquidate or transform them into publicly owned “bridge banks.” This plan was similar to the “Resolution Trust Corp.” (RTC) employed by U.S. regulators to clean up the Savings and Loan crisis of the late 1980s. A $516 billion package was proposed as part of the bank bailout program. It was rather interesting to see that in 1998 the banking system was still sitting on over $562 billion in bad loans. ♦ By the first quarter of 2001, Japan was still stuck in the mud with the same problems. On March 8, 2001, Finance Minister Kiichi Miyazawa alarmed the public with the statement that, “Japan's public finances are very near collapsing.” The currency markets had a field day with that remark, and within days, the Nikkei was falling to very low levels. On March 14, 2001, the Nikkei closed at 12,152.83, its lowest level since the mid-1980s. World talks centered on whether there would be a financial meltdown in Japan. Some of the issues debated were Japan’s $5.4 trillion public debt (which was estimated to be 130 percent of gross domestic product) its continuing deflationary problems, the unsolvable banking system crisis, super-low consumer demand and confidence levels, political stagnation and other related issues. The Japanese Connection 277

♦ In response to the growing domestic and international call for a new direction in Japan, in April 2001, Prime Minister Junichiro Koizumi was swept into power by popular support and as a leader determined to reform Japan’s political system. Koizumi promised to initiate an economic recovery through a system of structural reforms and to overhaul Japan’s ruling class. His first radical move (which was a clear break from old-line politics) was the selection of a new revolutionary cabinet. The new cabinet included five women, some members under the age of 50 and other nontraditional style leaders. ECONOMIST RICHARD KOO AND THE BALANCE SHEET RECESSION The extraordinary bubble economy of Japan that lasted for decades and reached a super bubble zenith in the late 1980s will go down in history as one of history’s greatest economic triumphs. From 1955 to 1990, stock prices increased 100 times in value and land prices increased 70 times in value. As stated earlier in the chapter, the Heisei Bubble years (1985-86 to 1990) lead to the all time peak for the Nikkei of 38,957 on December 29, 1989. During the 2008 meltdown, the Nikkei declined to 6,994 in October of that fateful year. This was one of history’s great reversals of economic fortunes; Japan was the center of one of the greatest bubble economies of all times. In 1990, Japan witnessed The Heisei Bubble Collapse and hit a brick wall, and fell into a deep recession. It was the end of an astounding bubble era and the start of a long-term bust era of asset- price bubbles. The descent was devastating as falling land and stock prices accounted for the loss of 1,500 trillion yen in wealth, an astronomical amount equivalent to three year’s Japanese GDP. A major casualty of the meltdown was commercial real estate: From 1989 to 2004, prices fell a whopping 87 percent. Golf club memberships did worse: the collapse from the 1989 peak to the bottom in 2003 was 95 percent. Japan experienced that degree of economic devastation and still remained the second largest economy in the world throughout the 1990s. 278 Global Economic Boom & Bust Cycles

Economist Richard Koo has conducted very significant research on this era. As chief economist for the Nomura Research Institute (a Japanese think tank) Koo has spent the past 27 years living in Japan in deep observation and analysis of Japan’s so-called lost decade. His book, The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession, is the definitive analysis of Japan’s deflationary collapse that began in the 1990s. This ground breaking study has brought to the surface something other economic textbooks have not uncovered, the significance of what he describes as the Balance Sheet Recession. According to Richard Koo, Japan’s economic downturn that began in 1990 was a Balance Sheet Recession and not an ordinary recession resulting from business cycles. Indeed, in his well structured analysis Koo indentifies two types of recessions: (1) the typical recession which is part of the normal business cycle and (2) the balance-sheet recession (a rare type) which is the result of the bursting of a nationwide asset bubble, like real estate, stock prices, art prices, etc.22 When there is a wholesale across the board collapse of asset prices, businesses and households will focus intensely on minimizing debt and repairing balance sheets. When asset values plunge to super low levels, the debt still remains and must be dealt with as first priority. In this type of economic environment, Koo tells us that, “Monetary theory does not work in a Balance-Sheet Recession until fiscal policy has been applied and balance sheets have been repaired.”23 Not only did Richard Koo live through the Japanese recession, he was also an active participant in the policy debates over a 15 year period. His eye witness examination of the events that shaped the crisis, as well as his theory of the balance sheet recession, enables us to better understand the reasoning for his conclusions of why we are looking at a different type of recession. A main assertion in Koo’s theory deals with the massive plunge in asset prices: “When a nationwide plunge in asset prices eviscerates asset values, leaving only the debt behind, the private sector begins paying down debt en masse. As a result, the broader economy experiences something economists call a “fallacy of composition.” This occurs when behavior that would The Japanese Connection 279 be right for one person (or company) leads to an undesirable outcome when engaged in by all people (or companies). Japan’s economy has suffered from this fallacy often over the past fifteen years.”24 Many companies went into the “Great Recession” in high leverage financial situations. This is completely understandable given the steady and consistent price appreciation that occurred on many asset classes over a period of decades. Companies and individuals borrowed against these assets taking out very sizable loans. Thus, when the collapse came, the first order of business was to clean up deplor- able balance sheets by paying down debt loads with existing cash flow. Koo reminds us that executives do not want the outside world to know that these problems exist on their balance sheets, so the need for the cleanup process is essential! Companies that were still generating profits targeted these cash flows for debt reduction. With businesses not reinvesting their cash flows, the economy will subsequently lose the vital force of aggregate demand. This is one of the reasons why monetary policies are useless in this type of economic crisis. Koo tell us that from 1991 to 1995 interest rates fell 800 basis points (from 8 percent to 0.5 percent) and this brought about no significant economic impact. On the household side of the spectrum, Japanese workers focused their resources and savings on paying down mortgages and had no appetite for taking on new debt even at zero interest rates. All of this would bring about contraction in aggregate demand which is the central cause of a recession. THE 1997 ECONOMIC POLICY FAILURE Similar to what happened during the Great Depression in the year 1937, the Hashimoto Administration attempted a program of fiscal consolidation or fiscal tightening (in 1997) with disastrous results. Similar to 1937, when a government begins to reduce fiscal stimulus and introduce austerity measures prematurely in a balance sheet recession, the economy will move into a meltdown mode. In response to strong recommendations by the Organization for Eco- nomic Cooperation and Development (OECD) and the International Monetary Fund (IMF) for Japan to reduce its spending programs in 280 Global Economic Boom & Bust Cycles the face of an aging population and large deficits, the country went on a crash diet to cut spending and raise taxes. The plan in 1997 was to reduce the fiscal deficit by 15 trillion yen, in addition to the introduction of a consumption tax hike from 3 percent to 5 percent, an increase in social security costs (taxpayer’s share) the discontinu- ance of a supplementary budget and other cost cutting measures. What happened next was not what the doctor ordered: the economy fell into a downward spiral for five straight quarters. These measures initiated a credit crunch and banking system crisis. Thus, a plan that was designed to reduce the deficit and control government spending actually did the opposite. By fiscal year 1999, Koo informs us that the annual deficit actually increased by 16 trillion yen to 38 trillion yen. The 1997 policy failure (just like in the American policy failure in 1937) was a very important economic history lesson, however, given the state of global economic affairs in 2012, this economic crisis was on track to happen again in America’s scheduled Fiscal Cliff 2013! Richard Koo is absolutely correct when he tells us that this was, “a prime example of what happens when a government tries to engineer a fiscal debt reduction plan during a balance sheet recession.” Tax revenues fell, deficits increased and the Japanese economy was thrown off course en route to a sustainable recovery. Corrective action (new stimulus programs) was taken in 1998 by the Hashimoto Administration, however, the measures were too late in order to quickly reverse a downward course. Much stronger measures were subsequently implemented by Prime Minister Obuchi to correct the failed policies of 1997. Given the fact that it takes considerable time for companies to repair their balance sheets (something that could not be achieved in one or two years) in the beginning of the recession, it was not surprising to see the minimal effects that fiscal stimulus had on the economy. The economy would reach temporary stabilization, then fall again the following year. In short, policy makers and economists were baffled about the weak response and this would continue to confound successive government and central bank attempts at solv- The Japanese Connection 281 ing the massive ongoing economic problem. Thus, even with the lucrative prospect of zero interest rates, Japanese firms - en masse - would spend years paying down existing debts. Koo’s research revealed that Japanese firms stopped taking out new loans in the mid- 1990s, and by 2002 to 2003, the debt repayment process hit a record high of over 30 trillion yen per year. A significant decline in the repayment process (by the private sector) began to take root in 2004, and by 2005, the repayment process for most companies was over and a recovery began to take place throughout much of the economy. This represented a major turning point for Japan and why Richard Koo identifies Japan’s Great Recession as a 15-year crisis (1990- 2005). The recovery that began in 2005 signaled to the Bank of Japan that it was time to change the monetary policy of zero interest rates (Zero Interest Rate Policy: ZIRP). As borrowers began to return to the market, it was a strong indication that balance sheets had been cleaned up and that the recession was over. By July 2006, the key benchmark rate was raised to 0.25 percent, and by February 2007, the addition of another 25 basis points raised the rate to 0.50 percent. In addition, quantitative easing was abandoned in 2006. Koo reminds us that as a recovery begins to take shape after a grueling balance sheet recession, the demand for loans by the private sector remains weak due to what he terms as the “debt-rejection syndrome.” This initial aversion to debt in the early stages of a recovery is understandable, given the fact that for many, enormous debt became a trap and a kind of debt prison for many years. And if a company or individual can move forward and operate without debt, that is a better remedy and path to follow. Enormous debt is a colossal burden, especially in a balance sheet recession. While most critics will point to Japan’s so-called lost decade as an absolute failure, Richard Koo argues that Japan “avoided a major depression because the government decided to apply fiscal stimulus and kept it going over many years.” This is the reason why we do not call Japan’s nearly two decade downturn a Great Depression: the government succeeded in preventing a catastrophic decline in 282 Global Economic Boom & Bust Cycles the nation’s standard of living despite the economic crisis. To Rich- ard Koo, this was one of the most successful economic policies in human history. Japan spent 140 trillion yen and avoided a deep economic depression. However, after two years of a short-lived economic recovery, Japan, like the rest of the world, had to endure the 2008 meltdown in the United States. In a global economy no nation can escape the impact of a major slowdown in the world’s strongest economy. Ja- pan would weather the storm, however there would be another crisis that would knock this nation to its knees and begin a new chapter in economic catastrophe. THE MASSIVE EARTHQUAKE OF 2011 On March 11, 2011, Japan was hit by a roughly 9.0 massive earthquake, tsunami and nuclear disaster that dealt the nation a catastrophe of enormous proportions. The economic impact of this triple blow disaster was felt throughout the world. In an age of instant news and communications, the world witnessed parts of Japan being ripped apart by massive earthquake damage, huge walls of water swallowing coastal areas and a smoldering nuclear disaster in a nation that had experienced the devastating force of the atomic bomb roughly 67 years ago. The disaster left more than 20,000 people dead or missing and thousands of people homeless. Transportation arteries, energy resources and several industries were crippled. And in the midst of this epic disaster the world witnessed the worst nuclear crisis in decades with the Japanese government struggling to contain the fallout. The initial cost of the disaster was estimated to be $300 billion. As the third largest economy in the world (China became the second largest economy in 2010) Japan’s massive disaster had an immediate impact on the global economy. Its export markets were derailed, generating shortages for parts and critical components in the manufacturing sectors. These economic dislocations were particularly damaging to the export markets of U.S. and China. The triple blow disaster forced an already weakened Japan into another The Japanese Connection 283 recession. By late August 2011, Japan’s exports had fallen for five straight months, leaving little doubt that the country had been dealt a severe blow to its economic engine. In Chapter Eleven (The Eco- nomic X-Factor: Natural Disasters and Terrorism) a deeper analysis and discussion of this extraordinary disaster is presented. SUMMARY/ANALYSIS After over 40 years of massive progress and building one of the most successful technological and economic societies in world history, Japan hit a huge barrier in 1990 and started a descent into economic chaos. Based on the ground-breaking research of Richard Koo, we now have a much better understanding of why Japan lingered in its Great Recession for 15 years and why this dynamic country did not fall into a deep depression reminiscent of the 1930s Great Depression in America. Despite the massive loss of wealth, after nearly a decade into the economic crisis, Japanese consumers were hoarding over $9 trillion in wealth, Japan’s corporate titans were still globally competitive, the Japanese people were still completely committed to developing new innovative Information Age technologies, Japanese corporate titans made serious inroads into mainland China, Japanese money and investments helped to fuel the boom and bust cycle of 1995-2000 in America and a new class of entrepreneurs emerged to challenge the old-guard. Even after losing trillions of dollars during the long bear market, Japan is still rated the third largest economic power in the world. Japan will recover and will remain an important economic, scientific and technological force in the world. However, the road ahead in the 21st century will be very different from the post-World War II era. With an aging population (median age was 45 years old in 2011) low birth rates, immigration restrictions and significant population shrinkage, Japan’s future growth will need to focus on productivity and not immigration and/or de- mography. Japan has had no real population growth in 20 years: births are remaining below the significant replacement rate. It is es- 284 Global Economic Boom & Bust Cycles

timated that by the year 2050, the median age in Japan will be 55 and the total population will be approximately 100 million people, half of whom will be elderly. A significant decrease in a younger work force in the decades ahead will have an impact on the ability of Japan to maintain its status as one of the key dynamic power centers in the world. Japan is at the crossroads! NOTES (1) Carthage was an ancient North African city-state located on a site near modern Tunisia. As a wealthy mercantilist society, it thrived on profitable trade and products of the world's great cultures and societies. For many hundreds of years, these North Africans were the most successful traders, seafarers and explorers in the world. (2) This period began the autonomous reformation and industrialization of Ja- pan; it was essentially Japan's industrial revolution and a break from its feudal past. (3) Paul Manning Dodd, Hirohito: The War Years, (New York: Mead & Com- pany, Inc., 1986) p. 31. (4) IBID, Hirohito: The War Years. (5) IBID, Hirohito: The War Years. (6) W.G. Beasley, The Rise of Modern Japan, (New York: St Martin’s Press, 1990) pp. 224-226. (7) Gary Swan, “Billionaire King of Downtown Tokyo Real Estate,” San Fran- cisco Chronicle, June 5,1989, p. c3. (8) Paul Erdman, Paul Erdman’s Money Book, (New York: Random House, 1984) pp. 132-33. (9) Jacob M. Schlesinger, “MITI ‘Vision’ for 1990's Seeks a Mellow Japan Oth- ers Shouldn’t Fear,” Wall Street Journal, July 3,1990, p.a1. (10) Richard A. Jenkins, Supercomputers of Today and Tomorrow: The Parallel Processing Revolution, (Blue Ridge Summit, Pa.: Tab Book Inc., 1986) p. 205. (11) Marcus W. Brauchli and Masayoshi Kanabayashi, “Land Prices in Japan Are Getting So Steep The Nation Is Jittery,” Wall Street Journal, March 23,1990, p.A1. (12) IBID., p.A1. (13) Edward D. Welles, “The Tokyo Connection,” INC., February 1990, pp. 52- 65. (14) By 1993 the art boom in Japan was over. Japanese investors who had paid extraordinary prices for collectibles during the late 1980s were hit hard by the rapidly falling prices during the deflationary period of the early 1990s. Impres- sionist art prices had fallen by 50 percent and many American and European The Japanese Connection 285 dealers traveled to Japan looking to pick up rare paintings for bargain prices. If Mr. Saito had been forced to sell his two paintings in 1993, he would have suffered an enormous loss. The boom and bust cycle works in this manner: whatever had been the subject of the boom period, would depreciate the most during the bust period. (15) Robert Sobel, The Great Bull Market, (New York: W.W. Norton & Com- pany Inc., 1968) pp. 36-38. (16) Approximately one year later (final week of April 1991) the Japanese and Germans were called upon to lower interest rates in order to assist in ending a recession in America. President Bush held an informal meeting with the Group of Seven representatives at the White House in a grand effort to lower world interest rates. As the recession deepened in America, the need for lower domestic interest rates became the Bush Administration's primary focus. However, continued cuts at home without international support placed the U.S. in a precarious situation. Japan's Finance Minister, Ryutaro Hashimoto, stated that pressures at home, specifically in its land prices and a tight labor market had placed Japan in a difficult position; it could not immediately lower its interest rates. Peter Trull, “Bush Pushes G-7 Countries on Reducing Rates, but Gets Unenthusiastic Re- sponse,” Wall Street Journal, April 29,1991, pp. A2 and A16. (17) Barbara Rudolph, “Pop! Goes the Bubble,” Time, April 2,1990, pp. 50-52. (18) Michael R. Sesit and Marcus W. Brauchli, “Tokyo's Market: Was It a Bubble Just Waiting to Burst,” The Wall Street Journal, April 3,1990, pp. C1 and C21. (19) Larry Holyoke, Neil Gross, Robert Neff and Karen Lowry Miller, “Fixing Japan,” Business Week, March 29, 1993, pp. 68-74. (20) Robert Steiner, “Japanese Stocks Tumbling Without a Net,” The Wall Street Journal, June 15, 1995, p. A12. (21) Jon Herskovitz, “Japan’s Big Firms Thrive Amid Crisis Plaguing Economy,” San Francisco Chronicle, April 13, 1998, p. A13. (22) Richard Koo, The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession, (John Wiley & Sons (Asia Plc. Ltd., 2009) p. 1 (23) IBID, p. 15. (24) IBID, pp. 17-18. CHAPTER SIX THE ROARING 90s and CRASH of 2000

“We will have more crises and none of them will look like this because no two crises have anything in common except human nature.” Alan Greenspan “The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them.” Warren Buffett

he decade of the 1990s was fast and furious and became a Tmajor transition stage for the 21st century and the new millennium. An explosion of new technologies hit the scene, driven by the competitive necessity to build new markets and new paradigms. The promises and vast potentials of the Information Age Revolution were unveiled. What had been building momentum for over four decades in laboratories and research centers, broke loose in many directions. The world began to think in Internet Time, build more sophisticated systems and robots and expanded the capabilities to break free of an oil-base economy in the 21st century. Creative destruction, a term popularized in the 1930s by economist, Joseph Schumpeter, adequately describes much of what we witnessed in the 1990s. His point was that “capitalism has a tendency to reinvent itself through chaotic disruptive change.” Having lived through the boom and bust period of the 1920s and 30s, Schumpeter was able to observe many of the incredible changes that took place during that era. And change is now a constant reality for this era, accompanied by the acceleration and speed at which things can be done. As a pivotal point in world history, the 1990s was a revolution in paradigms, and perhaps phase one of a much larger system of change. We are in an era of technological innovation that is very likely to last for most of the 21st century. And change will happen

286 The Roaring 90s and Crash of 2000 287 very quickly, in the spirit of a global free enterprise system unmatched in world civilization. The technological revolution - on all fronts - is moving quickly out of research labs and into practical applications, which is where the real excitement happens. Dynamic business enterprises are bringing new innovative products and services to the market at a very rapid pace. That’s where the action begins, and where new boom periods get their start. This is the underlying spirit and technological philosophy that this era is now seeking to manifest: the acceptance and accelerated pace at which we must now build these new technologies. This is also the new technological genesis that emerged in the 1990s, and it is this genesis that will dominate much of our thinking in the vast uncertainties of the 21st century. The boom and bust cycle of the 1980s was sensational in many respects, particularly when we add the dynamism of the Japanese connection. The microcomputer and software revolution expanded our productive capabilities and made billionaires out of Bill Gates, Michael Dell and others. However, the Internet and dotcom mania of the 1990s’ cycle, became bigger and more Roaring, breaking all standards of conventional investment wisdom. We clearly moved to the next level in the technological revolution, and the space and time it took for someone to become a billionaire was significantly reduced. Things sped up and the action was incredible. So as we examine this period, keep one central point in mind: that the next boom and bust cycles will likely move at a faster pace, be more brutal on the bust side, and create wealth at unbelievable speed. The implementation of dynamic new technologies will make all of this very possible. THE REVOLUTION “In the beginning there was Netscape, Amazon.com, Yahoo!, AOL and ebay, and they expanded our universe and vision of the world through the wonders of the Internet. And in the midst of these marvelous creations, we discovered profits and wealth, and found joy and happiness for a little while.” 288 Global Economic Boom & Bust Cycles

Like the early development of Microsoft (which went public in 1986 and sold for a $1.50 a share in 1988) Oracle and Adobe Sys- tems during the economic slowdown period of the mid-1980s, such companies as Netscape, AOL, Amazon.com and Yahoo! were establishing their foundations during the economic slowdown of 1994- 96. They went on to become the early pioneers and well-known brand names of the emerging era. With Netscape came the browser and an efficient technology to navigate the Internet. Yahoo! introduced us to directories and portals, while AOL provided the best organized system for access, community and convenience in the web universe. Amazon.com hit the market in July 1995 with a serious operation to sell books on the Internet. This represented one of the first proven operations for development of ecommerce in cyberspace. These early pioneers created structure, meaning and purpose in the brave new world, and were richly rewarded with brand names, investors, and billions of dollars in market capitalization. The microcomputer revolution of the 1980s had laid the foundation for this explosive new development that gave consumers, professionals, business operations and others a much stronger base of decentralized power. It is this level of empowerment that began to captivate the imaginations and aspirations of millions of people the world over. GLOBAL INFORMATION INFRASTRUCTURE Emerging from the telecommunication and digital revolution of the l990s, was the grand concept and global vision of an Informa- tion Superhighway. With the United States as the leading exponent and global apostle of the Information Age, trend-setting images and symbols moved this nation further to the forefront of a major global communications revolution. The Internet - a mass of interconnected computer networks - was built by the Pentagon in 1969 as a backup military option in the event of a nuclear war paralyzing world communication systems. It was strategically positioned to be the surviving communications system in the event of a holocaust. Over 30 years later, the system became the main artery of a major effort to link additional networks The Roaring 90s and Crash of 2000 289 to an ever-expanding web of communications developments on a global basis. On January 11, 1994, Vice President Al Gore delivered a speech at UCLA in Los Angeles, outlining the goals, objectives and future plans by the Clinton Administration to further the technological designs of a national superhighway. After that speech, Al Gore became the national guru for the telecommunications revolution. The term and concept of the Information Superhighway generated grand visions of a vast superstructure of communication networks in a place called cyberspace. THE CYBERSPACE CONNECTION The fact that millions or even billions of people will be commu- nicating to one another through a global system of interconnected computer networks, was the beginning of a very powerful social, political, economic, financial and technological movement. What we witnessed in the Roaring 90s was the development of a global information infrastructure, promoted and sponsored throughout the world by a very vibrant free enterprise movement. The universal imperatives of this global information system are: competition, open access, private investment, universal service and deregulation or flexible regulations. When fully implemented by the majority of the world’s nations, these global principles will define a new competitive marketplace for the 21st century and beyond. The Dot Com Era created a global awareness and belief system for the new economy, a movement that continued to build momentum despite the tremendous drops in stock prices that occurred throughout the Nasdaq and Dow Jones Industrial Average in the Crash of 2000. The amount of information on the Web continues to grow at an astronomical pace, with expectations of millions of new users joining the global communication system in the near future.1 According to the Computer Industry Almanac, online users worldwide totaled 259 million by year-end 1999. Expectations were that approximately 350 million people would be online by year-end 2000; 490 million by year-end 2002; and over 765 million by year-end 290 Global Economic Boom & Bust Cycles

2005. Additionally, a report put out by IDC Research in June 2001, boldly declared that, “almost 1 billion people around the world would be using the Internet by 2005.” Additional data supported the belief that the period between 2001-05 would witness rampant growth in the number of users in various countries and regions around the world. By the end of 2010 (after nearly five years of continuous explosive growth, particularly in the developing world) the global population of users had soared to over 2 billion people. In January 2012, the tally stood at 2.095 billion users, which included over 513 million users in China. The U.S. pointed the way as the vanguard nation heralding the birth of this dynamic new era. Thus, we are clearly in the midst of a tremendous growth period in regards to this incredible communications medium. The Internet Revolution opened a door to a broad range of communication opportunities, a door that was pushed wider as we proceeded through the early years of this bold new millennium. Out of the ashes of the dotcom and technology collapse emerged much stronger business models supporting revenue generation with solid links to the old economy. The so-called New Economy was not derailed, however, it was reengineered and given stronger legs to navigate the economic and financial terrains of the next phase in the new era. It was the Internet Revolution that gave birth to the Dot Com Era and the mantra of the New Economy. With it came online trading, business to business portals, the rise of ecommerce, and a host of other exciting developments. The New Economy mantra was not an empty pipe dream, but spoke to the significance of powerful new technologies building new business models. This new economic system boasted of major efficiencies that would save money and time, boost productivity and create better products and services for the new digital age. The rise of this New Economy witnessed an extreme focus and drive to lay the foundation for the new information age infrastructure. There was a rapid, almost fanatical growth in investment capital that had money pouring into U.S. companies and markets from all corners of the globe. The Roaring 90s and Crash of 2000 291

It’s important to understand this, for it provides the foundation and reasoning behind the incredible bubble market of the Dot Com Era. What essentially happened was an unbridled frenzy regarding this new technological paradigm, driven by uncontrollable greed and power. The Information Age Revolution of the 1990s is still very much intact and will generate and inspire many boom and bust cycles throughout the new millennium. Thus, despite all of the turmoil of 2000-01, the number of people joining the Internet Revolution continued at a steady pace. The Internet is a vibrant medium with tremendous potential, but it cannot be easily mastered and controlled, as the Dot Com Era has so clearly illustrated. It’s a vast universe with no boundaries, free and untamed. For those who will take the time to understand the true nature and spirit of the revolution, a proper strategy for success will be revealed. With millions of people joining the worldwide web each month, this movement continues to be the fastest growing telecommunications revolution in world history. It is certainly unprecedented and will bring about global changes that no one can possibly predict at this time. The magnitude and vast potentials for cultural, scientific and technological interchange is beyond mind-boggling. Fully aware, market-driven economies and societies will reshape our world in astonishing ways. THE SILICON VALLEY CONNECTION The commercial applications of new technologies emerging from the 1990s tech revolution, formed the nucleus of the boom and bust cycle of 1995-2000, with Silicon Valley and the Bay Area serving as the epicenter of this new movement. However, it is important to note that prior to this sensational boom period, Silicon Valley was in the process of reinventing itself during the slowdown period of 1994- 96. With the start of 1992, a nonprofit organization was started in Silicon Valley called Joint Venture: Silicon Valley or JVSV. The primary goal of this organization was the economic revival and rebirth 292 Global Economic Boom & Bust Cycles of the world famous Silicon Valley infrastructure complex. After the first six months in operation, the organization issued its Phase I report entitled, An Economy at Risk, which examined some critical long-term problems facing the economic growth of the region. In June of 1993, JVSV issued its Phase II report entitled Blueprint For A 21st Century Community, which outlined a number of dynamic solutions that could resolve the challenges facing the local economy. As the birthplace of the world’s most advanced high-tech companies, Silicon Valley has been an extremely important geographic engine of growth for California regionally, and the United States globally. For decades Silicon Valley lead the way as the high-tech capital of the world. With its unique combination of leading-edge companies, its strong dynamic entrepreneurial culture and a diverse pool of knowledgeable workers, Silicon Valley residents perfected the art of systematic innovation to a point where the spirit of technological revolution became a way of life. In this one geographic location can be found the broadest and deepest range of scientific and technological expertise, coupled with an entrepreneurial flair for adventure. From the semiconductor to communication technologies, to major advances in business services, the regional base of Silicon Valley pioneered movements that ultimately changed the way people work, play, learn new skills and enjoy the pleasures of modern civilization. The major industry clusters that drove the dramatic growth periods are Semiconductors, Computers/Communication, Defense/Space, and Business Service. During the early 1990s, these areas were in a transformation stage while the emerging industry clusters of Soft- ware, Bioscience and Environment were positioned as additional growth clusters of the 21st century. Thus, according to the Blueprint report, these seven export-oriented industry clusters represented the major lifeblood of the region’s economy. THE CLUSTER FACTOR The presence of industry clusters is an important phenomenon for a regional economy. An industry cluster consists of geographic The Roaring 90s and Crash of 2000 293 concentrations of interdependent and globally competitive companies in related industries. A combination of resources, talents, expertise, and production capacity provided by both domestic and foreign, large and small firms, fuel the growth and development of a dynamic cluster. This interaction and cross-fertilization of ideas, products, and services fosters a unique industrial self-generating environment that promotes dynamic growth throughout the local economy. With the support of a solid infrastructure consisting of state-of-the-art communication/information systems, modern transportation facilities, university/research environments, finance and marketing services, favorable governmental regulations and strong export markets, industry cluster developments can become the main engines of economic growth and prosperity for a region. As this growth translates into domestic and international success, the region begins to attract and recruit brilliant minds from around the world. An economic multiplier effect happens on many fronts. Local firms supply products and services for other firms located throughout the industrial region. Employees pump up the local economy by spending their paychecks at local stores and restaurants, and purchasing homes and automobiles. For the high-tech Silicon Valley, this economic phenomenon contributed greatly to a high standard of living throughout the four county network of Alameda, San Mateo, Santa Clara and Santa Cruz. The Blueprint report tells us that, “For every $100 in sales, cluster firms can induce as much as $300 of sales throughout the local economy by purchasing local goods and services with income new to the region.”2 Thus, the major seven key clusters of Silicon Valley were vital to the continued international strength of the region, and this was the main focus of the JVSV initiative. Many individual firms continued to prosper on a global basis, but expansion designs that consisted of outsourcing and building new facilities in other regions meant the gradual chipping away of the harmonious cluster-effect that made Silicon Valley a world class region in past periods. 294 Global Economic Boom & Bust Cycles

With a changing economic picture in world affairs, intense international competition, particularly from Asian countries, and the rise of other high-tech regional industrial complexes in various parts of the world functioning with lower operating costs (wages, taxes, etc.) the Valley slowly drifted into a period of significant economic decline. From 1984 to the early 1990s, 40,000 jobs were lost in manufacturing industries. From 1989 to 1993, job growth for the Valley was virtually stagnant. By the early 1990s, worldwide competitive forces had restructured the high-tech world, compelling some leading-edge Valley companies to expand outside of the region. The emergence of Japan and the Four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) and India (with its large base of two to three million software programmers and developers) had a dramatic impact on Silicon Valley’s worldwide prospects. In a reality where few things remain the same for very long, it seems that even the most powerful of entities cannot escape the inevitable cycles of birth, growth, maturity, death and in some cases, rebirth. The formation of the JVSV initiative had a mission to revive and restore the Silicon Valley’s world class life-style and to put it firmly on track for the expected growth periods of the 21st century. As the developments of the 1990s clearly illustrated, the timing for their rebirth strategy was on target given the period of industry chaos during the opening stages of the Information Age Revolution of the 1990s. REGIONAL COOPERATION In Blueprint For A 21st century Community, JVSV promoted a strong regional collaboration of business, government, community and educational leaders to fundamentally reshape the future of Sili- con Valley: the so-called collaborative advantage. More than 1,000 government, business and community leaders in the Silicon Valley came together to work on this fundamental problem affecting their collective overall future. In response to the rapidly changing world economy and the extraordinary prospects of the 21st century, the Phase II report recommended the following: The Roaring 90s and Crash of 2000 295

♦ The need to restructure the infrastructure of Silicon Valley to embrace the dynamics of change at a much faster rate. This included being more responsive to the individual needs of the companies and industries that are the essential components of the Valley. The report made the observation that smaller, less complex regions like Austin, Texas or Singapore were often able to meet the rapidly changing needs of companies faster than Silicon Valley. ♦ Silicon Valley would go beyond its reputation as the Valley of Entrepreneurs to become the Entrepreneurial Valley. While the independent entrepreneur was the primary engine of the Valley’s initial growth, a new growth engine of the 21st century will be the networked corporation having dynamic relationships with other companies and with many communities. The Valley will enjoy the fruits of individual entrepreneurs, but will also be able to capitalize on new ideas through strong networks of companies, institutions and individuals. ♦ In the future, Silicon Valley will become the world’s first truly networked region, nurturing the right environment to attract, retain and grow the virtual corporations that are linked extensively to the global economy of the 21st century. Instead of doing everything in- house in a single location, companies began locating activities globally to take advantage of each region’s unique offerings. In the process, a new type of business emerged; the networked or virtual corporation which generates unprecedented responsiveness and productivity. ♦ Flexible networks that link contractors, subcontractors, and customers in an elaborate web of relationships became the dominant organizational pattern. These networks were both local and global. ♦ In June of 1994, JVSV announced the formation of the first environmental incubator program in America. Eight entrepreneurial start-up companies moved into a 20,600 square-foot building in San Jose, California and began their two year nesting periods, which provided them with inexpensive space, free office furniture and management help for the emergence and hatching of their technolo- 296 Global Economic Boom & Bust Cycles gies commercially. Other incubator programs such as defense conversion, multimedia, and software development were prime examples of the Valley’s commitment towards assisting the systematic development of new technologies.

The overall success of the JVSV plan depended on a number of factors, but central to this issue was the ultimate impact of the Infor- mation Age Revolution of the 1990s and the rapid growth of the global economy in the 21st century. Silicon Valley is a prime example of a major industrial development region that can transform itself to compete in a rapidly changing world environment. The Blueprint report brought to light an important lesson and something that would be the cornerstone for success of all industry developments in the 21st century; the issue of cooperation and the collaborative advantage. Commitment to a common vision and unity in organizational focus, inspired a movement of cross-fertilization of ideas, concepts, resources, productive capacities, and expertise on a level that produced a regional rebirth. As we entered 1996, the revitalization of Silicon Valley was clearly on track. The cooperative spirit and the dynamics and sense of urgency initiated a rebirth and a clear example of what could be done when people are united behind a common goal. Driven by a red hot stock market, the dynamics of new technologies for the Internet, and Information Age euphoria, Silicon Valley emerged as a much stronger region in the global economy. Thus, as the new boom period was beginning to take root, Sili- con Valley and Sand Hill Road were just completing a period of revitalization. With the addition of other favorable economic, technological and global factors entering the picture, it became time to make a deal! ENTREPRENEUR PARADISE As the early pioneers demonstrated the efficient use and practical applications of the Internet, their success stories were given wide exposure by mass media and new industry publications. This ignited The Roaring 90s and Crash of 2000 297 an entrepreneurial gold rush with a passion and mission to follow these pioneers to wealth and fame. The period between 1997-99 witnessed some very exciting developments and intense competition with new niche markets opening up on a weekly basis. The fever ran high and deals were flying off the burner like hot cakes. Listed below are some of the more memorable events, milestones, and interesting observations of that period: ♦ IPO FEVER: Many Initial Public Offerings (IPOs) hit the markets with a huge bang. Investors were extremely eager to pick up shares in the latest rage. When Theglobe.com went public in No- vember 1998 with an opening price of $9 a share, the price per share soared to $97 - 606 percent on its first day of trading. The market value of the new company at the end of the day was nearly $1 billion! Online Industrial Auctioneer, FreeMarkets Inc., went public in December 1999 with an opening price of $48 a share. By January 2000 (one month later) the stock was trading as high as $370 per share before it fell back to earth. As the first major IPO of 1999, Marketwatch.com scored a 474 percent gain in stock price on Janu- ary 15th. The initial price per share was $17, the stock hit a high of $130 during the trading session, and finally closed at $97.50 for the day: the total market value for the day was $1.1 billion. Like most of the new companies, Marketwatch.com (an online financial news organization) was not expected to be profitable for at least several years. TheStreet.com went public in May 1999 with an opening price of $19 per share. The stock shot above $70 per share during the trading session. Commerce One, one of the heavy hitters in the infrastructure arena, soared from $7 to $196.50 in late 1998 after adjusting for a 3 for 1 stock split. For a short period, the stock traded in the $300 to $400 range. In the after markets, security analysts fed the flames with rosy predictions concerning a company’s prospects and profitability. One of the most successful of these analysts was Henry Blodget. In December 1998, Mr. Blodget issued a forecast that Amazon.com would hit $400 per share within 12 months. Ama- zon was comfortably trading at $240 per share at the time of this forecast; within four weeks the stock had soared well above the $400 298 Global Economic Boom & Bust Cycles level.3 Throughout the boom period, analysts played a key role in building the image and market strength of various companies. ♦ TECH SECTOR INVESTMENTS: Since the Internet Revolu- tion was just one part of the overall technology revolution of the 1990s, it was interesting to observe how individual tech sectors would take the spotlight at various points throughout the boom cycle. We moved from the excitement and hysteria of the Dotcom gold rush, to the telecom sector and the new global communications paradigm, to the golden goose of fiber optics, bandwidth, streaming audio and video, and other infrastructure technologies, and to the sensational opportunities in the biotechnology arena. There was clearly a lot of new technologies floating around to keep the investing public locked into the revolution. And this factor may also account for one of the reasons why there was so much confidence regarding continued growth in the markets. Investors were confronted with a host of new technologies destined to change the world. ♦ ENTREPRENEUR WINDFALLS: Many Dot Com Era entrepreneurs, employees and developers became millionaires in unbe- lievably short periods of time. For some engineers, software developers and managers, it was the good fortune of being in the right place at the right time. For others, it was the issue of hot money chasing quickly evolving technologies, creating opportunities for promising new companies. Many young Silicon Valley professionals retired early with fortunes ranging from $6 million to $20 million. Some became “serial entrepreneur” millionaires, using portions of fortunes made in one venture to finance the development of new enterprises. Steve Kirsch, founder and CEO of Frame Technology, acquired a fortune of $30 million after selling his firm in 1995. He then went on to become the founder and CEO of Infoseek.4 Serial Entrepreneur, Jim Clark, was the major financial player behind such successful companies as Netscape Communications, Silicon Graph- ics, Healtheon and My CFO. Sabeer Bhatia, founder of Hotmail, a very successful free email service, sold the company to Microsoft for $400 million in 1997. Broadcast.com (a four year old company) was sold to Yahoo! Inc. for approximately $5.7 billion in 1997. En- The Roaring 90s and Crash of 2000 299 trepreneur Mark Cuban came away from that deal with close to $1.5 billion. Indian entrepreneurs (from the country of India) saw their fortunes increase dramatically during the boom period. One report estimated this group’s collective net worth at over $25 billion. For many of the entrepreneurs and developers that were fortunate enough to cash out early in the cycle, they went on to reap the full benefits of this incredible period. ♦ BREAKING THE BARRIERS: There were some real excep- tional companies that proved to be major winners during the boom period. One such company is Cisco Systems (CSCO) the leading manufacturer of network routers and the 800 pound gorilla in the infrastructure arena that achieved tremendous growth and prosperity throughout the boom period. From 1996 to early 2000, Cisco acquired more than 40 companies in a bid to completely dominant its sector. During early February 2000, Cisco’s market capitalization surpassed General Electric’s to become the second most valuable company in America. The media declared that Cisco was on its way to becoming a $1 trillion company, surpassing Microsoft and anyone else in their way. Yahoo! Inc., with 185 million users worldwide and whose stock reached a high of $250 per share during the boom period, became a listed company on the Standard and Poor’s (S&P) 500 stock index in 1999. As a listed company on the index, Yahoo! had positioned its shares to be purchased by major institutional investors, pension plans and mutual funds that are required to own shares in S&P 500 companies. This was a major milestone for an company and a clear illustration of the growing power and influence of so-called New Economy companies. During the super rally of 1999, stocks rose on average 176 percent. The Nasdaq was up 86 percent. ♦ MERGER AND ACQUISITIONS: During the first week of September 1999, Viacom announced that it would purchase CBS for roughly $37 billion, creating the second largest media company after Time Warner Inc. This represented one of the first major moves by media titans to consolidate resources, talents, market share and technologies in a grand effort to create the new multimedia para- 300 Global Economic Boom & Bust Cycles digm for the 21st century. But this would not be the show stopper for this arena; that would come a few months later in January 2000. As the world entered the new millennium, America Online (AOL) scored the biggest deal ever by announcing on January 10, 2000, that it would be purchasing Time Warner for approximately $160 billion. In many respects this deal was very significant. It was a clear response to the Viacom/CBS deal, but more importantly, it firmly established the overwhelming power and market capitalization (which made this deal possible for AOL: market value of $162.3 billion for AOL vs. $118.7 billion for Time Warner) of an Internet company versus that of an off-line media titan. Announced in January 2000 (two to three months prior to the beginning of the Dot Com Era collapse) the deal would represent impeccable timing for AOL and Steve Chase, its CEO. Had Mr. Chase tried to work this deal after the start of the collapse, it simply would not have happened! Match- ing the largest online access service with Time Warner’s vast array of media properties was a stroke of genius. The deal created a mam- moth of a company, however I could not stop feeling that Time Warner should have been buying AOL. Under TV and Movies, Time Warner’s key holdings include WB Network, CNN, TNT, TBS, Cinemax, Warner Bros., New Line Cinema, HannaBarbera, Castle Rock, CNNfn, HBO and CNNSI. The publishing end of the business includes such magazines as Time, People, Sports Illustrated, Fortune, and 28 other magazines. Additionally, the company controls Warner Books, Warner Bros. Records, Atlantic, Elektra, Sire, and the sport- ing operations of the Atlanta Braves, Atlanta Hawks, and World Championship Wrestling. Time Inc. was founded in 1923 and Warner Brothers was incorporated in that same year during the Roaring 20s. These two companies merged in 1990 (in part) to create a stronger competitive entity for the Information Age Revolution. Given the strength of the digital revolution that is promoting digital formats for music, print publications and films, the strategic position and stock market strength of AOL (over 20 million online access users, owner of Netscape, AOL Instant Messenger facilitating 750 million messages per day among AOL users, owner of MovieFone and other The Roaring 90s and Crash of 2000 301 related online business operations) gave it the muscle to go after a giant like Time Warner Inc. Another significant acquisition during this period was the deal for MCI Worldcom Inc. to acquire Sprint for more than $100 billion. This strategic combination would allow the new entity to sell local, long distance, wireless and high-speed access. It was a major move by a key industry player to begin the consolidation of the telecommunications industry. ♦ HOT MARKET FOR PENNY STOCKS: As the frenzied atmosphere of the boom period continued and with the advent of online trading, the trading in highly speculative stocks began to really take off. OTC Bulletin Board and Pink Sheet companies found eager buyers for their highly speculative stocks. The average daily trading volume for these securities in 1998 reached 123.3 million shares; in 1999, the volume was 323.1 million shares; and by the first quarter of 2000, daily volume had soared to 1.07 billion shares. Many stocks trading below a dollar witnessed incredible gains in short periods of time. A prime example of this type of performance was the case of Smart Serv Online Inc. On October 20, 1999, the company's stock closed at $1.125; by the first quarter of 2000, this stock was trading at $148 per share, racking up over a 12,000 percent return! This was one of the extreme cases, however, many stocks went from trading well under a dollar to reach levels in the $5, $10 and $50 range. Many people were hoping to buy shares in the next Microsoft, Dell or Yahoo! (companies that at one time in their histories, traded at the penny stock level). ♦ OTHER DOT COM REFLECTIONS: The Dot Com Era brings to mind many interesting developments that rapidly came on the scene as new models and modes of operation. For those of us who closely followed these developments, we learned about and tried to implement plans based on banner ads, click-throughs, CPIs, email marketing, newsletter marketing, free offerings of all sorts and how to operate and think in Internet time. We went through periods of what models, markets and systems were working best at a given time in cyberspace. Internet “directories” and “search engines,” popularized by Yahoo! and others, were certainly one of the earlier major 302 Global Economic Boom & Bust Cycles trends that promoted the development of literally hundreds of new search engine sites. At one point in late 1998 and early 1999, “search engines” were all the rage and the copy cat artists flooded the markets with innumerable versions. With the enormous popularity of ebay.com, auction sites began popping up all over the place. We also witnessed the birth of “affiliate programs,” such as Commission Junc- tion and others, that extended the marketing reach and capabilities of the Internet. Then, we saw the extreme emphasis placed on “portals” and later went through the content is king syndrome which emphasized the significance of “unique content” as a key factor in achieving success on the web. Then, “Business to Business” (B2B) portals heated up and generated enormous interest and attracted rivers of capital. Expectations for B2B portals building out huge markets and facilitating multiple trillions of dollars of transactions by 2004 or 2005, set this field completely on fire. However, with the Internet, it was always what would come to pass; future projections based on no company really expected to make money for at least the following three to four years. Of course, there were many other sensational things that happened throughout the boom period; developments and events that kept us locked into the promises of the new era. INVESTOR MANIA The Baby Boom Generation and others made a huge shift in investment priorities during the early to mid-1990s. Billions of dollars began drifting out of low-interest paying passbook accounts, CDs and money market accounts, moving into mutual funds and stock investments. As the boom period started to build momentum and the media orchestrated the success stories, more and more people got into the action. What started out as a trickle very quickly turned into a landslide as investors pursued a course for greater returns. Needless to say, the opportunities were real but risky, and the returns (in many cases) were fabulous. And for those who had experienced the heyday of the Booming 80s, this party was shaping up to be a lot more exciting. The Roaring 90s and Crash of 2000 303

Some of the other key factors that drove the mania of this boom cycle were: low interest rates, low inflation, deregulations, merger mania, excitement concerning the promises of the Internet economy and ecommerce, mega money managers pumping billions of dollars into the markets, professional speculators driving some of the rallies, birth of the day trader and online trading, wealthy individuals driving up prices of IPOs, venture capitalists with multibillion dollar war chests hoping to back the next leader in a specific niche market, institutional mutual fund traders, major brokerage houses pumping out the next sensational deal, program trading and buy orders and international investors pouring money into U.S. stock markets. In addition, according to some analysts, large financial institutions and international speculators began borrowing Japanese yen at near-zero interest rates to buy American stocks and bonds. Begin- ning in 1995, billions of dollars began flooding into U.S. stock markets. This particular development certainly played a major role in stimulating the rapid rise in stock prices. Speculators were in a prime position to reap profits in the American stock markets and pay back those near-zero interest rate loans with portions of their capital gains. Thus, the Japanese financial system (as it did during the Booming 80s) continued to play a role in American stock markets during the Roaring 90s. Another interesting development that was a contributing factor in driving prices to the stratosphere was the irrational behavior (or rational during the mania?) of many professional fund managers. As the boom cycle got super hot, many of these managers began to take huge risks in their investment strategies. Preoccupied with quarterly performance scores and the desire to reap huge gains in the Internet and tech sectors, these managers began to invest heavily in the high- risk sectors of the boom cycle. Standard procedures and investment fundamentals were abandoned in favor of momentum tactics and Vegas-style gambling systems. Many knew that this was a bubble, but they were driven or even compelled to “perform or perish” during the extreme excitement of this period. Thus, billions of dollars 304 Global Economic Boom & Bust Cycles were funneled into the markets through the vast resources of multibillion dollar mutual fund operations. The atmosphere was charged to the hilt, with investors growing to expect 20 to 30 percent annual returns (the historic annual return of the Dow had been 9 to 10 percent). Speculation was fueled with the growing phenomenon of online trading, which provided a very convenient/personal computer system to place buy and sell orders for stock transactions. The longer the boom period persisted, the more people gravitated to the markets. Like the 1920s, many people would become investors in the markets for the first time in their lives. A red-hot dot-com fever developed for any company that had Internet-related potential: the markets were constantly searching for the next Yahoo! or Amazon.com. It was dot-com this and dot-com that; and niche markets were spawning clones as fast as the new territory was established and the IPOs broke records. Greed became a dominant theme and force in the markets, and it was really conta- gious. Many sound thinking people lost prospective of what was really going on, and this was not surprising. It was an exciting “wealth show,” but this was not TV. There were many trading sessions that featured new IPOs with price increases of 40 to 60 points in a day (and some a lot higher). These were fabulous returns especially if one was fortunate enough to get in on the deal at the opening price ($15 to $20 in many cases). Other exciting moments witnessed a stock shoot up 50 points in one day, and the very next day, fall by 50 points (oh well). And take the case of a penny stock moving from $2.00 a share to over $100 per share in a matter of a couple of months (that was sweet). There was some degree of financial insanity to all of this, but few questioned the market fever, especially if they were making money. It was a real show stopper. As the Nasdaq and the Dow continued to break records, billions of dollars continued to flow into the markets. At the height of the boom period, nearly 50 percent of American adults (49.2 million American households or 48.2 percent of the total population) were The Roaring 90s and Crash of 2000 305 involved directly or indirectly (mutual funds, pension plans, etc.) in the stock market. On March 29, 1999, the Dow rose 184.54 points to pass the 10,000 point milestone for the first time in history. It closed at 10,006.78 with an aura of extreme confidence. On May 3, 1999, just 24 trading days later, the Dow ran pass the 11,000 point level (up 225.65 points) to close at 11,014.69. This went on record as the fastest rise between 1,000 point milestones. Throughout most of the boom cycle, the overall annual rise in the Dow had been phenomenal. In 1995, the Dow rose 33.6 percent, in 1996, 25.8 percent, in 1997, 22.6 percent, and in 1998, 16.1 percent. The action was even more intense on the Nasdaq. The tech-heavy index closed above 2,000 for first time on July 16, 1998. During the super rally of 1999, the Nasdaq broke the 3,000 level in November, and on December 29, 1999, the index sailed above the 4,000 milestone. And in less than three months later, the Nasdaq hit its all-time high of 5,048.62 on March 10, 2000. Even faced with the threat of the Y2K millennium crisis, investors continued to pour money into the markets. There was this fever in the air of not missing out on the grand opportunities the markets were presenting. These were clear signals that the bubble was on fire. The U.S. economy was showing strong performance and great numbers: low inflation, low unemployment, low interest rates, high productivity and strong growth. Between 1997 and 2000, economic growth in the U.S. accounted for 30 percent of the total growth in the global economy. Economist, Paul Samuelson, called it, “a hon- eymoon economy,” as the good times continued. As mentioned elsewhere, the American consumer market was a significant factor in helping to revive the sunken Asian economies that were victims of the monetary crisis of 1997. Incidentally, one of the monetary strategies employed by the Fed was to flood the U.S. monetary system with liquidity (cash) in 1998, providing a safeguard and protection from the fallout in Asia. However, as consumers absorbed all of those imports and other consumer items, a credit bubble took root in the process. After the smoke cleared in 2001, 306 Global Economic Boom & Bust Cycles total American household debt had soared to $6.7 trillion! Total corporate debt had reached $4.4 trillion, while the overall federal debt level had soared to $5.7 trillion! During the boom period, few people noticed or cared (except the bean counters) about rising debt levels; the important thing was to keep the party going strong. For some analysts and writers, the sentiment was that we had arrived at a period of endless prosperity, and that this was the Golden Age of capitalism. Some even declared that perhaps the business cycle had been repealed; that this would be a time when economic laws and cycles would be revised. And as always the case in these “extreme optimistic” moments in history, new books hit the market preaching the gospel of the Dow rising to incredible levels. During this cycle, one book indicated that the Dow could rise to 30,000 by 2010, and another publication boldly declared that the Dow could reach 100,000 at some point in the 21st century. With the extreme optimism and exuberance in large numbers of people, by June 1999, bullish sentiment (as reported by Investor’s Intelligence) reached 60 percent for the first time since 1989. Ac- cording to this finding, “it is a sign of trouble when too many stock investors think the same way.” Many investors lost sight of such issues as investment fundamentals, valuation and earnings. Many bought stocks based on rising stock prices and future projections that were unrealistic. Some would play the game of momentum investing, where investors would jump into a stock or sector simply because it was on the rise. Others became day traders, using the convenience of online trading to place multiple buy and sell orders throughout the day, in a grand effort to score significant profits in one trading session. It was reported that most of the so-called day traders never really made any money; the big winners in this game were the brokerage houses that were collecting all of those wonderful commissions. Much of this was new and exciting, and had the feel of gambling in Vegas. The Roaring 90s and Crash of 2000 307

VENTURE CAPITALISTS AND INVESTMENT BANKERS At the root of the speculation and capital formation stood the Venture Capitalists (VCs) and Investment Bankers. Symbolized by the players and dealers on Sand Hill Road in Silicon Valley, the VC community bankrolled a ton of start-ups throughout the boom cycle. The VCs financed the gold rush and took the meaning of “venture capitalists” to a new level. Networks of money were organized to finance the gold rush. Multibillion funding flowed into the system not only from venture capitalists and investment bankers, but also from networks of private angel investors, corporate buyout funds, closed-end mutual funds, merger and acquisition specialists, internal corporate development funds such as the ones established by Hewlett Packard, Cisco Systems, Intel and Microsoft, from the growth and development of incubator companies such as CMGI, Softbank, ICGE, Safeguard (SFE) and others, and from anybody else who had an extra buck they wanted to throw into the pool. With all the players assembled for the gigantic chess game in the Roaring 90s, this huge capital pool created the fastest growth of wealth in history. Every successful IPO that soared to the stars on its first day of trading pumped more adrenaline into the financial pipelines of the system, generating a steady stream of new deals. Prior to the mid-1990s, it normally took start-ups about six years to go public. In the turbocharged tech-economy and boom period, companies were expected to proceed quickly from concept to test product within an 18-month to two year time frame. The product life cycle was shortened in order to accommodate the need to generate fabulous returns in record time. The key strategy for many of the dealmakers was to take a company public in the shortest time possible, with exit strategies of cashing out in the early stages. In many cases, the normal due diligence rules (in accepting a deal) were suspended. The markets were looking for the next hot new sector or deal, so a lot of companies with questionable business 308 Global Economic Boom & Bust Cycles strategies and plans to profitability were put on the fast track to an IPO. Backed by the support of mutual fund managers (managing billion dollar portfolios) eager to participate in the new offerings, many IPOs soared to unbelievable levels on their first day of trading. Support in the after markets by fund managers kept the interest and steam flowing for specific stock issues. According to VentureOne Corp., a San Francisco market research firm, venture capitalists pumped $14.3 billion into 1,972 deals in 1998. In 1999, the amount invested skyrocketed to $36.5 billion into 2,969 deals. Again, this is another clear indication that 1999 was a peak year for the boom cycle. Venture capital deals provided the key participants with equity stakes in the new venture at very attractive bargains, so that when a company did finally go public, the returns were absolutely fabulous. For instance, Idealab paid a half cent per share (a total of $100,000) in June 1997, for its initial stake in etoys.com. After selling 3.8 million shares in late 1999 (in the price range of $47.60 to $69.58) the company generated a profit of $193 million. Benchmark Capital put up $5 million for its stake in eBay Inc. and watched it grow to $4.2 billion before major distributions were made in late 1999.5 These were fantastic returns but they were not the exceptions. During the super hot boom period, the players were generating extraordinary returns on many deals, which is why the field began to attract people from all areas in the financial world. This was better than the LBOs and junk bonds of the Booming 80s. Like the players in the Boom- ing 80s, for those who had mastered the game, it was a time to build a system of enormous wealth. BRANDING AND ADVERTISING STRATEGIES During the Dot Com Era things needed to happen fast due to extreme competition, VC investment strategies and other related issues. One of the more interesting aspects of the entire era centered around the issues of branding and advertising budgets for many dot- com companies. Reckless marketing budgets literally broke the backs of many of the young Dot-Com start-ups. Hundreds of millions of The Roaring 90s and Crash of 2000 309 dollars were spent in futile efforts to create household names out of companies in record time. There appeared to have been great urgency and desperate attempts to create the new brand names in individual market segments; a colossal effort to create similar household brand names like Yahoo!, Amazon.com and AOL. As a new market niche became hot (through an IPO or media hype) dozens of new sites would spring up as new competitors. Such areas as music, pharmaceuticals, pet goods, financial sites, book stores, auctions, B2B portals and a host of others quickly became super crowded with dozens and dozens of new competitors. Prime examples were the number of sites attempting to duplicate the success of ebay.com with auctions, Petopia.com (a utopia for the pets of employees) with pet needs, or Amazon.com in regards to ecommerce in books: the duplication process simply got way beyond itself. The struggle then became one of capturing market shares in overcrowded markets. As reported by industry analysts, some companies actually ran through nearly $100 million in VC money in less than eight months. A lot of this money was used on the insane strategy of branding and advertising, without considerations or measurements of the results of such actions. Many companies jumped on the branding bandwagon just because everyone else was doing it! It quickly became a standard practice, so it was felt that one had to have this as part of any serious marketing program. It was that simple. There was enormous waste in this area and many of the participants simply didn’t take the time to examine more closely what was really happening to their organizations and their precious monetary resources. Some of the really extravagant Dot-Com advertising budgets purchased TV time and even went after Super Bowl advertising slots (and that was a very expensive gamble). It seemed that everyone was focused on getting to the IPO stage; that was the goose that would lay the golden eggs. In many respects (and in some cases, not all) the VC system of the Dot Com Era resembled the production of Hollywood movies with big $150 million budgets for production and advertising: it was 310 Global Economic Boom & Bust Cycles all centered on the hope that they would score a blockbuster at the box office. At the height of the branding and advertising mania in 1999 (folks were advertising in a mad rush to build brand loyalty during the 1998-99 period) it was interesting to drive down Highway 101 (going south out of San Francisco) and see dozens of Dot-Com billboards positioned throughout the route to San Jose. The Bay Area was bombarded with Dot-Com billboards, taxicab top advertisements, internal and external municipal bus ads, boats parked in the S.F. Bay advertising special online offers, flying blimps with ads and brand names on ramps connecting airplanes to airport terminals. As reports continued to indicate that more people were beginning to shop online during holiday seasons or for special occasions, the push for outdoor advertising, as well as newspaper, magazine, radio and TV ads, grew more intense as more companies went online. This is probably one of the reasons why the bubble began to burst in 2000; there was an almost unlimited supply of new products and services, but a limited amount of demand or customers to support the growing new markets. Consumers were still in the early stages of adjusting to the online experience and ecommerce. The Dot-Com frenzy shook up the advertising world, and in some cases, priced old-line advertisers out of the marketplace. In a report issued (in May 1999) by Advertising Bureau, it was revealed that “web banner ads, site sponsorships and e-mail marketing more than doubled in 1998 to $1.92 billion from $906.5 million in 1997.” Spending on outdoor ads had soared to $1.5 billion. According to Competitive Media Reporting (a New York-based research firm) Bay Area Dot-Com companies accounted for 17 percent of radio advertising and 11 percent for outdoor ads during the first half of 1999. During this same period, overall advertising nearly tripled compared to 1998. It appears that the peak of the boom cycle (in many respects) was the super rally year of 1999. THE GLOBAL EQUITY CULTURE One of the most significant developments of the Information The Roaring 90s and Crash of 2000 311

Age Revolution is the birth of the global investor. The 1990s set the stage for the Age of Globalism and unleashed a very exciting new era for the international stock investor. With the collapse of communism in the late 1980s, the spread of capitalism and free enterprise systems moved ahead aggressively during the Roaring 90s. As the world entered the 21st century, there were over 150 stock exchanges participating in the expanding global equity culture. By the end of the 20th century, dozens of new countries (many former communist countries) began participating in capital markets for the first time. Mainland China, Russia and other formerly closed economies in various parts of the world, started embracing the free enterprise system on many levels. Online trading, accompanied by the explosive speed and power of global telecommunication systems, continued to drive the momentum of the new global investor. Another factor promoting this development was the growing consolidation of the world’s stock exchanges. Birth of the Internet Era in the 1990s clearly influenced the decision to move quickly in this direction. Also, competitive forces from both online and off-line operators continued to spearhead the dynamics to create a global system that conveniently and efficiently facilitated investing on a global basis. One of the end results of this movement was the expansion of the power and financial capabilities of individual investors the world over. The numbers of new investors, on a global basis, experienced a dramatic increase as the world entered the 21st century. The impact of a large infusion of new global investors is very likely to increase volatility and the frequent emergence of boom and bust cycles in the new millennium. Researchers have revealed that the majority of the world’s investors still consider stocks as the best long-term investments. Additionally, stock markets, in general, are very popular in cultures all over the world. Many people have a keen interest in buying shares in promising companies. With a thriving global equity culture, thousands of companies throughout the world will be able to go public and have their shares traded on global exchanges. 312 Global Economic Boom & Bust Cycles

TURBULENCE IN THE BOOM PERIOD OF 1995-2000 The international scene was everything but quiet during the turbulent boom and bust period of 1995-2000. Several events shocked the world during this time period, and it’s important for us to examine some of the key issues and factors surrounding these global developments. INTERNATIONAL MONETARY CRISIS OF 1997 The economic storm and disaster that swept across East Asian economies during mid to late 1997 was a major international development of profound significance. By the time the smoke cleared, the crisis had crippled the region’s currencies, flattened stock markets, generated major banking and business failures, promoted rising inflation and high interest rates, and caused widespread unemployment. The term globalization took on a new meaning, particularly in the age of speed-of-light international capital and information flows, where a currency or stock market can experience extreme pressure on a moment’s notice. In a world of floating currencies, open borders and free markets, international speculation and rapid capital movements are significant features of the new global economy. For over a quarter century, Japan and the Asian Tigers (Hong Kong, Singapore, Taiwan and South Korea) had experienced tremendous technological and economic growth and prosperity. The entire Asian region was booming with knowledge, capital, success stories and technological wonders. Japan would become the first major nation in the region to experience a massive “bubble bursting” (in 1990) in its stock and real estate markets. By mid-1997, the crisis and economic contraction had finally hit other Asian power- houses in the region. A number of issues converged in the region to halt the rapid pace of economic development. Deep-seeded problems that rose to The Roaring 90s and Crash of 2000 313 the surface included a full-scale debt crisis involving banking systems throughout the region promoting imprudent lending practices reminiscent of the S&L crisis in the U.S. and the Japanese real estate bubble economy. Some international observers and analysts pointed to the issues of crony capitalism, capital flight driven by fear, business monopolies, corruption, far too much borrowed money and rampant speculation in markets that began bursting after 25 years of steady economic growth in the region. Powerful international currency speculators took aim at this situation and went in for the kill. Using whatever defenses they could assemble (including record high interest rates) governments and central banks throughout the region fought hard to defend their currencies against speculation. In July 1997, Thailand became the first casualty in what would develop into a regional collapse. Capital flight, in addition to the assault on Thailand’s currency (the baht) generated a huge international rippling effect. As the crisis continued to spread from one country to the next, an economic meltdown - which included deflationary pressures on prices - began to take root and promote an atmosphere of despair. On October 27, 1997, the impact of the region’s problems dealt a major blow to investor confidence and the Dow fell 554 points in the trading session. By November 1997, Thailand, Indonesia and South Korea had all turned to the International Monetary Fund (IMF) for financial packages. In the case of South Korea, the full impact of the currency crisis hit in December of that year. The country came very close to running out of foreign exchange reserves while fighting to maintain the value of its currency, the won. In the Indonesian situation, which has the fourth largest population in the world, the downward spiral included a wave of violence, as well as, a series of crippling economic reversals. From July 1997 to January 1998, the IMF had put together more than $100 billion in rescue loans for Thailand, Indonesia and South Korea. Loan packages consisted of direct loans from the IMF and special loan packages from other agencies and governments. For Indonesia, the loan package was roughly $43 billion. In the case of 314 Global Economic Boom & Bust Cycles

South Korea, considered to be the 11th largest economy in the world, the package totaled $58 billion in rescue loans. An issue of importance here is that of the $100 billion South Korean companies and banks borrowed from overseas at the end of 1996, $24 billion was owed Japan. There was a clear statement in these IMF activities: the international community simply couldn't afford to allow these countries to fall apart. MISSION OF THE IMF The International Monetary Fund serves as a kind of “World Central Bank” and plays the role as the lender of last resort to prevent financial panics from spinning out of control. Created at the close of WW II at the Bretton Woods meeting held in 1944-45, the IMF (and the World Bank) was put in place by the victorious West- ern allies to serve as a central institution that could deal effectively with short-term currency stabilization problems and long-term economic development projects. By mid-2001, the organization consisted of 182 member countries that contribute to the fund’s global war chest. The IMF’s economic priority is to put a country’s house back in order in the event of a devastating economic or financial crisis. Its stated mission is to maintain currency stability so that world trade can flourish. In addition, it seeks to avoid world financial collapse by rescuing a nation that has fallen on hard times. The ultimate goal is to prevent one country or a group of countries from bringing down a substantial part of the world economy. IMF mandates or economic remedies are usually painful, requiring major economic restructuring programs. The applications of strict monetary and fiscal policies will generally open economies to expanded trade and competition. In the case of the Mexico bailout in 1995, the economic cost was widespread unemployment, business failures and a widening gulf between the rich and the poor. The end result of the IMF prescrip- tions for Thailand, Indonesia and South Korea were widespread layoffs, removal of import restrictions on major industries, bank closures and the opening of banking systems to hostile takeovers, bank- The Roaring 90s and Crash of 2000 315 ruptcies, dismantling of monopolies, demands to cease subsidies to the politically well-connected and other tough economic and financial reforms. HONG KONG PANIC After nearly 150 years of British colonial rule, Hong Kong was turned over to mainland China on June 3, 1997. For the first few months of the crisis - that had spread like a cancer in the region - Hong Kong appeared immune to the onslaught. However, by late October 1997, Hong Kong hit financial turbulence and was hammered, sending ripple effects to stock markets throughout the world. Powerful international speculators were again accused of using sophisticated tactics in the markets to successfully profit from the regional crisis. The media began to refer to the overall crisis as the Asian contagion, as Malaysia and others were hit in succession with rampant currency and stock market speculation. Capital flight continued in the region and only began to reverse course around October of 1998. Around this same time period, regional currencies, such as the won, baht, rupiah, ringit and others, began to stabilize, with high interest rates declining in response to these stable conditions. Throughout this entire year-long economic episode, the U.S. and European Economic Community remained focused on maintaining strong domestic markets and growth initiatives that would insure that Asia had some markets for its exports. For the remainder of the 1990s, the U.S. ran record-breaking trade deficits primarily due to the loss of Asian markets and the heavy influx of cheap Asian imports. ECONOMIC FALLOUT The economic meltdown that rippled throughout Asian economies during the year-long crisis decimated the ranks of what had been a growing middle class. Millions of people were left in dire straits and faced with a shocking reversal in their standards of living. Some observers referred to this particular phenomenon as a “historic class plunge.” Many people had borrowed too much money 316 Global Economic Boom & Bust Cycles and had saved a lot less. It was a tremendous reversal in fortunes and a clear testament to the power and ferocity of boom and bust periods. Fabulous dreams were suddenly turned into ashes. CRASH OF ‘98 At the center of the international crisis that hit during the last quarter of 1998, was the collapse in the Russian economy accompanied by another currency crisis. To some analysts, the so-called Asian contagion had spread to Russia and was also working its way into Latin America. The problems were much deeper, and had been building over a period of many years. Starting in 1995, Russia, under the leadership of President Boris Yeltsin, borrowed heavily from the West to support its market economics movement and privatization efforts. Widespread reports indicated that much of this money was totally mismanaged, and as one economist stated, “they created an economy of looters and pirates.” It was another version of crony capitalism accompanied by a system’s inability to collect taxes. Having borrowed too much money, Russia simply reached a point where it couldn’t make payments on its debt. The country simply stopped repayment of foreign loans. The central bank suspended trading of rubles for dollars, and on August 17, 1998, Yeltsin’s government allowed the ruble to devalue. During the final quarter of 1998, the ruble experienced a 183 percent devaluation and inflation shot up to 84.3 percent before dropping to 19.6 percent in the first quarter of 1999. Nervousness in the markets finally came home to roost during late August. There were fears that Boris Yeltsin would resign, that Russia might return to Soviet era command economics, that the economic meltdown in a global nuclear power could spin out of control and plenty of other doubts concerning economic and political stability. On Thursday, August 27, 1998, the Dow fell 357.36 points on global reports concerning the Russian financial crisis. A further loss of 114.31 points (on the Dow) on Friday continued the gloom and doom of what was happening in global markets. The Dow closed at The Roaring 90s and Crash of 2000 317

8,051.68 on Friday, August 28, 1998, leaving investors with the weekend to ponder global news reports and commentaries by leading experts on the Russian crisis. On Monday, August 31, 1998, the Dow fell 512 points in a show of deepening concerns that the crisis could have been spinning out of control, without firm resolves or commitments by leadership. Russia was a huge question mark. The Dow ended the session at 7,539.07, and witnessed enormous drops in stock prices in many sectors. Many stocks were severely hammered. LONG-TERM CAPITAL MANAGEMENT (LTCM) In the aftermath of the Russia sovereign debt default, investors dumped higher-risk securities and fled to the safety of U.S. Treasury Bills and FDIC-insured deposits. In an effort to calm the markets and restore stability, the Federal Reserve lowered short-term interest rates three times in seven weeks. Increased commercial bank lending in September and October (to the tune of $30 billion assisting corporations to roll over their short-term paper) helped to avert a hard landing during the early stages of this crisis. However, there was another major problem that emerged from the turmoil: Long- Term Capital Management (LTCM). As a result of deep losses on its $125 billion portfolio of high- risk debt securities that included junk bonds and emerging market debt that investors were unloading, LTCM (a large U.S. hedge fund) was on the brink of total collapse. In normal business circumstances it would have been a simply matter to just have allowed this high- roller hedge fund to move quickly into bankruptcy and dissolve its operations. But, the central problem here, and why LTCM became a prominent footnote in financial and economic history, was its use of leverage. In order to purchase its high-risk $125 billion portfolio, it was necessary to borrow vast amounts of money from several major investment banking institutions, maintaining a leverage ratio of 24:1: LTCM had borrowed $24 for every $1 of investors’ equity. In addition, and this was probably more significant, the firm had further 318 Global Economic Boom & Bust Cycles leveraged itself by entering into derivative obligations (mostly interest rate and equity derivatives) with a notational value of $1 trillion. The lenders included some of the most prominent names in the industry: Lehman Brothers, Goldman Sachs, Merrill Lynch, JP Mor- gan, Chase Manhattan and Morgan Stanley. LCTM ran into a brick wall one month after the Russian partial default; the fund lost more than $4 billion, which was more than 80% of its $5 billion in equity. With a debt of approximately $120 billion, the company was facing a crisis of default and insolvency, not only with its primary lenders, but also on its obligations to its derivatives counterparties, which included many of the largest investment and commercial banks in America. In the deregulated derivatives arena, there was no requirement to maintain reserves or collateral for these positions, and LTCM had posted very little collateral. A LTCM collapse, at this point, would have had some pretty serious consequences for all of these institutions, so something had to be done to prevent a major financial crisis. It became necessary for the Federal Reserve to step in with a solution because in the opaque over-the-counter derivatives market (OTC) no one knew the full extent and size of the LTCM derivative positions. As we shall see later in Chapter Seven on the meltdown of 2008, this type of setup can cascade and spin out of control very quickly as counterparties across the board rush to liquidate their positions simultaneously. As we shall further see in the 2008 crisis, credit markets froze and there was fear and suspicions permeating throughout the global financial system. In retrospect, the LTCM debacle was a prelude of things to come; a significant warning of what could happen in a totally deregulated derivatives universe. The Federal Reserve System, under the leadership of Alan Greenspan, orchestrated a rescue effort to resolve what could have resulted in a major economic catastrophe. This would not be a federal government bailout using taxpayer money, but an orderly “banker’s gentlemen’s agreement” to clean up this mess. In the end, the bankers were convinced to essentially pay for the bailout of LTCM. The Fed called an emergency meeting of the major banks The Roaring 90s and Crash of 2000 319 that had significant exposures to LTCM’s debts and derivatives, and they were encouraged to resolve this problem by any means necessary. On September 23, 1998, 14 institutions agreed to “organize a consortium to inject $3.6 billion into LTCM in return for 90% of its stock. The firms contributed between $100 million and $300 million each…An orderly liquidation of LTCM’s securities and derivatives followed.” THE SUPER RALLY OF 1998-99 Despite the devastating impact of the Crash of ‘98 and the Rus- sian crisis, stock markets in the U.S. (in particular) staged astonishing rallies from September 1998 to the first half of 1999. It was clearly a time to be in the markets. The U.S. money supply grew at a huge rate of 12 percent in 1998, which certainly provided added fuel for the remarkable rally. Money poured into the U.S. markets from all over the globe in a vote of confidence and unbelievable support to continue the bull market of the 1990s. Demand was strong as prices of beaten down stocks soared to the stratosphere. It was particularly interesting to see a stock like Charles Schwab Inc. (ticker SCH) get beaten down to $18 a share in the crash, and then soar to a record $150 a share by January 1999. Many other stocks experienced similar record-breaking performance as investors moved in quickly to pick up the bargains. As we entered 1999 with major concerns about Y2K and the new millennium, markets continued to “roar on” in a wave of irrational exuberance (Greenspan) and giddy (War- ren Buffett) excitement about the technology revolution of the 1990s. THE CRASH OF 2000 There was intense excitement throughout the super rally of 1999, however, the world still had to deal with the vast uncertainties of Y2K. If there was to be a crisis in the year 2000, Y2K was the event most millennium watchers were clearly concerned about. When the clock moved the world into the new millennium, there were only minor outages and inconveniences, but nothing on the scale that the doomsayers had forewarned. The billions of dollars spent in fixing 320 Global Economic Boom & Bust Cycles the computer code problems had paid off. As we proceeded through the month of January 2000, Y2K quickly became a thing of the past. The markets continued booming ahead, relieved of the fears of the Y2K menace. However, like a thief in the night, something else was set to happen that caught many of us completely off guard: the steady but rapid collapse of the boom period that began in early March 2000. One thing we must bear in mind concerning the timing of this collapse is the Fed induced short-term interest rate hikes (six times, from 4.75 to 6.5) between June 1999 and May 2000. Chairman Greenspan had politely warned the markets in 1999 concerning irrational exuberance and other related signals that indicated things were getting out of hand. Most of us should have listened, the pros did! As with the onset of previous bust periods, interest rate hikes have always preceded a collapse: it signals to the pros and heavy hitters that the party will soon come to a close. The Nasdaq hit a beautiful high of 5,048.62 on March 10, 2000. This date will go down in history as the major turning point of the boom and bust cycles of 1995-2000. Like the 1990 collapse of the Nikkei, the descent happened in bits and lumps, leaving great confusion in its wake. The market change was so dramatic and so swift that it caused one observer to compare it to a millennium change of “B.C. to A.D.”: the optimistic climate of the boom cycle versus the onset of the gloom and pessimism of the bust cycle. A giant financial plug was pulled and all of the “financial magic” began to vanish. Many venture capitalists, investment bankers, and others walked away rich, while others got clobbered beyond belief. The steep deceleration was both shocking and unreal. With many investors accustomed to buying on the dips and witnessing rapid rebounds in share prices, the steady declines that continued throughout March and April were brutal and nerve racking. In the initial stages of a bust period, it's hard to believe that the boom period has bit the dust. But, as we have seen in other times and places, this stage is the most difficult adjustment, particularly for those that were not prepared for the new psychology that slowly permeates The Roaring 90s and Crash of 2000 321 throughout the markets. Like a lover who has to adjust to the reality that a love affair has ended, pumped up investors packed their bags and prepared for another season. In the period between March 11, 2000 and April 17, 2000 (the main crash period) the Nasdaq composite fell 34.2 percent. Selling pressures bombarded the markets from many sources, which included margin calls, mutual fund redemptions, folks fleeing the markets in panic, and many others needing cash to pay their tax bills. However, some investors (even after witnessing these drops) were still trying to wait it out, hoping for a rebound in prices. But, a major rebound never came, and as the correction continued to carve a deeper descent to lower prices, the weakest Dot-Com companies began falling to the wayside in the true spirit of the “Law of the financial jungle” where only the strong would survive. In probably one of the most bizarre trading sessions in stock market history, the Nasdaq witnessed an extraordinary swing (percentage-wise) in panic selling and buying. On April 4, 2000, the Nasdaq composite fell 574.57 points as a result of panic selling and margin calls in the early trading hours. Then, inside of one hour, massive buying moved into the markets (mutual fund managers and others) and staged a 451.84 point recovery. The Nasdaq closed at 4,148.89 (on volume of 2.8 billion shares) down 74.79 points for the day. It was a huge roller coaster ride (a 25.4% swing) that demonstrated the vast uncertainty and speculation that still persisted in the markets. At the low point in this one trading session, investors were facing a paper loss of $1.19 trillion in market value. The plug was pulled on so many games, including the one that provided companies with high stock valuations that could be used as currency in merger and acquisition deals. Many deals were called off or repackaged as “cash only” transactions. Many VCs began cutting the umbilical cord on their weakest deals but kept the pipelines open for their stronger plays. By June 2000, many investors were still holding tight on many of the stronger and technology companies (Commerce One, Yahoo!, ebay, Cisco, etc.) however, this would ultimately prove to be a bad decision. Yahoo! closed at $119.31 on 322 Global Economic Boom & Bust Cycles

June 26, 2000. By June 2001, the stock was trading in the $18 to $19 range! MARGIN CALLS The reality of margin calls was particularly devastating for many small investors. In the initial stages of the meltdown, margin calls played a major role in the implosion of prices of Dot Com and Internet companies. The crisis also painted a vivid picture of the large degree that many investors were involved in the purchase of high price stock with borrowed funds. In the business of buying shares on margin, an investor can borrow (from their brokerage firm) as much as 50 percent of the value of the (marginable) stocks they own. Once the new shares have been purchased, an investor’s equity (the value of the stock less the amount of the loan) must be equal to at least 25 percent of the current market value of the new shares. In a bust period where market values are falling rapidly, investors must either put up more cash or securities to meet a margin call, or sell some or all of their holdings to satisfy the repayment of the loan. This was a very painful experience for many investors caught in the crossfire of rapidly falling prices of previously bought high-priced stock. As one analyst so succinctly put it, “It’s an especially BAD IDEA to borrow against stock to buy more stock.” It’s great on the upside, but can be a devastating experience on the downside. There are enormous risks especially when purchasing high-price stocks. The Dot Com collapse vividly demonstrated the high risk in this type of investment strategy. Another strategy that appears to have backfired on its users was the borrowing of funds based on stock valuations of shares owned in SEC mandatory lockup periods. Some tech-rich entrepreneurs made the mistake of borrowing tens of millions of dollars against the stock they owned that was tied up in six-month lockup periods, and then invested the proceeds in other high-flying tech and Internet stocks. When the music stopped and the stock values had fallen across the board (including their shares in the lockup) many found themselves in losing positions. Fortunes were decimated on many fronts, The Roaring 90s and Crash of 2000 323 particularly where people were not aware of the enormous risks inherent in boom and bust cycles. By November 16, 2000, 130 Dot Com businesses had bit the dust, with more falling to the wayside as we approached 2001. The hardest hit sectors in the early stages were online retailers and web content companies. The shakeout was unrelenting, wiping out the weak competitors and unproductive business models. The strong survivors would reap the benefit of having more users gather around their sites. Markets are always self-correcting and the shakeouts are inescapable at the end of a boom period. This process is necessary if the next cycle is to start with a clean slate. It’s not a bad idea to monitor the periodic effects of the shakeout in order to judge if the system has wiped away enough of the unproductive business enterprises. By November/December 2000, the market for Business to Busi- ness (B2B) had slowed to a trickle. To one observer, B2B had turned into “boring-to-bankruptcy.” At its height, B2B was expected to generate great efficiencies and enormous profits for the players: an online marketplace for corporate buying and selling. Analysts came out with glorious forecasts stating that businesses would trade from roughly $2.8 trillion to $7.3 trillion worth of goods online by 2004. It became a super hot sector very quickly. Companies such as Ventro, TradingProduce.com, IronPlanet and incubator, ICGE (an incubator specializing in B2B companies) witnessed their share prices climbing to very high prices. The market got very excited about this sector, and then turned cold as ice as new competitive hybrid companies entered the space. Ventro hit a high of $240 per share in Feb- ruary 2000; by May 2001, the stock was trading at 61 cents per share with the company facing delisting from the Nasdaq Stock Exchange. ICGE hit a high of $192.50 during early 2000, but would witness its stock trading in the $2 to $3 range during the second quarter of 2001. New online industry consortias and partnerships established by the major off-line companies that were expected to populate the Dot Com independent exchanges began to take center stage as a more stable and profitable business model. 324 Global Economic Boom & Bust Cycles

Internet incubators had also been in a state of steady decline. The incubator icons of CMGI, ICGE and Safeguard Scientific could not escape the heavy downdraft of the bust cycle. The market value of CMGI at the end of 1999 was approximately $34 billion. By No- vember 2000, the value had fallen to roughly $5 billion as analysts began hammering away at the weaknesses of incubators in general and that CMGI had a burn rate of $63 million per month. And with many of its portfolio companies and tracking stocks losing market value, the house of cards of the incubator model began to look like a losing proposition: wherein lay the revenue generation and the ability to produce real profits. Indeed, for CMGI and others, “what a difference a year made.” By year-end 2000, the Bay Area had started to feel the real impact and ripple effects of the Dot Com collapse. Many areas of the local economy were hit, from the price of billboards, to party planning, to vendors of many types, to real estate and car sales, to public relation firms. The rapid cutbacks in advertising budgets of many Dot Com companies had a severe impact on print publications and web sites dedicated to technology news. Venture capitalists began to focus on next-generation optical networking companies, broadband wireless and other types of innovative infrastructure companies. Their new mantra (heading into 2001) was that companies would need to demonstrate solid revenue growth, scalability of their business models, stronger profit margins, a credible path to profitability, great management and realistic marketing plans. In other words, they were going back to the basics. It was time to regroup for the next phase of the revolution. The aftershocks of the collapse of the bubble continued as the year 2001 entered the scene. DOT COM AUCTIONS By January 2001, the Bear market psychology was a firm reality. The aura of the Dot Com world had faded, and for some people, Dot Com had become dirty words. The “death watch” continued as The Roaring 90s and Crash of 2000 325 more companies fell to the wayside with absolutely no hope of reversing the impact of the changed environment. As many of the victims laid off workers and closed shop, auctioneer specialists were called in to sell off the remaining assets. Dot Com entrepreneurs had purchased some pretty sophisticated and expensive equipment and toys. Most had been too extravagant in their purchases and spent too much money far too quickly. The remaining assets needed to be sold in order to pay off creditors and investors. In various locations in California, Dot Com auctions were held weekly, selling off the remaining assets of the latest victim. Many of the auctions featured such items as green leather couches, $700,000 Lucent affinity phone systems, Cisco routers, large servers by Sun Microsystems, smaller servers by IBM, HP and Compaq, Palm VII organizers, office furniture by Herman Miller, oak cabinets, pinball machines, air hockey tables and other recreational games, computer equipment ranging from laptops to processors, and still shrink- wrapped desks, chairs and other items. According to auctioneers Adam Alexander and partner Dow Cowan, during the one year period after the collapse began in March 2000, they liquidated 44 Dot Com companies with equipment valued at $60 million. Thus, the auction business thrived on the carnage from the Dot Com collapse, collecting standard 10 percent commission fees from the lucrative sales. SHAKEOUT PERIOD By the end of the first quarter of 2001, what started out as a Dot Com collapse had moved to drag down the entire technology sector, affecting companies across a broad spectrum of industry expertise. On March 12, 2001, the Nasdaq closed at 1,923.35, down 129.43 points for the day. Within one year since reaching a high of 5,048.62, the index had plunged 61.9 percent. Major bellwether companies and industry leaders such as Microsoft, Cisco, Intel, JDS Uniphase and others were feeling the full pain of a technology meltdown in the markets. Approximately $4.8 trillion or more in stock values had 326 Global Economic Boom & Bust Cycles gone up in smoke in one year. Blood was running in the streets and no one knew how to stop it. Throughout the previous year, various rallies had been staged with prices rebounding in certain sectors, however, these rallies were followed by investor selling pressures and profit-taking. Table 9 illustrates the market adjustments in share prices in some of the technology leaders of this period. The bubble-bursting had led to a serious economic slowdown across the technology landscape. Business, as well as, consumer demand dried up. This led to poor quarterly performance by many companies which resulted in lower stock prices by dissatisfied investors. A weaker economy meant that markets would continue to operate on low octane in the short-term, with very little upward momentum. The following highlights of the bust period provide further insight into the broad nature and impact of the meltdown:

HISTORIC SHARE PRICES OF TECH LEADERS

Company Dec. 2000 Mar. 2001 52-wk high

Cisco $47.88 $24.50 $82.00 Oracle $26.50 $21.38 $46.44 JDS/Unip. $50.06 $29.25 $153.38 Hewlett Pack. $31.68 $29.52 $78.00 Apple $16.50 $18.69 $75.83 Intel $38.06 $29.13 $75.81 Yahoo! $39.63 $24.44 $250.06 CMGI $10.50 $4.21 $162.72 ICGE $6.00 $3.50 $192.50 ebay $34.31 $37.50 $127.50

Table 9

♦ In early May 2001, the San Francisco Chronicle presented some significant findings in its survey of 500 Bay Area companies with The Roaring 90s and Crash of 2000 327 the largest market capitalizations. The survey revealed that the so- called Chronicle 500 had total market capitalization of $1.3 trillion as of April 5, 2001, down from $3.15 trillion in the year 2000. Over half of the companies in the survey (a total of 266) had lost roughly half their market value inside of one year.6 ♦ In regards to the liquidation process of many of these crash and burn victims, it was soon discovered that many were mostly built on intangibles with little or no hard assets. This bleak reality left creditors and VCs with little to retrieve from the ruins. Unless a company could be sold as a going concern or merged with a stronger competitor, there was very little value left to be considered as residual property. As for the corporate undertakers or insolvency specialists, many decided that it was not worth their time and effort to deal with a Dot Com liquidation problem. For the most part, they felt that at the end of the process, they would not be paid. According to some veteran insolvency experts, the Dot Com insolvencies and liquidations would be the worst ever for creditors and venture capitalists. ♦ According to a report issued by Challenger, Gray & Christmas, an outplacement firm that began tracking job cuts in December 1999, 93,079 workers had lost their jobs by late April 2001. They also stated that 51,564 dot-com jobs were eliminated during the first four months of 2001.7 During the boom period, there was a huge demand for high-tech workers, particularly in the Bay Area. As Dot Com companies went broke, many employees were let go without final checks, severance pay or assistance in finding another job. Many companies simply hit a brick wall and could not make payroll. ♦ As one of the most exciting and strongest companies of the Dot Com era, many people initially felt that Cisco Systems would survive the fallout of the technology meltdown without suffering severe damage in the markets. But this was not the case, particularly when CEO John Chambers reported in late March 2001 that the networking giant was suffering from, “the fastest deceleration that any company had ever experienced.” The company announced earlier in March that it was planning to eliminate up to 8,000 jobs. Hit hard by a faltering economy both in the U.S. and abroad, strong competitors, 328 Global Economic Boom & Bust Cycles a slowing demand for its products and weak quarterly earnings reports, Cisco was forced to contend with a new reality in the bust cycle. It was a huge reversal, particularly since the company was considered the “world’s most valuable company” in March of 2000. The market capitalization at that time stood at $555 billion; by May 2001, the total market value was dipping below $100 billion. On March 30, 2001, the stock actually closed at an all time low of $15.81. For a company to lose over $455 billion in market capitalization in one year was extraordinary. However, we are living in an extraordinary era! ♦ Yahoo! Inc.’s decline from Mt. Olympus was another show stopper during the bust cycle. As one of the Internet’s strongest companies with nearly 190 million online users, Yahoo! was not immune to the wrath of the vicious downturn. Having spent billions of dollars acquiring such companies as Geocities Inc., Broadcast.com and numerous other smaller companies, Yahoo! had established itself as a household brand name with global recognition and dynamic presence. It was the first major company to expand abroad and to popu- larize the business model of directories and portals. However, by June 2000, analysts began questioning the stability of Yahoo!'s business model that heavily depended on advertising revenues from Dot Com companies. Advertising revenues accounted for 80 percent of Yahoo!’s sales, and this was not a good thing given the continuing meltdown of the Dot Com world. In early 2000, Yahoo!’s stock had traded as high as $250 per share; by first quarter 2001, the share price had fallen to the $18 to $19 range. The company reported that it had $1.7 billion in the bank, so it would be in a position to ride out the storm. Many analysts felt that Yahoo! should have taken the same path as AOL and merged or acquired a strong off-line multimedia behemoth. ♦ Many other companies went through huge reversals in their market standing. NBC (NBCi) a site that featured a search engine, news, and stock quotes, loss hundreds of millions of dollars attempting to build out a strong presence in the content sector. The share price went as high as $100 in January 2000; by first quarter 2001, prices The Roaring 90s and Crash of 2000 329 fell as low as $1.50 per share. Kana Communications, a company that develops software for helping businesses field and track inquir- ies from customers, witnessed it’s share price soar to a high of $175.50 in March 2000 to a low of 81 cents by April 9, 2001. For such companies as etoys Inc., as well as many others, their stocks would eventually trade below 10 cents per share, and many were finally delisted from Nasdaq and forced to close their doors. The nose-dive for such companies as Ask Jeeves, Priceline.com Inc., Webvan Group, Capi- tal Group Inc. and others was 90 percent or more. Much of this was unprecedented but clearly pointed to the fact that this had been one of history’s greatest boom and bust cycles. The reversal in fortunes were simply staggering. ♦ In October 2000, The Wall Street Journal presented a very interesting article on executives who had witnessed their fortunes decimated by the Dot Com meltdown that began in the first quarter. The stories clearly painted a picture of the extraordinary wealth that was generated in such a short period of time. In the case of Ms. Candice Carpenter, founder of iVillage Inc., she witnessed her stake in the company of nearly $100 million get decimated to $890,000 by Oc- tober 2000. For Mr. Shelby Bryan, CEO of ICG Communications Inc., the ride was even more bizarre. His company’s stock peaked at $39.25 in March 2000, and then rapidly descended to 25 cents a share by October. He saw his stock wealth go from $89 million to roughly $550,000 in a seven to eight month period. Several other war stories spoke of CEOs witnessing their total stock wealth go from a high of $700 million to $20 million; from $281 million to $24.8 million; or from $827 million to $31.5 million.8 Some had borrowed money against the high stock valuations of their holdings, and certainly this proved to be a tough adjustment when stock values fell through the floor. This bust cycle ultimately caught many people off guard. The entire boom and bust period quickly made and destroyed enormous wealth in an incredibly short period of time. SUMMARY/ANALYSIS As incredible as the boom and bust cycles of 1995-2000 were, it 330 Global Economic Boom & Bust Cycles would not be the last time we would witness such extremes in market valuations. By the second quarter of 2001, venture capitalists had over $40 billion sitting on the sidelines waiting for the economic slowdown to run its course. It was very difficult to say how long the slowdown or recession would last. There were a number of factors that would determine that outcome. But one thing that was consistent, the momentum of the Information Age Revolution continued to remain strong and dynamic. The markets were taking a breather and regrouping from the wild extremes of the Dot Com Era. What we witnessed was extraordinary, but it was just the first phase of the Revolution, one of several technological developments in the much broader Information Age Revolution. The Dot Com Era essentially created a global awareness and belief system for the Internet economy and the New Economy mantra. The main things that had been derailed were the insanity of pumping billions of dollars into worthless Dot Com companies and the rampant speculation in the markets that makes fools and lovers out of all of us. New developments and new technologies were set to hit consumer markets in the near future; one had to remember that we were in the midst of the greatest technological revolution in the history of the world. Market slowdowns and recessions offer great opportunities to invest in quality companies at attractive prices. In late June 2001, fund managers and other professionals were sitting on the sidelines patiently studying their charts and looking for a clear bottom in the markets. What would spark the next sustained upward movement in the markets: strong earnings, consumer demand, the Nasdaq exchange going public in 2002, a new technology that would revolutionize the energy industry, the Fed lowering interest rates to one or two percent, Japan rising out of its long economic downturn, a sudden surge in global investing or the universal use of the euro starting in 2002? It would ultimately be a combination of factors, for we were presented with some very interesting surprises and disturbing events as we proceeded through the first five to ten years of the 21st century. The markets had to contend with the financial scandals of Enron, The Roaring 90s and Crash of 2000 331

Worldcom and other devious corporate characters that normally emerge after a spectacular boom period. By late June 2001, the U.S. Court of Appeals handed down a decision to not order Microsoft to be broken up into smaller companies. The overall impact of that decision was both favorable to Microsoft and the technology arena. Institutional investors held strong on the price of Microsoft shares, which benefitted the overall software market. In addition, Federal Reserve action during the first half of 2001 was both aggressive and unprecedented: lowering interest rates six times in six months was a first for the Fed! In the aftermath of the devastating events of 911 (September 1, 2001) the Fed maintained a policy of low interest rates to revive an economy that was in a downward spiral. Prior to 911, the economic picture had already worsened to the point where America’s economic weakness was moving the world towards a global recession. Investors and analysts paid very close attention to those critically important developments. Eventually, the markets responded strongly to these interest rate cuts (the Fed didn’t begin to reverse its interest rate policy until mid-2004). The next bubble was quietly taking root in America’s mortgage and housing industry, which ultimately lead to the next massive global boom cycle. Finally, I also think that we may continue to experience more frequent (mini-versions) boom and bust cycles during the next ten years (the second decade of the 21st century). The broad scope and impact of the Information Age Revolution is still yet to happen! 332 Global Economic Boom & Bust Cycles

NOTES (1) Many forecasts put out by reputable firms during the heyday of the Dot Com Era proved to be far too rosy. In fact, since the collapse, most have proven to be dead wrong. However, I still felt at that time that we had experienced only the tip of the iceberg in reference to the Revolution. Millions of people were still destined to migrate to this explosive global medium. (2) Joint Venture: Silicon Valley, Blueprint For A 21st century Community: The Phase II Report June 1993, (Wilson SanSini Goodrich & Rosati, Blueprint Un- derwriters). (3) Greg Ip, Susan Pulliam, Scott Thurm, and Ruth Simon, “The Bubble Broke Records, Rules And Bank Accounts,” The Wall Street Journal, July 14, 2000, p. A8. (4) IBID, The Wall Street Journal, July 14, 2000. (5) IBID, The Wall Street Journal, July 14, 2000. (6) Arthur M. Louis, “Top 500 shaken and stirred by this year's bubbleburst,” San Francisco Chronicle, May 7, 2001, p. D2. (7) Alan T. Saracevic, “Dot-com job cuts up 84%,” San Francisco Chronicle, April 27, 2001, p. B1. (8) Susan Pulliam and Scott Thurm, “For Some Executives, The Dream Has a Deep Downside,” The Wall Street Journal, October 20, 2000, p. A1 (front page). CHAPTER SEVEN MORTGAGE MELTDOWN AND THE CRASH OF 2008

“When the nation’s biggest financial institutions were teetering on the edge of failure in 2008, everyone watched the derivatives markets. What were the institutions’ holdings? Who were the counterparties? How would they fare? Market participants and regulators would find themselves straining to understand an unknown battlefield shaped by unseen exposures and interconnections as they fought to keep the financial system from collapsing.” The FCIC Report

n August 15, 1971, America, under the direction of the ONixon Administration, came off the gold standard in a move to devalue its currency. This lead to the total breakdown of the gold standard in the West and the beginning phase of the collapse of the Bretton Woods agreement negotiated in 1944-45. A new standard was introduced which would be based on a system of free floating exchange rates, where currency relationships are determined by the law of supply and demand. Gold prices were allowed to work their will, and they did to the tune of $850 per ounce by the first quarter of 1980. These arrangements did not please everyone in the world community, and the repercussions brought about many unpleasant results. OPEC’s initial response to this international maneuver was to raise the price of oil, a practice that continued throughout 1970s. Thus, the break from the gold standard ultimately triggered the price hikes in the pervasive oil/energy markets. Collapse of the gold standard also ushered in a period of rapid growth in the world’s major currencies and the consequent push towards double digit inflation during the 1970s. Paul Erdman tells us in his book entitled Paul Erdman’s Money Book, the results of a world awashed in dollar bills. In his words: “...the average expansion in domestic money was 45 percent between year- end 1970 and mid-l973, a compound annual rate of nearly 16 percent a year! The inflation that followed…in 1973 and 1974 was obviously fueled

333 334 Global Economic Boom & Bust Cycles

by this huge wave of money creation…the U.S. had spread the virus to Europe and Japan.”1 Unleashing the free floating exchange rate system in the 1970s began a new era of paper money creation. After Fed Chairman Paul Volker (1979-1987) broke the back on double-digit inflation ending the grueling 1981-82 recession, the stage was set for a new beginning. Reaganomics and the Republi- cans deregulated many industries, poured government money into the financial systems (through deficit spending) and gave free enterprise the green light to pursue its destiny. The financial industry exploded with new products and services (junk bonds, LBOs, etc.) and the boom moved into high gear. Thus, under President Ronald Reagan a 30-year period of deregulation began. Wall Street was given a green light to take on enormous risks, and it proceeded to do just that. The Savings and Loan Industry was deregulated in 1982, and by the end of that decade, the industry had collapsed. It was a colossal failure of unrestrained and unbridled capitalism which opened the door to widespread scandals, corruption and fraud. Since the era of the Boom- ing 1980s, the historic record reveals that each successive boom cycle has generated more prosperity and economic opportunities, and each bust cycle has caused more damage and wreaked more havoc than at any time in modern history. It’s a fabulous party on the upside, however, when the bubble burst we experience great hardship and economic devastation. These past boom and bust cycles exhibit the same reckless behavior: ethics and standards are thrown out the window. The Crash of 1987, the Dot-Com Bubble Collapse of 2000, and the Meltdown of 2008 illustrate the economic turbulence and calamities that have ushered in periods of great instability during the bust cycles. In a global interconnected world bathed in mountains of paper currencies, we have witnessed the formation of more bubble markets with greater frequency than ever before: the Japanese Col- lapse of 1990, the Asian market turmoil in 1997, the Russian debt default in 1998, and the Argentina default on its sovereign debt in 2001. Meltdown of 2008 335

High-tech innovations led to the creation of complex OTC derivatives which led to greater instability in the markets. By the end of the 1990s, the derivatives market had become a $50 trillion industry, completely unregulated. Thus, after three decades of deregulations, a free floating exchange rate system, low taxation on the wealthy, excesses of all types, and a continuous stream of boom and bust cycles, we have now reach a point of no return. Wall Street gambled and the American taxpayer covered the bets. The aftermath left the global economy in intensive care. After the Dot-Com bubble collapse in 2000 (a collapse that witnessed investor losses of $5-8 trillion but did not derail the global economic system) the stage was rapidly being set for the next global boom and bust period. What came next dealt a massive blow to the entire global economic system, an impact so crushing and widespread, that it shocked the world and came extremely close to starting the next Great Depression. The meltdown of 2008 will go down in history as one of the most devastating economic catastrophes of all time; often cited as the worse economic crisis since the 1930s Great Depression. The global financial system was extremely fragile with systemic risk and leverage at an all time high. The main actors in this drama were Lehman Brothers, AIG, Bear Stearns, Fannie Mae, Freddie Mac, Merrill Lynch and General Motors (GM). Worldwide, over 30 million people lost their jobs. This collapse witnessed a 17% decline in world trade, a major disruption to the global banking system and the rapid emergence of a freeze in credit markets. Due to the impact on global trade and credit, by December 2008, 23 million people in mainland China saw their jobs disappear as a result of factory closings. As the recession worsened, by early 2009, 800,000 jobs were being lost each month in the United States. Some analysts and economic thinkers expect that this set of events will repeat itself or worse during the next major downturn. The sharp decline and collapse had its greatest impact on workers throughout the world. In America the foreclosure crisis heated up with one million foreclosures in 2008. In Iceland, unrestrained free market principles, privatization and a real estate boom destroyed 336 Global Economic Boom & Bust Cycles the economy: by the end of 2008, its banking system collapsed. By 2010, the foreclosure crisis in America reached 6 million homes with another 9 million waiting in the wings. This was a global crisis of galactic proportions that in the end, would take trillions of dollars to prevent the onset of a Great Depression on a global scale. The end result of an unregulated economy, unfettered or unrestricted capitalism is the development of a concentration of wealth and a widening gap between the rich and the rest of us. As a result of these developments, the biggest financial bubble and boom cycle in history was created. MORTGAGE AND HOUSING BUBBLES Coming on the heels of the stock market collapse of 2000, this new bubble began its ascent in the American housing industry with global investors moving resources into this next big boom arena. Thus, the housing bubble and credit boom period began its rapid ascent between 2001 and 2007. A major factor spearheading this bubble was interest rates. Interest rates had been rising in 1999 (a strategy used by the Fed to reduce inflationary and bubble pressures) to take the steam out of the stock market bubble. However, after the Crash of 2000 and the bursting of the Dot-Com bubble, central bankers responded to the emerging recession, bankruptcies and over-in- debtedness by cutting interest rates. The steady progression of cuts would continue for some time in an effort to jump start a recovery in the economy with cheap money. In the wake of the enormous catastrophe and terrorist attacks of September 11, 2001 (911) the Fed continued the gradual lowering of rates to the level of 1 percent. The end result of this policy was the initiation of a new bubble, the housing bubble that began remarkably soon after the dot-com era collapse. Within a 10 year period, from 1996 to 2006, housing prices doubled and the subprime market soared from $30 billion to well over $600 billion in loans. The star performer in this arena was Coun- trywide Financial which funded over $97 billion in loans. Between 2001-2005, $2.4 trillion was generated from refinanced mortgages Meltdown of 2008 337 and home equity loans. The FBI mortgage fraud case load also increased dramatically from 2001-2004. The rush to supply new homes and more mortgage product lead to a massive boom in the home construction industry throughout America. Enormous projects were planned and built to fulfill the demands of a constantly growing body of buyers. It was clearly a sellers’ market with all the trimmings, bonuses and financial rewards. The floodgates were wide open offering a variety of loan products: Interest-only adjustable-rate mortgages, pay-option adjustable-rate mortgages, Alt-A loans, No Income No Asset (NINA) loans and other exotic products were offered to borrowers. With low introductory teaser rates (that provided two-year windows in most cases) the deals were made very attractive to first time home buyers and to seasoned investors. In addition, 100 percent finance loans with no down payment became a hot selling product for many mortgage brokers and mortgage lenders. It was a gold rush in the housing industry and the players at the top and the Wall Street magicians were fueling this bubble with all the fire power they could muster. There was literally a frenzied atmosphere to generate deals. Admittedly, many people got in way over their heads in the purchase of properties and found themselves living beyond their means. When the party came to a close a grim reality began to set in, which found millions of people stuck in very tough situations. By mid- 2004, the Fed began raising interest rates in order to combat the perceived threat of inflation. Inside of two years the fed funds rate went from 1 percent to 5.25 percent and this would be one of the main culprits to torpedo the mortgage boom. The higher interest rates brought the party to an end. The boom hit its peak in late 2006. MORTGAGE-BACKED SECURITIES AND SECURITIZATION During the housing boom most lenders and mortgage originators did not keep the majority of the loans they originated on their books. These loans were sold to the big Investment bankers on Wall Street to be packaged into Mortgage-Backed Securities that were 338 Global Economic Boom & Bust Cycles subsequently sold to investors all over the world. The more loans that were moved up the food chain in this process, the more money that could be made. The system was prime for all kinds of unscrupu- lous dealings, particularly as the subprime product became a key strategy and method for making even more money through the processing of loans. Investment Bankers used Collateralized Debt Obligations (CDOs) as the vehicle of choice to sell to global investors. These debt obligations came in different varieties and would change over time. Some CDOs not only gave investors a claim to the principal and interest payments on residential mortgages, but also to a host of other debt obligations such as student loans, car loans, credit card debt, corporate buyout debt, commercial mortgage payments, and in some cases, monthly leasing payments for aircraft, cars and mobile homes. Others concentrated strictly on mortgage-backed securities. A mortgage CDO featured the claim on a hundred or so mortgage- backed bonds, each of which was a claim on thousands of individual mortgages. The CDO was then sliced and organized into tranches in order to provide payments to specific investor risk categories, from low risk to high risk offerings. What many people did not understand, and what remained a mystery for some time, was the issue of what was happening to their mortgages after the origination process. A loan would get completed with a specific lender and shortly thereafter a letter would appear in the mail announcing that the loan had been sold to another lender or that XYZ bank would now be servicing the loan. This was standard operating procedure as loans were quickly moved through the funnel of the securitization chain. The total process was complex and consisted of many key structural components and several key players: (1) Mortgage-backed securities (2) the slice and dice Tranche System (3) Collateralized Debt Obligations (CDOs) (4) Subprime CDOs (5) Rating Agencies (6) OTC Derivatives: Credit Default Swaps (7) Synthetic CDOs. Meltdown of 2008 339

MORTGAGE-BACKED SECURITIES A Mortgage-Backed Security is essentially a bond backed by the underlying assets of a group of mortgages. Principle and interest payments made by the borrower (on an individual mortgage) are paid to an investor on the bond. Each bond could consist of thousands of individual residential mortgages. In the 1990s, institutional investors such as insurance companies were the main buyers of “private label” offerings of mortgage-backed securities. These deals came with insurance protection by bond insurers who had conducted a thorough examination of the total package. Thus, triple-A investors in these deals were fully protected. By the late 1990s, a different version of the mortgage-backed security began to take center stage. The new bond came with six or more “tranches” and other features designed to protect the triple-A investor. According to the Financial Crisis Inquiry Commission, “By 2004, the earlier forms of mortgage-backed securities had essentially vanished, leaving the market increasingly to the multi-tranche structures and their CDO investors.” THE TRANCHE SYSTEM Mortgage-Backed Securities consisting of mortgage pools are sliced into sections (tranches) with different maturity classes and risk and return categories. By slicing and dicing the bond into various risk categories, investors are given payouts consistent with the level of risk assumed or requested. Investors in separate tranches receive different streams of principal and interest based on an established order (the so-called waterfall because the money flows down). Payouts are made from the most senior position (low risk higher rated tranche (AAA): a safer investment for risk-averse investors) to the most subordinate positions (high risk lower rated tranches: BBB and lower). The ratings agencies assign ratings for most of the tranches based on their established system of classifications. For instance, S&P is set up as follows: “AAA” (the safest investments), “AA” (less safe than AAA), “A”, “BBB” and so on to its lowest level of “D”. In this example, anything below BBB is considered 340 Global Economic Boom & Bust Cycles

“junk” or “junk bond” status. As low risk investments, senior tranches receive the mortgage payments first, and are given a guarantee by an insurance company. After the senior tranches, the next in line, and considered more risky, are the mezzanine tranches. They pay a higher interest rate (some paid as high as 10 percent) and have a slower payout. And below the mezzanine tranches are the junior tranches. Also considered the “first loss”, “equity” or “residual tranche, the junior tranches are set up to receive whatever cash flow is left over after everyone else has been paid. If a foreclosure of a mortgage occurs in the pool of mortgages held by the Collateralized Debt Obligation (CDO), the junior tranche would be the first to assume the loss. With this higher risk comes a higher return. COLLATERALIZED DEBT OBLIGATIONS (CDO) CDOs consisted of a hundred or more Mortgage-Backed Bonds, with each bond consisting of thousands of individual mortgages. The CDO had its start in the “private label security” offerings (as opposed to CDOs offered by Fannie, Freddie or the RTC, which will be discussed in a later section). Consistent with the tranche system for Mortgage-Backed Bonds, CDOs were structured securities organized into multiple tranches consisting of all of the underlying mortgage pools. CDOs offered a promise to pay cash flows (principle and interest) to investors in a prescribed sequence (the waterfall), based on the amount of cash flow collected for the CDO on the pool of bonds and other assets it owns. If the funds collected are insufficient to pay all of its investors in the CDO, then those in the lower tranches would be the first to suffer losses. In the earliest versions of the tranche system, there were only two tranches: the low risk tranche that received the mortgage payments first and was given a guarantee by an insurance company, and the higher risk tranche which would be second to receive payments but was not given a guarantee (this tranche was usually kept by the company that originated the mortgages). Inside of a 10-year period (from the mid-1990s to the early 2000s) the entire method of slicing Meltdown of 2008 341 and dicing up CDOs went through a lot of changes. A wider spectrum of “risks” was set up to accommodate investor demands and to generate more income: each tranche essentially provided an investor a different priority claim on the stream of payments from the borrowers, in addition to a different interest rate and repayment sched- ule. One Mortgage CDO could consist of literally tens of thousands of individual residential mortgages generating a total value of $1 billion or more. The higher the value of the individual CDO, the higher the fee earned by the investment or commercial bank that securitized the package. For instance, each CDO Merrill Lynch un- derwrote (the typical size of the CDO security was $1 billion), the fee range was 1 percent to 1.5 percent. In a good year, Merrill would make nearly $400 million just in underwriting and selling CDOs. In 2006, the top of the bubble, Merrill generated CDO fees of $700 million by issuing $44 billion in subprime CDOs. Thus, this was a very lucrative business to be in while the party continued at a torrid pace. Prior to the collapse, many bankers were working hard and fast to get as many of these deals done as soon as possible before the party came to an end. The insiders knew that it wasn’t a question of if the party would end, but when? SUBPRIME COLLATERALIZED DEBT OBLIGATIONS (CDO) During the mortgage bubble of the early 2000s, a new version of the CDO became popular and more profitable among the central players on Wall Street. In the marketing and selling of tranches of CDOs to investors, tranches rated lower than triple-A were more difficult or harder to sell. A solution had to be found to make the other less attractive tranches more saleable. According to The Fi- nancial Crisis Inquiry Report, a 662-page report created by the Fi- nancial Crisis Inquiry Commission (FCIC) that was established as a part of the Fraud Enforcement and Recovery Act (Public Law 111- 21), this new CDO provided that solution. The report informs us that Wall Street: 342 Global Economic Boom & Bust Cycles

“…built new securities that would buy the tranches that had become harder to sell. Bankers would take those low investment-grade tranches, largely BBB or A, from many mortgage-backed securities and repackage them into the new securities. CDO securities would be sold with their own waterfalls, with the risk-averse investors, again, paid first and the risk-seeking investors paid last. As they did in the case of mortgage-backed securities, the rating agencies gave their highest, triple-A ratings to the securities at the top…Still it was not obvious that a pool of mortgage-backed securities rated BBB could be transformed into a new security that is mostly rated triple-A. But math made it so.”2 Thus, this is the principal CDO that provided the base of structured financing for the subprime bubble and generated oceans of cash flow during the explosive boom period. Like the leverage buyout (LBO) strategy of the 1980s, the subprime CDO became the vehicle of choice in the pursuit of enormous profits. The central players on Wall Street purchased all of the BBB and other lower rated tranches in mortgage-backed securities they could get their hands on, and converted these bond tranches into new CDOs with triple-A ratings. Between 2003 and 2007, Wall Street issued $700 billion in CDOs that included mortgage-backed securities as collateral. Hundreds of billions of dollars flowed into the mortgage industry to create more loans to feed this new subprime CDO money machine. In 1994, subprime mortgages accounted for only 5 percent of total mortgages; by 2006 the market had escalated to 20 percent. The subprime assembly-line of the early 2000s under-minded the mortgage origination process; most originating lenders shipped their loans to Wall Street as soon as the documents were signed. They then acquired additional funding and repeated the process as quickly as possible in order to earn the lucrative fees. That was one of the main reasons why it was a lot easier for the average American to get a loan to purchase a property. With millions of mortgages pooled into mortgage-backed securities and CDOs, this financial and economic orgy became a house of cards positioned to collapse when the right trigger came along: rising interest rates. A survey conducted by the FCIC “identified at least $275 billion of repo borrowing as of June 2008 by the approximately 170 hedge funds that Meltdown of 2008 343 responded…The ability to borrow using the AAA and AA tranches of CDOs as repo collateral facilitated demand for these securities…But repo borrowing carried significant risks: it created significant leverage and it had to be renewed frequently.” The leverage ratio (with 5% down) was 20:1 on these transactions. If the value of the collateral decreased, the repo lender would demand more collateral to hold the position, similar to buying stock on margin. When the proverbial crap hit the fan, CDO securities were hard to sell. The role of the CDO manager was to select the collateral, such as the mortgage-backed securities, and in some cases manage the portfolio on an ongoing basis. Between 2003 and 2007, CDO managers earned $1.5 billion in management fees. CDOs with as much as 80% to 100% of their cash invested in other CDOs were typically known as “CDOs squared.” THE RATINGS AGENCIES The leading credit agencies are Standard & Poor’s (S&P), Moody’s and Fitch. They played a critical role during the boom and bust mortgage era. As the impartial entity or independent party between the issuer of the securities and the investor, their role was to provide an impartial rating and opinion of the investment vehicle, giving the investor a good idea of the quality of the investment. The historical record has shown that there was tremendous failure in this area, and that the agencies did not fulfill the impartial role expected of their position in the marketplace. According to the Financial Cri- sis Inquiry Report, “Investment …banks paid handsome fees to the rating agencies to obtain the desired ratings…The role of the rating agencies was to provide basic guidelines on the collateral and the structure of the CDOs - that is, the sizes and returns of the various tranches - in close consultation with the underwriters. For many investors, the triple-A rating made those products appropriate investments. Rating agency fees were typically between $250,000 and $500,000 for CDOs. For most deals, at least two rating agencies would provide ratings and receive those fees - although the views tended to be in sync.”3 344 Global Economic Boom & Bust Cycles

Commercial banks and Wall Street knew that they needed favorable ratings in order to sell structured products to investors, so this became a part of the plan to make the entire system work and run smoothly. The stamp of approval by ratings agencies was a very important part of the process. Investors relied on the agencies to provide an accurate assessment of the quality of the investment. When professional and astute investors see AAA on an investment, that certifies to them that this is a safe investment and least likely to default. Many investors who had been investing for decades had never seen a default on an investment rated AAA. In their interview and analysis of Moody’s operations, the Financial Crisis Inquiry Commission uncovered some very interesting facts about Moody’s operations: “Moody’s was paid according to the size of each deal, with caps set at a half-million dollars for a ‘standard’ CDO in 2006 and 2007 and as much as $850,000 for a “complex” CDO…To estimate the probability of default, Moody’s relied almost exclusively on its own ratings of the mortgage-backed securities purchased by the CDOs. At no time did the agencies ‘look through’ the securities to the underlying subprime mortgages…To determine the likelihood that any given security in the CDO would default, Moody’s plugged in assumptions based on those original ratings…Meanwhile, if the initial ratings turned out - owing to poor underwriting, fraud, or any other cause - to poorly reflect the quality of the mortgages in the bonds, the error was blindly compounded when mortgage-backed securities were packaged into CDOs.”4 The report also indicates that there was a high turnover rate at Moody’s during this period, and that many of their analysts went to work for the investment banks because they were offered higher pay. CREDIT DEFAULT SWAPS (CDS) As deregulated OTC Derivatives, Credit Default Swap (CDS) contracts were essentially the principle vehicles used to bet against the raging bull housing bubble. In one sense these vehicles were a kind of insurance against failure, but on another front they were used as vehicles to speculate on the demise of the housing bubble. Similar to stock market investors shorting the market or buying put options, the CDS contract was an insurance policy against non-pay- Meltdown of 2008 345 ment by a third party. Some major hedge fund investors were in fact speculating on the downside of a mortgage and housing industry that had exceeded the limits. Hundreds of millions of dollars were invested in CDS contracts. A unique feature about these derivatives was that several CDS contracts could be purchased on the same underlying assets. If you take the analogy of purchasing an insurance policy on a home, wherein that specific home can only be insured by one insurance policy; under the accepted practice of CDS derivatives, several policies could be written on the same property (naked credit default swaps). Since this market was completely deregulated, there were no regulations in place to prevent this type of development; this practice allowed the notational value of derivatives to expand far beyond the value of the underlying assets. In addition, the firms selling these contracts did not have to put aside reserves or collateral to hedge against potential losses. There were several major investors who studied and waited patiently for years for the collapse to finally happen. The way the contract works is that an investor pays an annual premium as insurance on a possible default on a large portfolio of debt. An example would be an annual premium of $500,000 covering a potential loss of a debt portfolio of $100 million dollars. If a default occurs and the debt became worthless, the CDS protection would be triggered and the holder would be due $100 million. The company issuing the contract earns the income each year, in this case, $500,000 per year. Leverage was hidden in derivative positions and off-balance sheet entities. The number one company that sat on top of this game issuing CDS contracts and pocketing the annual fees was American Interna- tional Group, Inc. (AIG), the largest U.S. insurance company. Dur- ing the bubble period, AIG issued CDS contracts and assumed credit risk on billions of dollars of positions. When the music stopped in late 2008, AIG was required to immediately pay out over $13 billion on CDS contracts written. Given the interconnectedness of the Wall Street titans, the Lehman Brothers collapse had a direct impact on 346 Global Economic Boom & Bust Cycles

AIG; CDS contracts that speculators had written betting on the collapse of Lehman had to be covered. AIG had to make payment on these deals, and was unable borrow any money due to the freeze in the credit markets. The FCIC report tells us, “Much of the risk of CDS and other derivatives was concentrated in a few of the very largest banks, investment banks, and others…Among U.S. bank holding companies, 97% of the notional amount of OTC derivatives, millions of contracts, were traded by just five large institutions (in 2008, JP Morgan Chase, Citigroup, Bank of America, Wachovia, and HSBC) - many of the same firms that would find themselves in trouble during the financial crisis.”5 In the early 2000s, Warren Buffett labeled derivatives “financial weapons of mass destruction” and warned that they could “harm not only their buyers and sellers, but the whole economic system.” He was absolutely right! There was an orgy of activity surrounding CDS contracts, which witnessed the underlying value of assets soar from $6.4 trillion in 2004 to a peak of $58.2 trillion by the end of 2007. Hedge Funds such as Paulson & Co. and Tricadia, and investment bank, Goldman Sachs, made billions of dollars on CDS contracts when the bubble finally imploded. SYNTHETIC COLLATERALIZED DEBT OBLIGATIONS (CDO) As an inherent component of the mortgage-back and CDO security investment, leverage was literally compounded in layers of mortgages and structured finance tranches. Homeowners borrowed heavily to purchase a home (in the subprime arena 100% financing was the hot selling ticket) in some cases, with very little money out of their pockets. Lenders were borrowing heavily to finance and originate loans for their operations. And Wall Street investment banks, hedge funds and others borrowed heavily to pump billions of dollars into the system to keep a steady flow of deals in the pipeline. The use of leverage throughout the securitization process was the helium that expanded the mortgage bubble. This game of leverage was taken to the limits and then some. Investment banks leveraged up 33 Meltdown of 2008 347 to 1, and in some cases, higher ($33 of borrowed funds was covered by only $1 of assets). Greater leverage allowed the banks to buy more mortgages and create more CDOs. A small decrease in the asset base (3% or more) would leave them insolvent. This was entirely too much risk. And on top of this pyramid was added another level of leverage and risk: the Synthetic CDO. In the mad rush to put together as many subprime CDO deals as possible, a critical requirement was a larger flow of mortgages, and this was not happening fast enough for some of the more aggressive Wall Street architects. Thus, an additional CDO product was created to facilitate the consistent production of securitization bond products. With that in mind, the ingenuity of Wall Street found an expanded use of Credit Default Swaps (CDS). In this new vehicle (the Synthetic CDO), the CDS contract would form the basis and financial structure of the bond. In The Financial Crisis Inquiry Report the Synthetic CDO is described as follows: “Synthetic CDOs were complex paper transactions involving credit default swaps. Unlike the traditional cash CDO, synthetic CDOs contained no actual tranches of mortgage-backed securities, or even tranches of other CDOs. Instead, they simply referenced these mortgage securities and thus were bets on whether borrowers would pay their mortgages. In the place of real mortgage assets, these CDOs contained credit default swaps and did not finance a single home purchase. Investors in these CDOs included “funded” long investors, who paid cash to purchase actual securities issued by the CDO; “unfunded” long investors, who entered into swaps with the CDO, making money if the reference securities performed; and “short” investors, who bought credit default swaps on the referenced securities, making money if the securities failed. While funded investors received interest if the reference securities performed, they could lose all of their investment if the reference securities defaulted. Unfunded investors, which were the highest in the payment waterfall, received premium-like payments from the CDO as long as the reference securities performed but would have to pay if the referenced securities deteriorated beyond a certain point and if the CDO did not have sufficient funds to pay the short investors. Short investors, often hedge funds, bought the credit default swaps from the CDOs and paid those premiums…Firms like Goldman found synthetic CDOs cheaper and easier to create than traditional CDOs at the same time as the supply of 348 Global Economic Boom & Bust Cycles

mortgages was beginning to dry up. Because there were no mortgage assets to collect and finance, creating synthetic CDOs took a fraction of the time. They also were easier to customize, because CDO managers and underwriters could reference any mortgage-backed security - they were limited to the universe of securities available for them to buy.”6 The pooling of large groups of mortgages had the effect of spreading the diversification of risk. By slicing and dicing the CDO into tranches, buyers were able to customize and tailor their payments and risk assignments. A risk-averse investor could assure that she would be paid first (particularly in the event of a default) but was required to accept a lower interest rate or yield. Investors seeking higher yields purchased higher yield tranches that assumed a higher risk. In the final analysis, the securitization system of diver- sifying the risk didn't actually reduce the risk. Wall Street, and their quantitative analysts that devised these securities, and the financial models that predicted their performance, missed a few things along the way. But everybody was drinking the same Kool-Aid and dancing to their bank accounts, so it didn't matter! It was another bubble and a time to get rich! Losses were magnified with the use of synthetic CDOs. Benefits to Commercial Banks and Mortgage Originators: By securitizing loans the banks were able to get these loans off of their books, thereby reducing the amount of capital they were required to hold as protection against losses. The process of securitization allowed a bank to generate income or fees by quickly selling their loan portfolios to Wall Street. The whole system of securitization became a very important source of revenue for all the players in the game. The entire process of securitization was designed to benefit all of the key parties in the transaction: the lenders, investment bankers and investors. Lenders and mortgage brokers earned fees for originating mortgages. Commercial banks and Investment banks earned generous fees (consider 1% or more on a $1 billion CDO) for issuing mortgage-backed securities. And for the investor, even those in the so-called safe tranches, the returns were often higher than super- safe Treasury notes. In theory, these were sound investments based on real estate markets in the United States, the largest and most suc- Meltdown of 2008 349 cessful economy in the world. On the surface, and given the atmosphere of irrational exuberance (Greenspan terminology) of the mortgage bubble of 2001-2007, it is not hard to see how a global investor in Asia or Europe could justify the logic and validity of the CDO investment. One additional observation on this issue is that since banks were not keeping these mortgages on their books, many were not very much concerned about the quality of the loans. At some point in the scheme of things, it became a business of quantity and not the quality of loans that were being originated. PRELUDE TO A CRISIS A great deal has been written about why the Federal Reserve and other regulatory bodies did not foresee the massive crisis that was headed our way in 2008. There were plenty of warning signs, independent thinkers, economic writers, and others that sounded the alarm of imminent disaster. But much of this was either ignored or clearly underestimated in terms of the actual impact an impending crisis would have on the U.S. and global economy. Ivory tower economists such as Greenspan and the Fed presidents did not foresee the housing bubble. Greenspan stated that “Everybody missed it…academia, the Federal Reserve, all regulators.” And the issue again is why did they miss it? Raghuram G. Rajan, Chief Economist at IMF (2003-2007) wrote a paper entitled Has Financial Develop- ment Made the World Riskier, and delivered a presentation on his findings in 2005 to central bankers at the Jackson Hole conference in Wyoming. His presentation and paper was not well received at this gathering, in fact, he was essentially ignored. If this prestigious gathering of world financial leaders had paid attention to Rajan’s warning of extreme systemic risk permeating throughout the financial and economic system, there might have been a call to change the direction of the regulatory environment. In the late 1990s, Brooksley Born had warned of the extreme dangers of derivatives before Congress, Chairman Greenspan and the Fed, Robert Rubin and the Treasury, Larry Summers and others, and for her efforts she was silenced and ostracized. The Trillion Dollar Meltdown by Charles 350 Global Economic Boom & Bust Cycles

R. Morris was published in March 2008, warned of an impending crisis. And there were people like Michael J. Burry, Henry Paulson and others that were betting against the bubble and had a clear insight on what was happening. So why didn’t the Fed see this thing coming? In an article written by Michael J. Burry, he put it quite succinctly “…our leaders in Washington either willfully or igno- rantly aided and abetted the bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Fed- eral Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool - the epic and unfair taxpayer-financed bailouts.”7 A December 2006 article entitled “Housing-linked recession seen as unlikely” illustrates the mindset of mainstream economists at the time. The article stated, “Historically, recession follows a sharp downturn in housing. Yet few economists are betting on recession.” Nariman Behravesh, chief economist for Global Insight, a forecaster in Lexington, Mass., had this observation at that time, “Housing is in a recession. The good news is it isn’t dragging down the rest of the economy.” The soundness of this argument was that companies were flush with cash at the time, consumers were still spending, and employment was strong. The article also stated that Greenspan predicted that the worst was over for housing. In reality, the worst crisis in housing was just beginning. Senior public officials did not understand that the bursting of the mortgage bubble could unravel the entire financial system. In its research on the crisis, the FCIC came to the following conclusion: “…key policy makers - the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York - who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008. Other agencies were also behind the curve…Time and again, from the spring of 2007 on, policy makers and regulators were caught off guard as the contagion spread, responding on an ad hoc basis with specific programs to put fingers in the dike…There was no comprehensive and strategic plan for containment, because they lacked a full understanding of the risks and interconnections in the financial markets.”8 Meltdown of 2008 351

In another telling example of how the Fed misunderstood the severity of the impending crisis, the release of transcripts of Federal Open Market Committee (FOMC) meetings in 2006 revealed that most leaders in the Federal Reserve were completely in the dark on what was really going on in regards to falling housing prices. Full transcripts do not get released until five years after the year of the scheduled meetings, so it was very interesting to see what these financial experts and Fed officials were thinking in 2006, at the top of the bubble and the early stages of the collapse. The transcripts cover the 8 meetings of 2006 (the Fed meets every 6 weeks and on any additional special meetings that are convened due to extraordinary market conditions). In 2006, Greenspan’s last meeting was in Janu- ary, and Bernanke’s first meeting as Fed Chairman was in March of that year. Bernanke stated at the March meeting that “I agree with most of the commentary that the strong fundamentals support a relatively soft landing in housing…I think we are unlikely to see growth being derailed by the housing market, but I do want us to be prepared for some quarter-to-quarter fluctuations.” In September 2006, Timothy Geithner, then the president of the Federal Reserve Bank of New York, was not very concern about “collateral damage” from a housing slowdown. His observations were “We just don’t see trou- bling signs yet of collateral damage and we are not expecting much.” In December 2006, Geithner stated, “We think the fundamentals of the expansion going forward still look good.” Overall, the meetings in 2006 indicated that these overseers of our economic system did not foresee any danger on the horizon triggered by the housing bubble. I’m beginning to wonder if they even recognized that there was a significant bubble in progress and if so, as trained economists, bankers and experts in their fields, they should have known that bubbles do not last, that sooner or later they will collapse or burst. Bernanke and other Fed officials have stated that they failed to see the severity of the impending crisis, and these transcripts help us to understand the extent of their limitations of managing the U.S. economy. The intimate connections between the housing market and Wall Street was not evident in their thinking. 352 Global Economic Boom & Bust Cycles

The major overriding concern of the 2006 meetings was inflation. The blind faith to unfettered free markets and deregulation on all fronts must have played a critical role in this massive oversight by so many top officials looking at the economic system at that time. In a testimony before a Congressional Committee, Greenspan finally had to admit the he was wrong about his blind faith to unfettered free markets. Finally, in writing for the New York Times, Binyamin Appelbaum remarks, “The transcripts of the 2006 meetings…clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.”9 It appears that all of these Fed officials were drinking the same Kool-Aid of deregulation and unrestricted free markets. BEAR STEARNS - BEGINNING OF THE IMPLOSION The first major sign of implosion came when Bear Stearns’ hedge funds imploded in June of 2007. These funds were heavily invested in mortgage-backed securities and were highly leveraged investments. Bear Stearns, like many of its cousins on Wall Street (Goldman Sachs, Lehman Brothers, Morgan Stanley and Merrill Lynch) was operating on really thin capital. With a stock that had traded as high as $150.00 per share during 2007, the company had entered the path of a downward spiral which could not be reversed. Thus, when a problem arose in the operations of its fund, it was magnified by the heavy weight of the borrowed funds. According to FCIC, “…at the end of 2007, Bear Stearns had $11.8 billion in equity and $383.6 billion in liabilities and was borrowing as much as $70 billion in the overnight market.” Bear Stearns was skating on thin ice heading into 2008, a year that would witness a series of calamities. However, despite its de- plorable reserve capital status, Bear still had a credit rating of A2, a Meltdown of 2008 353 rating that was not consistent with a company operating in that financial condition. By March 2008, Bear Stearns had run out of cash and was forced to cease operations. The Fed was called into action to orchestrate a bailout. As one of the largest U.S. brokerage firms and the second- largest underwriter of mortgage-backed securities, Bear Stearns represented a major threat to the financial system and its collapse or bankruptcy had to be a controlled event. In addition, Bear Stearns was very active in the derivatives markets and no one knew the full extent of its obligations to counterparties in the event of a messy Wall Street meltdown. Who else would go down as a result of a sudden collapse of Bear; would credit markets freeze up; would the overall financial system take a devastating hit? There were a lot of unknowns, and that’s why the Fed was very aggressive in stepping in to solve this problem by putting together a very special deal. It was called a “shotgun marriage” with JP Morgan Chase, and Bear had to accept the proposal. This will go down in history as the famous “$2 a share deal.” The deal was negotiated on the weekend in mid March, with that Friday’s closing price of $30.00 per share for the venerable firm. One week prior, the stock had been trading at $60.00 per share. The book value of the firm (a measure of assets minus liabilities) was estimated to be near $80.00 per share. This was not a nickel and dime company, however its fortunes had fallen so low and confidence had broken down to the point where clients and counterparties were leaving the firm, that Bear would witness billions of dollars of value evaporate in a matter of days. JP Morgan Chase & Co. negotiated a deal of a lifetime, with government backing and guarantees. Valued at $236 million, the Fed- eral Reserve-backed bailout was unprecedented. In order to essentially make the deal work, the Fed purchased $29.5 billion in toxic assets. When the markets opened on Monday, March 17, 2008, the world would learn that the deal offered Bear Stearns investors $2 a share (a $30 billion package to be acquired by JP Morgan Chase). The stock had closed at $30.00 per share the previous Friday (March 354 Global Economic Boom & Bust Cycles

14th) and the pre-market action on that Monday witnessed shares of Bear Stearns trading at $3.30. It would seem that with the Fed having been that involved with the Bear Stearns crisis, there would have been some recognition that more of the same type of problems were simmering in other firms and parts of the economy. But the history of this crisis tells a different story, one of confusion, mismanagement and no plan or strategies in place to deal with the unfolding crisis. COLLAPSE OF THE BEHEMOTHS: FANNIE MAE AND FREDDIE MAC Federal National Mortgage Association (Fannie Mae or Fannie) and Federal Home Loan Mortgage Corporation (Freddie Mac or Freddie) are Government-sponsored enterprises (GSEs) created by Congress to support the mortgage market. Fannie was created during the Great depression in 1938, chartered by the Reconstruction Finance Corporation to buy mortgages insured by the Federal Hous- ing Administration (FHA). Mortgages purchased were either held in Fannie’s portfolio or resold to insurance companies, thrifts and other investors. The mandate was to establish a strong supply of mortgage credit for the economy, allowing banks and thrifts to extend credit to homebuyers. As a result of Fannie taking on a tremendous amount of debt to fund its operations, the Johnson Administration and Con- gress created the Government National Mortgage Association (Ginnie Mae) in 1968 to replace the overly indebted Fannie. Thus, Fannie was reorganized as a publicly traded corporation and became a quasi- government enterprise. Freddie Mac came on the scene in 1970 helping thrifts or savings and loans sell their mortgages. All GSEs have specific guidelines under which a loan origination must “conform” to their standards before it can be purchased. Loans that do not meet these guidelines are not purchased or accepted by the GSEs. The new laws of 1968 and 1970 established a new option: securitization. This program or process allowed the GSEs to assemble a pool of mortgages and issue securities backed by the mortgage pool. Investors received the principal and interest payments which Meltdown of 2008 355 were guaranteed by a GSE. Ginnie Mae was the first GSE to jump into the new securitization game. Once the mortgages were packaged and sold, Ginnie Mae charged a fee to issuers for the guarantee. Freddie entered the securitization arena in 1971 and essentially did the same thing. Ten years later (in 1981), Fannie got started in securitizing mortgage pools. As both public and private corporations, Fannie and Freddie are required to support the mortgage market and maximize returns for their shareholders. These companies are not set up to originate mortgages; they purchase the mortgages from banks, thrifts and mortgage companies and either hold them in their portfolios or securitize and guarantee a mortgage pool. They have a $2.25 billion line of credit with the Treasury and are exempt from state and local taxes. To protect against losses, the GSEs are required to hold only 0.45% reserves to back their guarantees of mortgage-backed securities and 2.5% reserves to back mortgages in their portfolio. By contrast, banks and thrifts capital reserve requirements are at least 4% for mortgages held in their portfolio. These thin capital requirements allowed Fannie and Freddie to assume more risk than was reasonably justi- fied, which eventually led to the collapse in both firms. From the early 1980s to the start of the 21st century, Fannie and Freddie grew to become massive too-big-to-fail institutions holding or securitizing mortgages worth hundreds of billions, and then trillions of dollars. FCIC Reported that “Fannie Mae’s quest for bigger market share, profits and bonuses… led it to ramp up its exposure to risky loans and securities as the housing market was peaking.” By the end of 2007, Fannie and Freddie’s combined leverage ratio, which included loans they owned and guaranteed was an astounding 75:1. In essence, for every $75.00 in liabilities only $1.00 of assets was held in reserve on their books. Major warning signs were flashing by July of 2008 indicating that both of these firms were in trouble. Their stock prices were taking a severe beating in the markets as investors realized that Fannie and Freddie had fallen victim to same set of mortgage related issues that brought down Bear Stearns in mid March: a rising number of 356 Global Economic Boom & Bust Cycles foreclosures, declining real estate values and super-high leverage ratios. And given their size and market share, the fear and specter of collapse was getting closer to reality day by day. By the end of 2007, Fannie alone had packaged and guaranteed approximately $2.8 trillion worth of mortgages, around 23 percent of all outstanding U.S. mortgage debt. Thus, the GIANTS in the industry were staggering from the weight of massive debt and mismanagement. Basic day to day operations required Fannie and Freddie to constantly borrow money, and this was unsustainable given their steady and persistent fall from grace. Moreover, despite these rather dismal circumstances, both companies still held AAA credit ratings. With the clock ticking on Fannie and Freddie, the specter of insolvency loomed on the horizon, and this was something that carried far greater implications for an economic Armageddon than anyone could imagine. In the beginning the Federal Reserve and the Treasury tried to distance themselves from the notion that the government would be obligated to bail out either Fannie or Freddie if they became insolvent. The fact that these companies serve an essential role in the market had to be strongly considered: between Fannie and Freddie the actual number of the securities they guaranteed and mortgages they held totaled in the area of close to $6 trillion in the U.S. residential mortgage industry. This was clearly Too- Big-To-Fail! Ultimately, the Federal Reserve and the U.S. Treasury Depart- ment made the decision to bail out the Behemoths. On September 7, 2008, Fannie and Freddie were taken over. It was on this date that the Director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III, placed the two companies under conservatorship of the FHFA. The executive officers and boards of directors of both firms were dismissed. As part of the bailout deal, the firms were instructed to issue 79.9 percent of their equity to the U.S. Treasury in exchange for cash infusions and credit guarantees for GSE-held securities and GSE-issued debt. The approximate value of this rescue operation was $1.1 trillion. Millions of toxic loans issued dur- Meltdown of 2008 357 ing the housing bubble remain on their books and delinquencies on those loans continue to rise. THE LEHMAN BROTHERS, MERRILL LYNCH, AIG WEEKEND Two days after Fannie and Freddie were bailed out and placed into conservatorship (September 9, 2008), Lehman Brothers, the fourth largest investment bank in the America, began its final descent into financial hell. But as the total analysis of 2008 reveals, Lehman Brothers was not the main cause of the massive meltdown, but the trigger or the lighted match that exposed the structural decline and heavily indebted companies and governments of Europe and America. The entire financial system was on the brink of collapse; Lehman was the straw that broke the system’s back! For most of 2008, Lehman (like many of the other firms on Wall Street) struggled with toxic assets it held on its books. The company was holding very large positions in subprime and other lower-rated mortgage tranches on its books, generating huge losses throughout that turbulent year. Leverage for the firm had increased from 24:1 in 2003 to 31:1 by 2007. The month prior to its demise, Lehman was sitting on 900,000 derivative contracts. In February 2008, Lehman’s stock had been selling for $66 per share. A year earlier (February 2007) Lehman’s traded as high $86.00 a share. During the first half of 2008, the value of Lehman’s stock fell by 73% as uncertainty about the firm’s future began to circulate in the markets, especially after the collapse of Bear Stearns in March. It was felt by some analysts and big institutional investors that Lehman would be next. With 25,000 employees worldwide and an asset base of over $640 billion, Lehman had been a formidable competitor on Wall Street, and a financial force to be reckoned with. But in 2008 it all began to unravel, and its power base was systematically stripped away. CEO Dick Fuld and other key Lehman executives began to focus on raising additional capital for the firm. In late March Warren Buffet and Berkshire Hathaway were approached to make a $3.5 billion preferred stock investment in Lehman with a conversion price 358 Global Economic Boom & Bust Cycles of $54 per share. Buffett would ultimately indicate a possible interest at a $40 per share conversion price, however after reviewing Lehman’s 10-K and discovering other important facts about the company’s finances, Buffett decided against a Lehman investment. Buffett had deep concerns regarding Lehman’s real estate and high yield investments, lending related commitments, Level III assets, derivatives and their related credit market risk and Lehman’s securitization activities. This was a deal that presented far too many red flags. And given the fact that Warren Buffett had gone on record in 2003 identifying derivatives as “financial weapons of mass destruction,” the extraordinary high risk and high leverage must have alerted him to pass on this opportunity. Dick Fuld and other Lehman executives knew that an investment by Buffett would have given Lehman a stamp of approval, generated some confidence in the market and bought them some needed time to get their house in order. By late May, Lehman had begun talks with a consortium of Ko- rean banks for possible investments in the beleaguered firm. The consortium of banks did not agree to move forward on a deal, however one bank, the government-owned Korean Development Bank (KDB), expressed an interest and would continue talks (off and on) up until late August. With the global economy revealing signs of financial stress and the declining value of the Korean currency, KDB decided to walk away from the Lehman deal, deeming it too prob- lematic. However, by the beginning of April Lehman was able to complete a $4 billion preferred stock issuance that helped to shore up its financial position. On June 12th Lehman raised $6 billion (through a private placement) in preferred and common stock. Thus, a total of $10 billion was raised during the second quarter of 2008. But the company still had some major hurdles to contend with as the year moved forward. By late March, the stock price had slid just below $40.00 a share; the wild swings in volatility of price movement would continue to the upside and downside for the remainder of the year. On June 8th the firm announced a second quarter loss of $2.8 bil- Meltdown of 2008 359 lion. The markets cheered the firm’s ability to still raise capital but would also roar its disapproval when the company reported losses. In August 2008, Lehman reported that it intended to dismiss 6% of its work force, 1,500 people, prior to the release of its third-quarter-reporting deadline in September. As the company entered the month of September, events began to spiral out of control. The markets had been patiently awaiting an important alliance with a deep- pocketed partner (KDB), but it fell to materialize. The company had worked on the restructure of its commercial portfolio and other assets, but it was too little, too late. On September 9, 2008, Lehman’s shares plunged 45% to $7.79. The following day (September 10th), Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business. The markets continued the brutal sell-off. As Lehman reported its losses, investors continued pulling their money from the company. The stock plunged to $4.00 a share. On September 13th, the president of the Federal Reserve Bank of New York, Timothy Geithner, and the Treasury Secretary orchestrated a meeting of high-powered bankers to discuss the future of Lehman, which included the possibility of an emergency liquidation of its assets. By this time Lehman was in talks with Bank of America and Barclays as possible candidates to purchase the company. It was “fire sale” time, with the company staring insolvency and bankruptcy dead in the face. It was the end of the road and Lehman needed a savior. At that moment in time, on that fateful weekend, few of the participants in the negotiations knew exactly how important it was to keep Lehman from declaring bankruptcy. Ben Bernanke and the Federal Reserve, Henry Paulson and the Treasury Department, and Timothy Geithner and the Federal Reserve Bank of New York did not fully understand the systemic risks involved in allowing Lehman to collapse into bankruptcy. On September 14, 2008, the deal that was being brokered with Barclays to purchase all or part of Lehman collapsed. Banking regulators in the UK torpedoed the deal for various reasons. According to one account, British Banking Regulator, Sir Callum McCarthy, 360 Global Economic Boom & Bust Cycles stopped the Lehman deal with Barclays. He stated that “we do not want to import your cancer.” Another account simply states that the deal was vetoed by the Bank of England and the UK’s Financial Services Authority. As for the Bank of America bid for Lehman, there was a request by the bank for government involvement similar to the Bear Stearns deal; however, Paulson resisted any calls for government bailout money for Lehman. Bank of America walked away from the Lehman deal and into the arms of Merrill Lynch, and subsequently agreed to a deal it would later regret. After a weekend of intense deliberations, it was decided that Lehman would need to file for bankruptcy. On September 15, 2008, with $639 billion in assets and $619 billion in debt, Lehman Brothers filed for Chapter 11 bankruptcy protection. Up to that time, it was the largest U.S. bankruptcy filing in history. On the day of the announcement, the Dow Jones fell over 500 points, a 4.4% decline. But this was just the beginning! Two days later, AIG was the next problem to be solved by the government. It was a domino effect; the deep financial interconnections of the Wall Street firms had begun to surface in way that no one had foreseen. The Lehman Brothers bankruptcy brought AIG to its knees. AIG had to cover all of those Credit Default Swap contracts it had written on the possibility of a Lehman Brothers’ demise. The holders of those contracts had to be paid, and AIG had not put aside any reserve funds for this possible event. This industry was not regulated so there was no reserve requirement. With $850 billion in assets, 116,000 employees in 130 countries, and 223 subsidiaries, American International Group (AIG) was a global powerhouse. Its business of offering credit protection on various types of assets grew from $211 billion in 2002 to $533 billion in 2007. As a virtual giant in the insurance industry, AIG was a well respected company in the marketplace with significant global connections. Since 1983, AIG had held an AAA credit rating with S&P, and since 1986, Aaa by Moody’s. During the housing bubble, AIG’s London division issued $500 billion of CDO contracts, many backed by sub-prime mortgages. This would be a major source of its Meltdown of 2008 361 sudden and unexpected decline. European banks had tremendous exposure to AIG; this was clearly not just an American problem but a full blown international crisis. The problem cascaded way past Wall Street, affecting such America corporate icons as General Elec- tric and AT&T. In the case of AT&T, the company could not borrow money for entire week. In the days and weeks that followed September 15th, the global financial system fell into a death spiral. It was a massive global meltdown simmering in a toxic waste dump of mortgage assets. Confi- dence was eroded throughout the financial and economic system. As banks stop trusting each other, credit markets froze up: Interbank lending stopped! Companies and individuals were unable to obtain loans that they needed to maintain their daily operations. This was a real life example of how lack of credit in the financial system can destroy an economy. Stock markets responded by selling off sharply. In the face of massive uncertainty, investors fled to safety. The CDO market imploded. The flow of loans to investment banks came to a screeching halt. The immediate emergency strategy was to devise a plan to unfreeze the system before it was too late! The global economy was infected and government needed to step in with massive liquidity, low interest rates, and bank bailouts: Shock and Awe was the Fed’s rapid response strategy. The Fed moved to backstop everything. Treasury Secretary Henry Paulson and Fed Chairman Ben Ber- nanke went to Congress with a special request for emergency funding for $700 billion to bail out the American financial system. In a hastily written ten-page document known as the “Troubled Asset Relief Program” (TARP), this program was designed to purchase troubled assets and equity (mainly mortgage-backed securities) from financial institutions to strengthen the financial sector. Members of Congress were informed that if they did not pass this emergency legislation immediately, the country would be faced with the greatest economic crisis since the Great Depression of the 1930s. Paulson and Bernanke had been running from one big crisis after another and knew that they had run completely out of time. On September 362 Global Economic Boom & Bust Cycles

29, 2008, the House of Representatives held a special session to vote on the TARP legislation. The bill was rejected on a vote of 205- 228. All hell broke loose in the stock market: The Dow fell 777.68 points after the vote was announced. In the face of this catastrophic collapse, the House passed the bill four days later. The passage of TARP restored some measure of confidence, liquidity and calmness to the system, however volatility and fear was still very much a part of the markets for much of the remainder of 2008. In the month of October the Dow had four days of 400-point plus gains and four days of similar losses. On an exceptionally bullish day, the Dow soared 936-points on October 13, 2008 (driven by a coordinated plan by European central banks and the U.S. Treasury to provide special aid to banks). Two days later the Dow fell 733 points in response to a report that retail sales had fallen more than expected. During the month of November, Standard & Poor's 500 index fell by 4 percent for four straight trading days between Nov. 19, 2008 and Nov. 24, 2008. By December 2008, GM and Chrysler were on the brink of bankruptcy and needed a bailout. Exports to Asia collapsed and in December, the banking system collapsed in Iceland. The initial bailout for AIG was $85 billion to keep this giant global octopus from infecting the entire global economy. SOME CRITICAL THOUGHTS ON THE BANK OF AMERICA/MERRILL LYNCH DEAL During the turmoil of 2007 and 2008, the financial industry went through extraordinary period of consolidation, with the stronger companies acquiring their weaker competitors. Bank of America (B of A) acquired Merrill Lynch and Countrywide; Wells Fargo acquired Wachovia; JP Morgan Chase acquired Washington Mutual and Bear Stearns. Goldman Sachs and Morgan Stanley became bank holding companies, extending their breath and reach in the financial arena. And a special attraction was Warren Buffet taking a stake in Goldman Sachs for $5 billion with very generous conditions. However, the deal that warrants deep reflection and should be studied as a classic case of buyer beware, was the Merrill Lynch acquisition. Meltdown of 2008 363

B of A made its commitment to acquire Merrill the day before Lehman announced that it would be filing for bankruptcy. The next morning Lehman announced its bankruptcy and the value of that company decreased significantly. Barclays, who had previously been a potential buyer for the company, stepped back into the picture and secured a deal to purchase Lehman’s investment banking and capital markets operations for $250 million, a price substantially lower than it would have paid prior to the bankruptcy. Perhaps it was a stroke of luck or just proper due diligence by Barclay’s regulator(s), that prevented the company from purchasing Lehman prior to the bankruptcy. However, Barclays had insisted, and the regulators en- forced it, that they would not assume the toxic liabilities and assets of Lehman, which consisted of more than $600 billion in debt. By purchasing Lehman out of bankruptcy, Barclays avoided the acquisition of an entire valley of toxic assets and liabilities. In short, Barclays ended up acquiring clean assets and resources for a quarter of a billion dollars. On the other hand, B of A paid $50 billion for Merrill Lynch during the 2008 crisis. At the time of the transaction, Merrill Lynch was choking on toxic assets and was next to go into a free fall after the Lehman collapse. Henry Paulson and the Treasury Department were eager find a suitor, and B of A stepped up to the plate as a willing buyer. However, B of A paid too much for Merrill and made the mistake of buying the entire company, toxic assets and all, swallowing it whole. Merrill added $900 billion worth of assets to B of A’s balance sheet. Merrill’s liabilities related to the mortgage-backed securities were enormous, totaling in the tens of billions of dollars. B of A had to contend with a laundry list of toxic assets. In the final analysis, B of A paid a huge premium for a company that it could have picked up for a much lower price. B of A should have waited until after the Lehman announcement to see what the fallout was going to be in the markets. Asset prices fell through the floor across the board, especially for risky assets and companies drowning in toxic mortgage-backed securities. Merrill was not a clean acquisition, nor was Countrywide with its billions in toxic waste. One has 364 Global Economic Boom & Bust Cycles to wonder if B of A’s board of the directors ever did any work on any proposed deals. Bottom line, Merrill would have been a lot cheaper after the Lehman bankruptcy announcement. ELECTION YEAR 2008: THE COMING OF BARACK OBAMA In the midst of all of the economic calamity and turmoil of the year 2008, America was also preparing for a major presidential election in November. With the Republican Party in power under the Bush Administration, the economic crisis that was engulfing the entire world did not favor a continuation of the same policies of the ruling political party. The American people were ready for a change. After a long, grueling democratic primary season and billions of dollars of political contributions, the Democratic Party chose Barack H. Obama as its candidate for the president of the United States. In a year of unprecedented events, this represented yet another extraordinary development: the first African-American had won the democratic race to become president of the United States. However, it would cost a lot of money to put the first Black president of the United States into office. With his unprecedented use of the Internet for donations supported by a dedicated nationwide political organization, Barack Obama took his message of change to the American people, and for the most part, the majority of the people agreed with that message. I like to refer to Obama as the $750 billion president, because that’s how much money it took to finally get him elected. On November 4, 2008, the American people went to the polls and elected Barack H. Obama as the next president of the United States. After two terms of Republican administrations (eight long years of President George W. Bush) and the near total collapse of the entire global economy, it was time for a change. Obama came into the oval office at a time of extreme crisis. He joins the ranks of other presidents that walked into office under similar circumstances: Harry S. Truman, Abraham Lincoln and Franklin Delano Roosevelt (FDR). On January 20, 2009, Barack H. Obama was inaugurated as America’s 44th president. He ascended to the Meltdown of 2008 365 oval office inheriting over $10 trillion in national debt, the failed policies of the Bush Administration that had squandered a budget surplus from the Clinton Administration with repeated tax cuts, two wars which included the elusive War on Terror and the worst global economic crisis since the Great Depression of the 1930s. At that point in history, America was right in choosing Obama in 2008 as its next president. With a Democratic majority in Congress, his mandate was set to take off. It was a historic moment and Obama needed real solutions to deep problems. This was clearly going to be a very difficult job. Harvard University political philosopher, Michael Sandel, provides some insightful thoughts on the Obama presidency: “FDR did not run on the New Deal in 1932…He ran on balancing the budget. Like Obama, he did not take office with a clearly articulated governing philosophy. He arrived with a confident, activist spirit and ex- perimented. Not until 1936 did we have a presidential campaign about the New Deal. What Obama’s equivalent will be, even he doesn’t know.” Thus, it took years before FDR was able to fine tune his approach to economic policies to deal with the enormity of the Great Depression. With history as a guide, it appears that Obama is on the same trajectory in terms of his administration finding a resounding path towards the massive economic ruin caused by decades of deregulations and unregulated markets. When Obama stepped into the White House he was confronted with the massive power of Wall Street and the banks who had dominated the oval office for nearly three decades: a political establishment that was already deeply influenced by the too-big-to-fail institutions. The big banks and Wall Street have tremendous influence in Washington: campaign money and lobbyists. With businesses and consumers pulling back due to the economic shock of 2008, Presi- dent Obama’s first priority was to stabilize the economy and prevent the harsh reality of a global depression. The need for an economic recovery was of supreme importance during the first year of Obama’s presidency. Under the Bush Administration, Congress, the support of President-elect Obama and the Federal Reserve System, TARP 366 Global Economic Boom & Bust Cycles had been implemented and other monetary policies were already in operation, which had stopped the economic bleeding and slowed the pace of the downward spiral. In addition, President Obama and his administration put together a recovery plan with an initial value of $787 billion (SEE the Prologue). On Feb. 13, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 in response to the Meltdown of 2008 and to jumpstart a deeply wounded economic system. In the end, as we shall see in a later section, it would take trillions of dollars to keep the world from falling deep into the next Great Depression. Thus, the first few months of the Obama presidency focused on containing the crisis and the prevention of economic contagion. To achieve his administration’s economic and financial goals, he chose as his top advisors many Wall Street types and insiders who, in previous years, could have implemented policies that would have prevented the crisis in the first place. Ben Bernanke was reappointed Federal Reserve Chairman in 2009 (a second four-year term), Timo- thy Geithner became Treasury Secretary, and Larry Summers became his Special Economic Advisor. Many dubbed his administration another Wall Street government. This represented a downside of the Obama Administration, that the Wall Street cast had reassembled, and they did not bring change. But this was not new: Big business and Wall Street had been a permanent fixture in both Demo- cratic and Republican administrations over the preceding 30 years, continuing the mission of deregulation and unfettered free market capitalism. What President Obama needed, and what the country desperately required, was an economic and financial team of reformers, not deregulators and people who got us into this mess in the first place. As an astute and highly gifted politician, Obama was given the enormous task of reforming the financial system that required help from the financial sector; however, he was locked into a mission impossible. The banks did not support Obama on any of the key initiatives he put forth. Instead, they spent hundreds of millions of dollars lobbying Washington politicians (on both sides of the aisle) Meltdown of 2008 367 and campaign contributions pushing their case for deregulations. In addition, his presidency was plagued in the beginning with a hardcore Republican opposition, an intractable economic recession, and wars and rumors of war. And again, he needed a stronger team of reformers, not the Wall Street people who were steadfastly against any major reforms. Overall, during his first term as president, critics viewed the Obama Administration as having banker friendly policies. In Ron Suskind’s book, Confidence Men: Wall Street, Washing- ton and the Education of a President, the author speaks to the difficulty the president had with his chosen economic team. The books tells us that Timothy Geithner and the Treasury Department ignored a March 2009 order to consider dissolving the over-bloated Citigroup while continuing stress tests on banks, which many were still burdened with toxic mortgage assets. Suskind writes “The Citibank incident, and others like it, reflected a more pernicious and personal dilemma emerging from inside the administration: that the young president’s authority was being systematically undermined or hedged by his seasoned advisers…” In Confidence Men, we see Obama struggling with (certain members) of his chosen team that did not share his vision of reforms and other necessary policies to correct the evils of the past. His Wall Street team had a different agenda. Obama’s economic and finance team tinkered with certain reform measures and gave the impression that something substantial was being done. A case in point is “The Making Home Affordable Modification Program,” a program that was supposed to help 3 million to 4 million borrowers. By September 2011, 720,612 mortgages had been permanently modified, falling short of its established goals. On the other hand, the mission to bailout General Motors and Chrysler to save the car manufacturing industry and hundreds of thousands of jobs, met with greater success by saving American jobs and an Ameri- can industry that was falling into terminal bankruptcy. But nothing major was done about the financial system that is seriously broken, the derivatives ticking time bomb, or the resurrection of the Glass- Steagall Act. 368 Global Economic Boom & Bust Cycles

Passage of the American Recovery and Reinvestment Act of 2009 was a monumental Obama era achievement that helped to implement many of Obama’s campaign promises of structural and dynamic change. Michael Grunwald’s book, The New New Deal: The Hidden Story of Change in the Obama Era, is an excellent book for understanding the complexities, vision and politics that went into crafting this $787 billion piece of legislation, that is now becoming known as the New Deal of the 21st century. The New Deal investments in America’s clean technology future were significant. Grunwald’s analysis informs us of the following: “The Recovery Act’s most important long-term changes aimed to jumpstart our shift to clean energy, reducing our carbon footprint, our electric bills, our vulnerability to oil shocks, and our subservience to petro-dictators while seeding green new industries…Overall, it pumped about $90 billion into green energy, when the United States previously spent a few billion a year.”10 Critics make the point that Obama and his Democratic majority in Congress (the reality during his first full year in office) should have been more aggressive (during 2009) in passing legislation favorable to their agenda for change. Indeed, they had the Power to move mountains, but it was short-lived. After the Tea Party landslide victories in the 2010 elections, the Democrats lost their majority in Congress. The end result of that political failure left Obama extending Bush-era tax cuts for the wealthy (at the end of 2010) and not getting anything in return. His presidency now had to contend with a much stronger and powerful opposition: after 2010 it became gridlock in Washington on all fronts! As we headed towards the November elections in 2012 and Presi- dent Obama’s bid for re-election, America was still suffering from the aftershocks of 2008. Monetary and fiscal policies had averted or postponed the onset of the second phase of the Great Depression. The so-called Great Recession which economists say started in De- cember 2007 and ended 18 months later in June 2009, left in its wake an anemic recovery. With the birth of “Occupy Wall Street” during the third quarter of 2011, the issue of wealth disparity in America began to take center stage: Wall Street and the Big Banks were bailed out but the Meltdown of 2008 369

American people were not! Books have been written, special government reports have been issued, several documentaries have been produced and distributed all over the world, so everything is on the table now; people are much more aware about what had happened prior to 2008 and what has happened since 2008. And in early 2012 there is a growing anger and bitterness over a Wall Street and banking oligarchy in America. Over-the-top greed and power, and other inherent abuses in the system would be a part of the dynamics of the November elections. As I stated earlier in this book, President Obama will need to increase his awareness that he is a depression-era president who, like FDR in the 1930s, must begin to implement the second phase of his New Deal (resurrection of the Glass-Steagall Act and other reform measures) for this era if America is to avoid a major economic collapse. He understands the message and dynamics of the Informa- tion Age Revolution, and in very significant ways has initiated a massive movement towards alternative energy. He understands the importance of raising taxes on the wealthy, and there are a sizable number of wealthier taxpayers who are in agreement with this policy. He acknowledges the dangers of global warming and that the Age of Oil is steadily coming to a dramatic end at some point in the foreseeable future. He is a president that appreciates the world of science and technology, and is not fuzzy on how we must deal with the 21st Century. These are some of the qualities we need in a leader who will guide us through the next phase in this turbulent period. How- ever, the most immediate concerns that needed to be addressed prior to the elections in November were jobs and the housing crisis in America. According to CoreLogic, about 11 million Americans - approximately 1 in 4 homes with mortgages - are underwater. Confronted with a massive number of foreclosures and plunging house values, millions of American homeowners are searching and requesting novel solutions to this massive nationwide problem. Simply sitting by and allowing massive foreclosures to take place will only plunge the nation into a deeper economic crisis: this is an unprecedented situa- 370 Global Economic Boom & Bust Cycles tion that requires an unprecedented government/industry solution. The Obama Administration’s earlier attempts at resolving the housing, mortgage and foreclosure crisis in America did not bring about a measure of great success, much of that having to do with not having key reform-policy architects in his administration dedicated to the implementation of a New Deal for the housing industry. His economic and finance team, as well as the Federal Reserve System, have “tinkered” with this problem and produced Tinkerbell results. On the other hand, Obama has advocated that stronger measures be taken to rectify the damage that has been done to the industry and the American homeowner. In an October 2012 “Weekly radio and Internet Address” President Obama informed Americans about recent proposals introduced in 2012 to help struggling homeowners refinance at current lower rates. He stated that, “It’s a plan that we know will work. It has the support of independent, nonpartisan economists and leaders across the housing industry. It’s a no-brainer that should have passed easily...But Republicans in Congress banded together and kept this plan from even coming to a vote.” Throughout much of his presidency, Obama has appealed to Congress to pass legislation that would make it easier for more borrowers to refinance their loans and secure loan modifications. However, he receives no support from a deeply divided government on these issues. Former Massachusetts Gov. Mitt Romney, the Republican presidential candidate, had suggested that the foreclosure crisis should have been allowed to “run its course and hit the bottom.” President Obama took the opposite position by stating “It is wrong for anyone to suggest that the only option for struggling, responsible homeowners is to sit and wait for the housing market to hit bottom. I refuse to accept that, and so do the American people.” Without a stable and fully functioning Middle Class in America, there will be no meaningful economic recovery, only years of economic chaos and deepening austerity measures similar to the Greek economic crisis. This is not your typical garden-variety recession but something much deeper: This Time Is Different! Meltdown of 2008 371

Billionaire investor George Soros stated in an article, in early February 2012, that President Barack Obama deserved a second term. In his words “The problems that he inherited, because he came in immediately after a financial crisis, were bigger than any president could have immediately remedied…So, whoever gets elected now has a much better chance of being successful than Obama had.” I agreed with this analysis, and more importantly, I also agreed that President Barack Obama deserved a second term in the White House. In his second term he will have a much better chance of giving the American people a New Deal with much greater and substantial change. On this critical issue of Obama’s re-election, political strategist James Carville made a valid point in May 2012 as the campaign season was starting to move into full gear: “If we don’t get on the offense, reconnect with the American people, talk about how the middle class is in a struggle for its very existence, hold the Republi- cans accountable, and fight like the dickens, we are going to lose.” What European politics demonstrated in recent elections is that in- cumbents in country after country were being voted out of office. If a sitting president was not responsive to the needs of the people, he or she was thrown out of office. FOUR MORE YEARS OF THE OBAMA ERA America went to the polls on November 6, 2012, and the majority of the people voted to keep President Barack Obama in the White House. This was a very important election for a lot of reasons (much of which will be covered in another book). However, regarding the various issues discussed in this publication (economic policies, natural disasters and climate change, economic and financial reforms, the green technology and the Information Age Revolution, etc.) this was, without a doubt, an astounding historic victory for the people of this great nation, and by extension, the entire world. With Presi- dent Obama and the Democrats in power, the American people have been given a fighting chance to build a strong coalition for economic justice and full development of the clean technology revolu- 372 Global Economic Boom & Bust Cycles tion. This victory is a grand opportunity to do great things! We will either move forward and achieve massive change and revision of the global economy or we will collapse into dysfunction and terminal creative destruction. “The Nation we need to build is our own” is what Obama stated in a campaign speech given in early May, 2012. This should be the driving force of his presidency for the next four years: the renewal of America, rebuilding its infrastructures and broken systems, and restoring the strength and vibrancy of its Middle Class. The continuation of the Obama Era can bring a much needed boost of economic energy and revision if the right policies are followed and implemented. America needs strong financial and economic reforms and sound economic policies that will benefit the majority of its people. If these goals can be achieved, we may be able to avoid a devastating global economic collapse, however, there must be a firm political resolve to meet these challenges. The second phase of his 21st Century New Deal and the Obama Era should include the following resolutions and programs: (1) Mas- sive new infrastructure developments utilizing the genius of new technologies in various fields (2) A revolutionary plan for energy independence that will concentrate on phasing out the use of oil over the next 10 years and the full implementation of new energy vectors and ginormous use of alternative energies (3) A comprehensive program to resolve the housing crisis and help families refinance or modify their existing mortgages at lower interest rates: Bail out the American people in order to create economic stability throughout the nation (4) the use of novel strategies to put Americans back to work (5) A dynamic plan to deal with the $1 trillion student loan crisis and affordable higher education in America and (6) Resurrec- tion of the Glass-Steagall Act with stronger reforms for the banking system and the over-the-counter derivatives market: In 2012 (similar to the Meltdown of 2008) OTC derivatives is a ticking time bomb set to explode at any time given the right trigger mechanism(s). These are some of the key issues that many Americans would like to see addressed by a reinvigorated Obama Era. It’s worth repeating here Meltdown of 2008 373 that, President Obama should clearly make the rebuilding of America the backbone of his push to redefine this nation’s mission and power in the 21st century. Some aspects of the above measures have already been included in the first phase of the New Deal: the next four years should witness the implementation of a complete clean energy revolution and the other significant factors required for economic revision. Like FDR, President Obama’s real agenda and a more meaningful presidency will take root in his second term. We are in the implementation stage of the Information Age Revolution, and now is the time for a great transformation utilizing the best technologies for economic growth and development. This will be the center and the heart of Obama’s 21st Century New Deal. THE AFTERMATH: REGULATORY REFORMS After more than 30 years of deregulation and reliance on self- regulation by the financial sector, the core and lifeblood of the financial system was finally nuked. For decades, no one wanted regulation in the financial sector and the game of leverage was allowed to increase beyond reason. All of this was akin to skating on thin ice. Many regulatory bodies had ample power in several arenas, but they chose not to use it. And the power of money and political influence played a major role in prolonging the deregulation era: From 1999 to 2008, the financial sector spent $2.7 billion on its lobbying machine in Washington. In the markets, traders and managers were encouraged to make the big bets and take on the big risks; this was the time to score that quick deal, and for the most part, the focus was for short gains without regard for any long-term consequences. When the Financial Crisis Inquiry Committee (FCIC) began the work on The Financial Crisis Inquiry Report to unravel the causes and key policies that led to the financial crisis of 2008, there were some major objectives they were hoping to achieve in their findings. In a section entitled “Conclusions Of The Financial Crisis Inquiry Commission,” they write: 374 Global Economic Boom & Bust Cycles

“Our task was first to determine what happened and how it happened so that we could understand why it happened…If we do not learn from history, we are unlikely to fully recover from it. Some on Wall Street and in Washington with a stake in the status quo may be tempted to wipe from memory the events of this crisis, or to suggest that no one could have foreseen or prevented them…This report endeavors to expose the facts, identify responsibility, unravel myths, and help us understand how the crisis could have been avoided. It is an attempt to record history, not to rewrite it, nor allow it to be rewritten.” And they go on to tell us, “But our mission was to ask and answer this central question: how did it come to pass that in 2008 our nation was forced to choose between two stark and painful alternatives - either risk the total collapse of our financial system and economy or inject trillions of taxpayer dollars into the financial system and an array of companies, as millions of Americans still lost their jobs, their savings, and their homes?”10 It’s very important to understand this history and the key events that led to the greatest economic collapse in the post-World War II era. And the FCIC is right to point out that there are those who would like for us to wipe from memory the events of this crisis. That would be unwise and tragic, especially since (in 2012) this crisis is not over. We need to understand as much as we can before entering the next downward phase of a systemic global decline. From the late 1990s to 2008, a series of legislative and political maneuvers helped to fuel the bubbles of this period:

♦ Passage of the Gramm-Leach-Bliley Act on November 12, 1999, that literally destroyed the economic safeguards of the Glass-Steagall Act of the 1930s. This happened during the Clinton Administration who was not watching how far the pendulum had swung. Financial markets were zooming and the Clinton Administration went with the flow of the Roaring 1990s. In response to the passage of Gramm- Leach-Bliley, bank analyst Lawrence Cohn at Ryan, Beck & Co. stated in an article in Time Magazine, Nov. 8, 1999: “This is hor- rible legislation…It creates a huge potential obligation for the U.S. taxpayers.” He said the bill (the destruction of Glass-Steagall) would encourage concentration of financial power in a few hands, any one Meltdown of 2008 375 of which could topple the system if it failed - forcing a government bailout. ♦ The decision in early 1998 to stop and silence a proposal by Brooksley E. Born, head of the Commodity Futures Trading Com- mission, to regulate derivatives. ♦ With the passage of the Commodity Futures Modernization Act of 2000, the political establishment and regulators had decided not to have federal oversight over this area of the derivatives markets (OTC derivatives). Indeed, the Federal Reserve did not take responsibility for regulating derivatives. In the FCIC report they noted: “Within the financial system, the dangers of this debt were magnified because transparency was not required or desired. Massive, short- term borrowing, combined with obligations unseen by others in the market, heightened the chance the system could rapidly unravel.”11 There are far too many unknowns with OTC derivatives. ♦ Bush tax cuts of 2001 and 2003. ♦ With the Securities and Exchange Commission’s decision in April of 2004, large investment banks were allowed to increase their debt- to-capital ratio from 12 to 1 to 30 to 1, or higher. Since the 2008 meltdown, the Securities and Exchange Commission Chairman now leads the call for increased regulation of derivatives. THE FEDERAL RESERVE SYSTEM The Federal Reserve System (the Fed) is a very powerful chess piece in the growth and decline of boom and bust cycles. Of interest here is the fact that the Federal Reserve System (established in 1913) was originally put in place to control the severe boom and bust cycles that had been rampant in the banking industry during the 19th and early 20th centuries. The overall system consists of a control Board of Governors in Washington, D.C. and 12 regional Federal Reserve Banks, each of which is privately chartered but subject to the federal authority held by the Board. A significant part of the Federal Reserve System is the Federal Open Market Committee (FOMC), which establishes monetary policy decisions regarding interest rates. The FOMC meetings are closely 376 Global Economic Boom & Bust Cycles watched events with major implications regarding stock and bond markets, and consumer confidence levels. The committee consists of the seven Federal Reserve governors and five of the 12 presidents of the regional Reserve Banks. They normally meet once every six weeks to review interest rate policy. FEDERAL RESERVE MANEUVERS As stated in the mission statement of the Fed, the primary object of monetary policy is to influence the performance of the economy as reflected in such factors as inflation, economic output, and employment. “Monetary policy, as conducted by the Fed, influences demand in the economic system by raising and lowering short-term interest rates. Through managing the money supply and availability of credit, the Fed is working to maintain sustainable economic growth and stability, and to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” These maneuvers affect many kinds of economic and financial decisions people make in America - on whether to invest in the stock market, bonds, or place funds in a savings account, to acquire a loan to buy a house or new automobile, whether to expand a business by investing in new plant or equipment, and on whether to take a vacation or start a new business. And since consumer spending makes up roughly two-thirds of Gross Domestic Product (GDP), effective monetary policy has proven to be very beneficial in jump starting the national economy. In addition, given that the U.S. economy is the largest in the world; significant changes here can produce major economic and financial effects in other countries. Some of the key tools employed by the Fed are as follows:

♦ The federal funds rate: this is the rate banks charge each other for overnight loans. When the Fed cut this rate, banks will tend to lower their prime interest rates; the rates they charge their best customers. Cuts in the Fed funds rate works through three primary channels: (a) lower borrowing costs; (b) stimulate the stock market; and (c) helps to make U.S. goods more competitive in world markets. Rates on Meltdown of 2008 377 credit cards, home-equity loans, car loans and other consumer rates are affected. This is the rate most cited by the media when reporting the latest rate activities of the Federal Reserve. ♦ The discount rate: this is the basic rate banks must pay when they borrow money from the Federal Reserve Bank. In essence the Fed- eral Reserve Bank is the banker’s bank. This rate is generally lower than the federal funds rate. ♦ Reserve requirements: this is the proportion of deposits that banks and other depository institutions must maintain on reserve (generally 10% against specified deposit liabilities) in their own vaults or at Federal Reserve banks.

In the period from mid-1989 to mid-2001, the Federal Reserve launched three rate-cutting cycles. The first one ran from June 1989 to September 1992, and was in response to the early 1990s recession. The second cycle ran from September 1998 to November 1998 and was focused on the impact of the Crash of ‘98 and the Russian financial meltdown. The third cycle began in January 2001 and was in response to the massive stock market declines initiated by the dot-com bubble collapse of 2000. In a statement issued by the Fed (on January 3, 2001) in response to a surprise move to cut interest rates, the swift and decisive move was a result of a “weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets and high energy prices sapping household and business purchasing power.” In the period from June 1999 to May 2000, short-term interest rates (federal funds rates) were raised six times from 4.75 to 6.5 percent. The Fed focus at that point (in a rate hike cycle) was to slow down the rapid growth in the economy and rampant speculation in the stock markets. Federal Reserve Chairman, Alan Greenspan, had made repeated references to the speculation in the markets as irrational exuberance by highly confident investors. However, many of these giddy investors stayed on course and ignored the cautious warnings of Greenspan and the interest rate hikes. For the most part, 378 Global Economic Boom & Bust Cycles when rates are going up, an economic slowdown or recession will be building momentum behind the scene. Nearly every correction since WW II has been accompanied by rising interest rates. It’s a major signal that the boom is about to turn into a bust in the not-too- distant future. THE “FED EFFECT” By the late 1990s, FOMC meetings had become an intensely watched and anticipated event by global investors. Whether a long- term or short-term phenomenon, a trend was established that focused on what the Fed would actually decide to do at these meetings. Stocks would rally strongly in the days up to and the day of the actual meetings. After the meeting was held, prices would tend to level off or possibly fall unless there was a strong rally in progress. Like the so-called January effect, where there is a tendency for small stocks to outperform large stocks (each year) during the month of January, the so-called Fed effect had become an established pattern that many sharp-eyed investors had started counting on for short- term profits. Historical evidence supported the claim. The Wall Street Journal reported in a June 2000 issue that the past eleven Fed meetings (prior to that date) starting with that of February 1999, the S&P 500 showed better performance in the five days up through the meeting than it did the five days following the meeting. Investors made money by buying before a scheduled meeting and selling after the meeting had taken place. CHAIRMAN ALAN GREENSPAN By 2001, Alan Greenspan had been the Chairman of the Federal Reserve System for 14 years. Appointed in 1987 by President Ronald Reagan to support his free market capitalism agenda, he presided over this super powerful organization during one of the most fascinating periods in the history of economics and finance. During his colorful tenure at the helm of the Fed, Greenspan was viewed by many observers throughout the world as an extraordinarily lucky, skillful and brilliant Fed Chairman directing the affairs of America’s Meltdown of 2008 379 financial bloodline. Whenever Chairman Greenspan spoke, everyone listened. Known as the Maestro, The Oracle, and other magical names, Greenspan had secured for himself a prestigious position in world history. Markets reacted whenever Greenspan and the Fed got together (or even planned a meeting) for their open market sessions. In January 2000, President Clinton nominated Greenspan for a fourth term as the Chairman of the Federal Reserve System. The Clinton Administration (and many others) considered this decision as the best hope for continued economic prosperity in America and the world. Greenspan’s term was due to expire on June 20, 2000, however Clinton thought it necessary to make the appointment six months prior to the expiration date. No one else was even remotely considered for the job. THE GREENSPAN PUT: Throughout his tenure as the Chair- man of the Federal Reserve System, investors, big banks and other Fed watchers from many walks of life, began to rely on Greenspan and the Fed to come to the rescue when the economy fell into a major downturn. It became predictable that in the event of a bust cycle, interest rates would be cut and liquidity pumped into the system to quell the crisis. Investors had faith the Fed would keep the capital markets functioning no matter what. After the bursting of a bubble, the Fed would use all of its tools to stabilize the markets. Financial markets were assured that these actions would be taken, in addition to any necessity to bail out “Too Big To Fail” institutions. In essence, this constitutes moral hazard on a grand scale. Financial institutions (banks and investment banks) were encouraged to take extraordinary risks on an upside without boundary, while the full power and influence of the Fed protected the downside against extreme losses. Alan Greenspan retired in February 2006, to the applause of many that heralded the “Greenspan Era” as an era of great prosperity. However, the meltdown of 2008 would change all that and would alter the Greenspan Legacy! Ben Bernanke took charge of the Fed- eral Reserve System in 2006, maintaining policies consistent with that of his predecessor, Alan Greenspan. 380 Global Economic Boom & Bust Cycles

BROOKSLEY BORN Brooksley Born was head of the Commodity Futures Trading Commission (CFTC) under the Clinton Administration from August 1996 to June 1999. This agency and independent department is responsible for the supervision of derivative contracts. While the whole world was on fire and running hard during the explosive years of the dot-com boom of the late 1990s, Born was deeply concerned about the over-the-counter (OTC) derivatives market that was rapidly building up momentum. Prior to the CFTC, Born had spent 20 years in derivatives law and was a first class financial regulator. Having observed and studied the fallout of the Orange County debacle in 1994, she was convinced that over-expansion in OTC derivatives in a deregulated environment was a disaster waiting to happen. In the Or- ange County case, the investment fund of $7.4 billion was facing losses of $1.5 billion due to derivatives and enormous leverage. In order to increase the returns for the fund, fund management employed the use of interest rate-sensitive derivative contracts. The County Treasurer borrowed $14 billion to help facilitate these operations. When interest rates went up, Orange County was facing massive losses on its derivatives contracts. In the end Orange County had to file for bankruptcy. Brooksley Born, in the hostile deregulatory environment of the late 1990s boom period, decided it was time to regulate the OTC derivatives market. That set the stage for some very tense and often brutal confrontations with other regulatory agencies and federal ad- ministrative departments in Washington. To say that her proposals were not well received, is an understatement. After all, it was the deregulated markets that gave us the boom times. It was a pro-business, anti-regulation economy, and no one wanted to stop that! This was an era of deregulations, unfettered free markets, and unrestricted capitalism. However, Born was pro-government regulations, especially in the high-risk game of derivatives. On Wall Street OTC derivatives were known as the Black Box: big banks could operate in secrecy with no transparency, and best of Meltdown of 2008 381 all, the government didn’t know what was happening. Born was not happy with this clandestine arrangement and felt that sooner or later these instruments would be the center of a major collapse in the economy. As a dedicated public servant, Born wanted to protect the America people from a disaster in the markets. She wrote that she was “really terribly worried” that a major financial crisis was coming. Her opposition was some of the most powerful men in Wash- ington: Alan Greenspan, Larry Summers, Treasury Secretary Robert Rubin, Arthur Levitt, Chairman of the SEC, Timothy Geithner, and even some senators in Congress. These were the people that stopped Born from regulating the OTC market. Born was up against some very powerful forces in Washington. As one writer put it, these people were looking to “shut her up and shut her down.” Indeed, an article in The Wall Street Journal stated “the nation’s top financial regulators wish Brooksley Born would just shut up.” She was completely out-of-step with the order of things and they wanted her silenced. With few or no supporters, Born maintained her ground and strong convictions that OTC derivatives were a ticking time bomb waiting to explode. The fireworks started when Born announced that she was to release a “Concept Paper,” which solicits input on regulation and is the first step in the process of establishing a regulatory model. Upon hearing about the paper, Larry Summers, Co-chair of the SEC, told Born (in his now famous 13 banker quote) “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II.” At a meeting with Presi- dent Clinton’s Working Group, a gathering of top financial regulators that met at the Treasury Department, Born was informed not to release the “Concept Paper.” She acknowledged the request, however, two weeks later the paper was released. Now considered a “rogue regulator,” Born would be forced to deal next with Congress and a series of hearings. Congress was confronted by Greenspan, Rubin and Levitt urging that a moratorium be passed on the CFTC on regulating OTC derivatives. Born testified 382 Global Economic Boom & Bust Cycles in Congressional hearings four times during the summer of 1998. After these hearings, Congress agreed with the urgings of the Oracle, Greenspan. In the fall of 1998, after the Russia sovereign debt default (discussed in Chapter Six), investors dumped higher-risk securities and fled to the safety of U.S. Treasury Bills and FDIC-insured deposits. In an effort to calm the markets and restore stability, the Federal Reserve lowered short-term interest rates three times in seven weeks. In addition, increased commercial bank lending in September and October (to the tune of $30 billion assisting corporations to roll over their short-term paper) helped to avert a hard landing during the early stages of this crisis. However, there was another major problem that emerged from the turmoil: Long-Term Capital Management (LTCM). This was a perfect example of what Born had foretold would happen in an unregulated OTC derivatives market. The thing she had been predicting had come to pass, but it did not sink in, it did not register high enough on the Richter scale for the free marketers. This single hedge fund nearly destroyed the economy and temporarily derailed the boom of the 1990s (SEE Chapter Six on LTCM). Even in the wake of the massive problems that LTCM presented, Congress passed the moratorium to stop the CFTC. Born would later state that they were “muzzling an independent agency.” She left office in April-June 1999. DODD-FRANK: Enacted July 21, 2010: The Dodd-Frank Wall Street Reform and Consumer Protection Act The first major piece of legislation to emerge after the 2008 Meltdown was The Dodd-Frank Wall Street Reform and Consumer Protection Act. This new legislation implemented financial regulatory reform and is strong on consumer protections but weak on the regulations required to prevent 2008 from happening again. Signed into law July 21, 2010 by President Barack Obama, it mandated a GAO audit of the Federal Reserve System (discussed in another section). To many critics, Dodd-Frank is too weak and did not go far Meltdown of 2008 383 enough in preventing systemic risk. According to Kenneth Rogoff, a former chief economist at the IMF and currently an economics professor at Harvard University, “Regulators are not going to go far enough to prevent this from happening again.” One key observation is that the new bill did not bring back the Glass-Steagall Act nor does it mandate tough regulations for the OTC derivatives market. BLOOMBERG Many questions needed to be answered after the 2008 Melt- down, and Bloomberg was one of the news corporations searching for hard facts on the causes and the Federal Reserve response to the massive crisis. Under the Freedom of Information Act, Bloomberg, an American multinational financial news corporation, initiated a long court battle to gain the release of Fed documents that detailed its lending practices and operations during the crisis. It would take two years to break down the barriers, and it wasn’t until March 2011, that the data was finally released. It took the firepower of Bloomberg to get this information; otherwise it may have stayed buried for another decade. In response to the Dodd-Frank Act, the Fed had to release 18 databases detailing its temporary emergency-lending programs. What the records revealed was that the $700 billion TARP operation was minor compared to the full blown nearly interest-free trillion dollar Fed operations. Bloomberg sued in November 2008 when the Fed refused to release the names of the firms it lent to or disclose the amount of assets it used as collateral under its lending programs. The lawsuit, handled by Willkie Farr & Gallagher LLP, was brought under the U.S. Freedom of Information Act (FOIA). Under FOIA, federal agencies are to make government documents available to the press and public. Bloomberg argued that the public had a right to know about the unprecedented use of public money. The Fed didn’t want to release this information, and fought hard during those two years to prevent releasing the identities of the borrowers and the terms of their loans. The Fed’s main defense and overriding concerns given for not providing disclosure was that it would “stigmatize banks,” 384 Global Economic Boom & Bust Cycles possibly leading to massive depositor withdrawals or bank runs, and ultimately be harmful to their stock prices. For the most part, the banks kept quiet about these dealings with minimal disclosures in their quarterly and annual financial filings: these companies wanted to avoid the “stigma” borrowing from Federal assistance programs. Bloomberg reported in August 2011 that “A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.” The lower court finally agreed with Bloomberg. Federal Judge Loretta Preska of the U.S. Court of Appeals in Manhattan decided to order the Federal Reserve to release documents related to the 2008 economic collapse. In her ruling regarding the central bank’s concern about harm to the banks, Judge Preska states that this “specu- lates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed…Conjecture, without evidence of imminent harm, simply fails to meet the board’s burden of proof.”12 When the documents were finally released, Bloomberg was able to conduct an analysis of 29,346 pages of Fed documents in addition to 21,000 transactions from Federal Reserve databases. According to Bloomberg these documents revealed “…for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.”13 The central bank documents highlight the fact that America’s largest six banks, Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Wells Fargo and Morgan Stanley, borrowed over $500 billion from the Fed. It appeared that out of this list of big banks, Citigroup was the most “chronic borrower.” This bank was literally in “economic intensive care,” nursed back to life by the generosity and facilities of the Fed. The documents also revealed that as the crisis intensified in 2008, the Fed began to accept low-rated collateral for the loans that Meltdown of 2008 385 it was dishing out. The standard protocol was to accept only bonds with the highest credit grade; however, the Fed began accepting junk bonds and stocks for collateral. Bloomberg makes the point that without federal money the “aristocracy of American finance” was going down the tubes. We were further informed: “It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances were European firms. They included Edinburgh- based Royal Bank of Scotland Plc, which took $84.5 billion…and Zurich- based UBS AG, which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.”14 Other big European borrowers included Dexia SA, Belgium’s largest bank by assets, Societe Generale SA, based in Paris, Barclays PLC (United Kingdom), Deutsche Bank AG (Germany), Credit Suisse Group AG (Switzerland), BNP Paribas SA (France), and Dresdner Bank AG (Germany).15 An interesting observation here is that Dexia SA had to be bailed out again in late 2011 as the European crisis intensified over the possible default of Greece and the other PIIGS nations. According to the Fed there were “no credit losses” on any of their emergency programs. Emergency loan activities from Au- gust 2007 through December 2009 are stated to have “generated $13 billion in interest and fee income.” Overall, Bloomberg reported that $7.7 trillion in loans were given to these key financial institutions throughout the world. A total of $1.2 trillion was release on one day alone, December 5, 2008. The Fed’s open market window was wide open during this turbulent period. And according to Bloomberg, the banks generated $13 billion in profits by benefitting from the Fed’s below-market rates. And again, while all of this emergency funding and lending was going for big banks in dire need, no special request for were made to these banks for foreclosure relief or anything. An interesting side note here is that it took a court order to force the Fed to release this information. By borrowing from the cheapest source, the “banking aristocracy of America” was able to survive the crisis, profit from the crisis and live to see another day. How- 386 Global Economic Boom & Bust Cycles ever, they have done very little for the American homeowner in the foreclosure crisis. They were given a secret lifeline to survive, and then turned around and did the bare minimum to help the ongoing foreclosure crisis in America. The American people didn’t receive any direct benefit in the form of foreclosure relief, loan modifications, etc. Now I ask: “Where is the economic justice in that scenario.” And after four years of economic stagnation and a world economy that is still on the brink of a major collapse, this banking system still can’t provide a comprehensive solution to keep millions of people in their homes. The massive problem of unwinding billions or perhaps trillions of dollars of mortgage-back securities has not been something investors (who own these bonds) are willing to do. Due to the complexity of this monstrous situation, significant barriers are preventing the wholesale modification of mortgages so people can stay in their homes. This is one of the primary reasons why the next stage in this crisis is going to be brutal! GAO REPORT: $16 TRILLION DOLLAR GLOBAL RESCUE OPERATION After three years of senate hearings, investigative reporting and documentaries, a court-ordered release of Federal Reserve documents, and a special Financial Crisis Inquiry Commission report, in 2011 the American people were finally getting the total picture and corresponding events of what really happened in the 2008 Meltdown. The shocking and disturbing truth is that an astronomical amount of money was spent to keep the entire world from falling into the next Great Depression. Trillions of dollars were spent preventing what would have been a devastating global meltdown. Nothing on this scale had ever been contemplated or attempted in world economic history. Billions and trillions spent to save drowning financial institutions, but nothing for the individual American homeowner. As a result of an amendment by U.S. Senator Bernie Sanders to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Government Accountability Office (GAO) completed an audit of the Federal Reserve System. The report uncovered an enormous Meltdown of 2008 387

GAO AUDIT REPORT: INSTITUTIONS WITH THE LARGEST TOTAL TRANSACTION AMOUNTS

BANK FUNDS PROVIDED

Citigroup $2.513 trillion Morgan Stanley $2.041 trillion Merrill Lynch $1.949 trillion Bank of America $1.344 trillion Barclays PLC $868 billion Bear Sterns $853 billion Goldman Sachs $814 billion Royal Bank of Scotland $541 billion JP Morgan Chase $391 billion Deutsche Bank $354 billion UBS $287 billion Credit Suisse $262 billion Lehman Brothers $183 billion Bank of Scotland $181 billion BNP Paribas $175 billion Wells Fargo $159 billion Dexia $159 billion Wachovia $142 billion Dresdner Bank $135 billion Societe Generale $124 billion "All Other Borrowers" $2.639 trillion.

Table 10

Source: GAO - July 2011: Federal Reserve System - Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance. level of conflicts of interest at the Fed during the financial crisis, as well as providing revelations of enormous outlays in its emergency lending operations. Between 2007 and 2010, the Federal Reserve 388 Global Economic Boom & Bust Cycles

System of the United States handed out nearly $16 trillion in nearly interest-free money to primarily Big Banks in America and Europe. In essence, the Fed made the strategic choice of who would win and who would lose in the global financial chess game. The broader time period covered for this enormous outlay of financial resources is between December 1, 2007 and July 21, 2010, when the $16.1 trillion in secret loans were dispensed to financial institutions. Page 131 of the GAO Audit Report presents a list of the firms and the amount of money they received. Table 10 provides a list of the bailout recipients during this turbulent period. Most members of Congress received a copy of this report, but said very little about it. I guess the magnitude of the bailout operations must have been so overwhelming that they simply fell silent on the issue. But Senator Bernie Sanders was very vocal about the trillion dollar international bailouts. He has been the main voice speaking out about the Fed dealings. The following are some of the thoughts of Senator Sanders on this matter: “ Over two years ago, I asked Ben Bernanke, the chairman of the Federal Reserve, a few simple questions that I thought the American people had a right to know: Who got money through the Fed bailout? How much did they receive? What were the term of this assistance?...Incredibly, the chairman of the Fed refused to answer these fundamental questions about how trillions of taxpayer dollars were being spent. As a result of these GAO reports, we learned that the Federal Reserve provided a jaw-dropping $16 trillion in total financial assistance to every major financial institution in the country as well as a number of corporations, wealthy individuals and central banks throughout the world. The GAO also revealed that many of the people who serve as directors of the 12 Federal Reserve Banks come from the exact same financial institutions that the Fed is in charge of regulating. Further, the GAO found that at least 18 current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis. In other words, the people “regulating” the banks were the exact same people who were being “regulated.” Talk about the fox guarding the henhouse! The emergency response from the Fed appears to have created two systems of government in America: one for Wall Street, and another for everyone else. While the rich and powerful were “too big to fail” and were given Meltdown of 2008 389

an endless supply of cheap credit, ordinary Americans, by the tens of millions, were allowed to fail. They lost their homes. They lost their jobs. They lost their life savings. And, they lost their hope for the future. This is not what American democracy is supposed to look like. It is time for change at the Fed - real change.”16 While the Fed was passing out all of those trillions of dollars to bank executives and their cronies, at least one trillion dollars could have been allocated to bailout the American housing crisis. The American housing crisis is “Too Big To Fail,” however this did not take center stage with a remedy to stabilize the industry: There will be no strong recovery without stabilizing the American housing industry. It has taken nearly five years for our leaders to finally understand this point. And it’s very interesting to observe that when any kind of a mass solution is presented to help modify or refinance loans for the individual homeowner, pundits come out of the wood- work screaming the dangers of moral hazard (if the homeowner is given insurance or a deal, they are going to be less careful or prone to do something again). Yet, moral hazard is massively pervasive in the financial industry when it comes to big institutions, and for those who have accepted the bailout money over the past several years. This is what I call moral hazard hypocrisy. During the meltdown crisis, the Fed essentially concentrated on stabilizing the global economy by bailing out American and Eu- ropean banks. A quote by Judge Napolitano in the Wall Street Jour- nal concerning the bailout of big banks, adequately describes this modern phenomenon: “Their profit is privatized, but their risk is socialized.” Senator Bernie Sanders is fighting to have the Federal Reserve System serve the needs of the American people and not just Wall Street and the Big Banks. In his words, “To get this process started, I have asked some of the leading economists in this country to serve on an advisory committee to provide Congress with legislative options to reform the Federal Reserve.” On a similar point regarding the Fed, the senator tells us “The Federal Reserve has a responsibility to ensure the safety and soundness of financial institutions and to 390 Global Economic Boom & Bust Cycles contain systemic risks in financial markets. Given that the top six financial institutions in the country now have assets equivalent to 65 percent of our GDP, more than $9 trillion, is there any reason why this extraordinary concentration of ownership should not be broken up? Should a bank that is “too big to fail” be allowed to exist?”17 Simon Johnson and James Kwak, authors of 13 Bankers: Wall Street Takeover and the next Financial Meltdown, pondered similar concerns in their book. A seminal message in the book is that “We have no leverage over the banks.” Johnson and Kwak are recommending, among other things, the breakup of the Megabanks. They are recommending a much stronger political response to the ongoing crisis, and they see the likelihood of another global meltdown. Rather than bailing the megabanks out again, the political establishment should implement rock-solid banking reforms now: “The alternative is to reform the financial system now, to put in place a modern analog to the banking regulations of the 1930s that protected the financial system well for over fifty years. A central pillar of this reform must be breaking up the megabanks that dominate our financial system and have the ability to hold our entire economy hostage. This is the challenge that faces the Obama administration today. It is not a question of finance or economics. It is ultimately a question of politics - whether the long march of Wall Street on Washington can be halted and reversed.”18 JP Morgan CHASE in 2012: $2 BILLION LOSS AND THE $600 TRILLION DERIVATIVES MARKET On Friday, May 11, 2012, three to four years after the Crash of 2008, JPMorgan Chase informed the world that it had suffered a $2 billion loss over the previous six weeks from a “hedging strategy that backfired.” According to CEO Jamie Dimon, these losses were caused by “errors,” “sloppiness” and “bad judgment.” Dimon disclosed to the media that the trader responsible for placing these bets was London-based credit trader Bruno Iksil, known as the London Whale for his enormous risky trading positions. The London-base investment unit for JPMorgan operates much like a hedge fund and is in charge of hedging the firm’s risk. It appears that the London Meltdown of 2008 391

Whale had built up position that totaled $100 billion in a credit- derivative index known as the CDX (A hedge on a portfolio of credit default swaps (CDS) discussed earlier in this chapter) which tracks the default risk of a basket of companies. The index is a benchmark for protecting investors owning bonds against default, and traders use them to speculate on changes in the credit quality of CDS positions. The losses occurred in this arena as many asset managers, arbitrageurs and hedge funds took the other side of the bet, “viewing it as good value and an effective way to insure portions of their portfolio.” Rogue traders taking these types of huge risks may ultimately to be the spark of fire lighting the fuse to a global economic collapse. If events spin completely out of control, it may be impossible to contain the domino effect of collapse and widespread contagion. Dimon indicated in his statement to the media in the after-hours conference call on Thursday (5-10-12), that the $2 billion in losses could rise by a further $1 billion. This left a lot of analysts, reporters and observers scratching their heads and wondering if this was just the tip of an iceberg and if contagion was brewing in the $600 trillion global derivatives market. This was clear evidence that the foundation of the derivatives meltdown of the 2008 was still present in 2012. The problem had grown bigger and more pronounced, and regulatory reform was essentially non-effective: we were expecting lawmakers to protect us against a repeat of 2008. For many analysts, writers and others who have been tracking the fallout from 2008, this was actual testimony and proof that the “too big to fail banks” still posed enormous systemic risk to the financial system. Nothing had changed except the fact that the next major meltdown was going to be a lot bigger and much more difficult to contain. The stock market took a hit, however it was an orderly retreat from the financial sector: Citigroup dropped 4.2 percent, Goldman Sachs fell 3.9 percent and Bank of America took a hit of 1.9 percent. Fitch Ratings downgraded both JPMorgan’s short-term and long- term debt, with the latter falling to A+ from AA-. Standard & Poor’s revised their rating on JPMorgan’s debt from stable to negative. The market value of JPMorgan’s stock declined by $15 billion, or 9.3%. 392 Global Economic Boom & Bust Cycles

Reactions from lawmakers and others were swift in a world already boiling over in economic uncertainties in Europe, China and elsewhere. Many people were stunned by the announcement coming from the largest bank in America. Rep. Barney Frank (D-Mass), the co-author of the Dodd-Frank Wall Street Reform and Consumer Protection Act, stated, “When supposedly responsible, well-run organization could make such an enormous mistake with derivatives, that really blows up the argument, ‘Oh, leave us alone, we don't need you to regulate us’.” Frank further commented, “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today.” An important part of the Dodd-Frank legislation is the Volcker rule, which is designed to prohibit federally insured banks from trading and making speculative bets for their own profit. There is a dire need to prevent the banks from evoking the “too big to fail” premise the next time they fall flat on their face. When things go wrong and the sky is falling, these same banks go running to Washington asking the American taxpayer for bailouts. The Volcker rule is still being written (2012) and the Federal Reserve has indicated enforcement will not begin until 2014, six years after the meltdown of 2008! That’s pathetic! According to Shah Gilani, Money Morning Capital Waves Strat- egist, the Dodd-Frank bill is baby steps in correcting the major issues of 2008. In his words, “Much of it is yet to be written. Some of it may never be written…We won’t get another chance to fix the system until the next crisis.” Simon Johnson, co-author of 13 Bankers, observed, “It just shows they can’t manage risk - and if JPMorgan can’t, no one can.” Sen. Jeff Merkley (D-Ore) commented, “This really is a textbook illustration of why we need a strong Volcker rule firewall.” In addition, we not only need a strong Volcker rule, we need to bring back the Glass-Steagall Act before it’s too late. Richard Fisher, president of Dallas Federal Reserve Bank, commented, “What concerns me is risk management, size, scope…At Meltdown of 2008 393 what point do you get to the point that you don’t know what’s going on underneath you? That’s the point where you've got too big.” Coming in the aftermath of the MF Global debacle, the JPMorgan Chase affair was another potent warning that the global financial system was not sound and that regulatory reforms had did very little to curb rampant speculation in the derivatives markets by “too big to fail” institutions. It appears that we are destined to repeat 2008 but on a much grander scale. SUMMARY As we observed in this chapter, the meltdown of 2008 offered us a glimpse of a nation almost completely unprepared for the sudden demise of its financial system. The markets were in chaos and investors were totally confused concerning the moves and activities of the Fed: at one point Bear Stearns was rescued with a generous bailout package, in sheer panic Fannie and Freddie were placed into conservatorship, then, in what appeared to the Treasury and the Fed that there were no more options, Lehman was allowed to collapse while AIG was bailed out. One has to wonder, what would have happened to Merrill Lynch if Bank of America had not committed to acquiring the company at that critical point in time? The Treasury Department and the Fed were reacting to a rapidly unfolding crisis with essentially piecemeal strategies and plans. Filmmaker Charles Ferguson, the producer of Inside Job (the award winning documentary that provides a comprehensive analysis of the meltdown of 2008) stated in an interview with Charlie Rose of the “astonishing incompetence of government,” and he further noted how “the U.S. was completely unprepared for the crisis.” And this was all happening in a country that is the leading economic superpower in the world! As one writer so succinctly stated, “The financial sector is repeatedly blowing itself up.” However, the super-star investors during this devastating crisis that nearly sunk the entire global economy (John Paulson, Tricadia, Magnetar and others), made billions of dollars betting against the sub-prime CDOs. It 394 Global Economic Boom & Bust Cycles happens repeatedly, that in each major boom and bust cycle there are winners and there are the losers. The AIG rescue amounted to $180 billion in taxpayer money, and the world would later discover that AIG paid out $165 million in bonuses to executives and traders with some of this bailout money. In addition, owners of the Credit Default Swaps at AIG were paid 100 cents on the dollar; the regulators didn’t try to negotiate a lower price in the face of the imminent collapse. By March 2009, Citigroup was trading below $3 per share; 95 percent of its value had been wiped out. After two bailouts, Bank of America had lost 85 percent of its stock market value. The meltdown generated a 17% decline in world trade and major disruptions to banks throughout the world. Over $11 trillion in household wealth was wiped out: retirement accounts, life savings, home equity, foreclosed properties, etc. In the 2008 crash, the Dow entered a death spiral, falling 2400 points over an eight day period. Millions of people worldwide loss their jobs, homes, and savings. Mainstream economists tell us that the Great Recession covered the period from De- cember 2007 to June 2009: an 18-month period that witnessed a 5.1 percent contraction in GDP and the S&P reaching a low of 666 and the Dow 6,547 in March 2009. And the global financial picture has truly changed: We are now living in an era where the big debtor nations are in the West (with Europe and America in structural decline) and the big creditor nations are in Asia. In 2008, the interconnections and web of “too big to fail” institutions caused credit markets to stop functioning. Confidence and trust in the financial system collapsed. The warning signs of the impending disaster were ignored and discounted by the regulators and the so-called captains of finance. For instance, Fed Chairman, Ben Bernanke, did not take on regulatory issues. The belief in an unrestricted, self-regulated financial system was ingrained in Wash- ington and on Wall Street. For the players, it was a time to get as many deals done before the party came to an end. And even after all that has happened as a result of the devastating meltdown of 2008, Ben Bernanke and Timothy Geithner still didn’t move to regulate Meltdown of 2008 395 the derivatives market. After the 2008 disaster, with its multiplicity of events, there should have been an urgency to establish reforms in this area. It would have seemed appropriate for these actions to be taken in the aftermath of the greatest economic crisis since World War II. Even with all the damage that's been done; our regulators may still be allowing the world to go through the same downward spiral again. The JPMorgan affair in early 2012 was the wake up call. While the banks and the overall financial system was on their knees and backs, that was the time to make the big changes and big demands of these institutions! The government and the Federal Re- serve System should have demanded concessions that would have benefitted the American people; instead they were given a blank check and a free ride. Big banks were given no conditions on the foreclosure crisis, no conditions on reforms, and no conditions on bonuses. It was expected that these banks would go into a supportive lending mode, but they did not. In time they recovered and went back to business as usual. Now that’s what you call authentic moral hazard. The financial sector has now become a much more dominant and pervasive force in our society. The set-up for the next crisis is in place. Since the banks have gotten bigger, it makes their preeminent standing and guaranteed bailout ticket a near certainty in America. And looming on the horizon is the possibility of another credit crunch, or a sudden rise in interest rates or oil could be the spark for the onset of an abrupt crisis. Financial Weapons of Mass Destruction (derivatives) are in place and again represent a ticking time bomb. In 2008, the total notional value of these instruments was $176 trillion; in 2011 the total was $244 trillion, a 40% increase. The global risk factor has increased since the first phase of the meltdown. The chess pieces have reassembled; 2008 will happen again, but this time on a much larger scale. In 2008 it was mortgage-backed securities; at the center of the next major downturn will be European sovereign debt. That debt cesspool is a lot bigger, and there will be enormous obstacles 396 Global Economic Boom & Bust Cycles preventing any major bailouts. The monetary and political will has been used up, particularly in America; 2008 exhausted the system. In the next crisis and grand shock to the economic system, monetary policy will be the instrument of choice due to the political atmosphere against the use of fiscal policy. In 2012-13, the financial titans (flying in on private jets) will not be able to go the politicians with their begging cups, pleading for another handout. In 2012 the red lights are flashing on UniCredit in Italy, Bank of America, and Societe Generale in France. As this crisis continues to unfold, we will drift further into the second phase of a global depression. What seems normal and stable will quickly unravel in a rapidly escalating crisis. The last two quarters of 2011 were the early signs of what is scheduled to come; the warning and early tremors of the bigger financial and economic quake headed our way set to unleash the final death spiral in the markets in some unsuspecting moment. Major banks have huge exposure to the derivatives on Euro- pean sovereign debt. There is no way of knowing who is set to go under until it actually happens. The derivatives market is still unregulated. In 2012, there is nothing in place to alert the markets of who has derivative exposure to any particular asset or bond. No- body knew about the cesspool of toxic waste in AIG until the weekend of the crisis. When the dominoes start to fall, there will be many unknown casualties emerging from the global financial battlefields. The power of Wall Street, the Federal Reserve System and Big Banks has kept the derivatives market from any meaningful regulations. And when the bubble burst, we will begin to know who was indeed skating on thin ice. For instance, Bank of America has heavy bond and CDS exposure in Ireland. In the 1920s stock manipulation was legal and there were few or no controls; the modern equivalent is OTC derivatives. In our fourth year after the Meltdown of 2008, we are still experiencing anemic consumption and investment growth. After over two and a half years into our so-called economic recovery, performance has been very weak especially in the jobs market and the housing industry. Fortunately, in 2012 we have not seen GDP falling by 25 Meltdown of 2008 397 percent, or massive bank runs (due to FDIC). But the price of oil has gone back up and a gallon of gas that hovers near $4.00 in America. We are like the Titanic taking on more water before the final plunge to the bottom. The underlining premise of this book is that we have yet to experience the full impact of this crisis. We must remain conscious of the fact that economic depressions have the potential of initiating political revolutions as the world continues to navigate through this period of vast uncertainties. In America (and to a lesser extent in other parts of the world), the gap between the extreme wealthy and everyone else (the 1% versus the 99%) is at a level reminiscent or worse than 1928, the year prior to the crash of 1929 and the advent of the 1930s Great Depression. History tells us that these types of extremes are not healthy and are unsustainable. It is my hope that we will not have to wait until everything is broken before we get full consensus on how to realistically deal with the economic crisis of our times. 398 Global Economic Boom & Bust Cycles

NOTES (1) Paul Erdman, Paul Erdman’s Money Book, New York: Random House, 1984, pp. 53-54. (2) Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, January 2011. (3) IBID., FCIC. (4) IBID, FCIC, pg. 43-44. (5) IBID., FCIC. (6) IBID., FCIC. (7) Michael J. Burry, “Some lessons learned from bursting of the housing bubble,” The Sacramento Bee, April 6, 2010, pg. A15. (8) IBID.,FCIC quote pg. xxi. (9) Binyamin Appelbaum, “Inside the Fed in 2006: A Coming Crisis,” New York Times, 2012. (10) IBID, FCIC, pg. xv. (11) IBID., FCIC, pg. xx (12) IBID., FCIC (13) David Glovin and Thom Weidlich, “Federal Reserve Seeks to Protect U.S. Bailout Secrets,” Bloomberg, January 11, 2009, online news, pg. 2. (14) Bradley Keoun and Phil Kuntz, “Wall Street Aristocracy Got $1.2 Trillion From Fed,” Bloomberg, August 22, 2011, online news, pg. 2 (15) United States Government Accountability Office (GAO), “Institutions with Largest Total Transaction Amounts,” Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance, GAO, July 2011, pg. 131. (16) GAO: Senator Sanders Bernie Sanders, U.S. Senator from Vermont, “The Veil of Secrecy at the Fed Has Been Lifted, Now It's Time for Change,” www.sanders.senate.gov, November 2011. GAO Audit: U.S. Senator Bernie Sand- ers (I-Vt.)”The Sanders Report on the GAO Audit on Major Conflicts of Interest at the Federal Reserve”, Washington, DC, October 19, 2011. (17) IBID., Senator Sanders. (18) Simon Johnson and James Kwak, 13 Bankers: The Wall Takeover and the Next Financial Meltdown, Vintage Books (A Division of Random House, Inc.) New York, January 2011, pg. 13. FORCES OF TRANSFORMATION CHAPTER EIGHT INFORMATION AGE REVOLUTION

“We are living in an era characterized in a fundamental way by an explosion of technological innovation.” Albert H. Teich “The root of our problem is not that we’re in a Great Recession, or a Great Stagnation, but rather that we are in the early throes of a Great Restructuring. Our technologies are racing ahead but many of our skills and organizations are lagging behind.” Andrew McAfee and Erik Brynjolfsson

he Information Age revolution of the 1990s was the dawn Tof a New Age and was destined to have an enormous impact on the social, political, economic, financial and cultural arenas of societies worldwide. What happened in the 1990s was not simply an American revolution or a Western Civilization phenomena; it was global in origin and evoked a vast, penetrating manifestation. This was tantamount to the spread of a new worldwide religion, except the subject of this proselytizing was science and technology on an unprecedented level. The advances in science (particularly in physics and mathematics) in the 20th century and early 21st century, have illustrated, in a most dramatic way, the profound significance of the unseen power of the universe and the creative discovery process. Our progressive understanding of the universe has dramatically shifted the relationship between man and nature. The technological and scientific revolution that is happening during the opening years of the new millennium marks an amazing milestone in the history of man’s existence on the planet earth. This is absolutely an incredible era, what Afri- can American physicist, Dr. Lloyd Quarterman identifies as, “an age of discovery,” dramatically illustrating (in his perception) that, “we live in the world of the unknown.” From a physicist’s point of view, the world that we as human beings experience is largely dominated

400 Information Age Revolution 401 by an unseen world, a world that mankind has struggled thousands of years to understand. We are at the threshold of something so enormous as to shatter all illusions and false mythologies; in time it will be difficult to sustain a system of false beliefs and prejudices in the face of a prepon- derance of facts and revelations. The evolution of the scientific mind has brought us the reality of thermonuclear physics, laser technology, genetic engineering and computers on a chip. We are not watching a science fiction movie or projecting some theoretical proposition; our science is now unveiling very critical realities about our universe. This is the dawn of a New Age, the beginning of a dynamic era that will continue to bring about whole new categories of jobs, industries, university training and a major revolution in our systematic approach towards economics. This period is similar to the arrival of the major scientific advances initiated and nurtured by the African Moors in Spain and Portugal during the 12th and 13th centuries or the Industrial Revolution that began in England in 1760: in each case there were major adjustments in economic and world affairs. The almost blinding pace of the evolution of technology will eliminate certain categories of jobs, and in some cases, entire industries, while new ones will emerge to take their place. Advances in robotics and artificial intelligence are shifting the production, assembly line and basic factory job functions to the realm of intelligent machines. The proliferation of machines of many types will continue at a rapid pace, with machines making machines, as evolving technologies generate greater advances and highly intelligent systems. This is the wave of the future! Evolutionary developments in physics and mathematics in the 18th, 19th, and 20th centuries gave birth to a materialistic/mecha- nistic worldview. In laboratories around the world, scientists unveiled the secrets of nature and the universe, and implemented mechanical and electrical systems to harness their energies. With the advent of the Industrial Revolution came the steam engine, assembly line production, rapid firing guns, the discovery of electricity, 402 Global Economic Boom & Bust Cycles wireless communication systems, a profound knowledge of electro- magnetic waves and the atom, and many other revolutionary developments. BIRTH OF THE COMPUTER AGE The modern high-tech society that evolved during the 20th Cen- tury could not have been accomplished without the rapid advances of the computer. From manufacturing to automation, database management, special effects in films and high-tech communication systems, computers are dominant throughout the broad spectrum of advanced societies. The computer has taken on an almost omnipresent significance; the ultimate mechanical mind and the crowning success and termination point of the Industrial Revolution. The first generation of American electronic computers was born around the time of the first atom bomb test that occurred in New Mexico in 1945. The first all-electric computer called the “Electric Numerical Integrator And Computer” (ENIAC) appeared in 1946. Consisting of approximately 18,000 vacuum tubes and enough electronic circuitry to fill an entire room, ENIAC was capable of only processing several hundred multiplications per minute and did not have operational programs electronically stored in its memory. ENIAC also presented some operational challenges; its nearly 18,000 vacuum tubes generated a room temperature of 120 degrees with many of its tubes burning out prematurely. The huge room-size machine cost less than $500,000 to build and was instrumental in solving many complex mathematical problems that previously required a large number of man-hours to compute. The computer revolution was born, which brought together the elements of digital processing and vacuum tube technology: the perfect merger of the physics world of electrons and the abstract world of mathematics. Thus, mathematics, science and technology would find one of its greatest expres- sions in the making of the computer. Built by physicist John W. Mauchly and engineer J. Presper Eckert, ENIAC would soon be su- perseded by Von Neumann’s IAS Machine and further advances in the world of electronics. Information Age Revolution 403

Modern electronics experienced a major technological shift with the invention of the vacuum tube at the start of the 20th Century. With vacuum tubes, electric signals could be manipulated and am- plified in order to generate strong and consistent signals, i.e. voice or music in the radio wave spectrum. The evolutionary transition from the vacuum tube to the transistor brought about significant efficiencies in space, weight, power consumption, reliability and a considerable reduction in the cost of production. The transistor technology invented in 1948, during the initial stages of the baby boom generation, marked another important milestone in the history of science and technology.1 The intensive research during the war years helped to stimulate the demand for these cost effective powerful devices. With the efficiencies of the transistor, the computer moved on to incorporate greater computing and reasoning power, and rapid advances in speed of computer operations. Similar to the multiplying and complexity of cells to create more complex biological organisms, the transistor represented a major evolutionary leap into the development of more complex computing machines. With the arrival of the integrated circuit in 1959, continued progress has consisted of placing a larger number of switches on a square centimeter of silicon. In 1970, Intel Corporation introduced the first DRAM chip (dynamic random access memory) and one year later (in 1971) the microprocessor. The introduction of large scale integrated (LSI) circuit technology and very large scale integrated (VLSI) circuits gave birth to the microprocessor, the CPU (Central Processing Unit) chip that is the basic brains of a computer. By 1985, more than 600,000 circuit elements could be assembled on one chip. This was the beginning of a remarkable surge in scientific breakthroughs. All of the full room-size circuitry of the ENIAC computer of 1946 can now be placed on one computer chip: progress in several fields of science and technology brought about incredible changes in the computer industry over the past 60 years. SEMICONDUCTOR TECHNOLOGY Computers consist of a very large collection of on and off 404 Global Economic Boom & Bust Cycles switches which in some cases (supercomputers) are timed to a billionth of a second: the basic switch represents the heartbeat of all digital computers. Since the invention of integrated circuits in 1959, chip design and chip technology have made extraordinary leaps into dimensions of space and time. The brain power and speed of computers are driven by the rapid advances in computer chip technology. Digital technology is the mathematical bloodstream of this era’s scientific revolution. The binary mathematics of 0 and 1 serve as the basic machine language for computers. The memory and storage capacities of computers are measured in bytes, with each byte composed of 8 bits and each bit represented as a 0 or 1 in the logic and arithmetic of the system design. We have seen how computers are composed of a massive number of switches. In the binary system the number 1 equals an ON condition and 0 equals OFF. This digital operation is similar to a clock ticking away seconds that eventually adds up to hours, days, weeks, months, and so on. All of the processing is invisible and abstract. Under the binary system of ones and zeroes, the transistor’s on-off conditions of true or false enable the computer to perform logical thinking. The natural number system consisting of the 10 digits 0 through 9 is the foundation of the binary system. It is often referred to as the human number system, since most of us have 10 digits (the ten fingers or toes). On the other hand, the binary system is considered a machine number system. It is interesting to note that the natural number system that we use so extensively in our modern world, originated in India and was brought to Europe by the African Moors and Arabs during the Moorish occupation of Spain and Portugal that lasted for over 700 years (from roughly the 8th to the 15th centuries). The medieval scientific, mathematical and technological advancements of Moorish Spain were greatly enhanced by the natural number system. The Moors made algebra an exact science, laid the foundation of analyti- cal geometry, and were the founders of plane and spherical trigo- nometry.2 Information Age Revolution 405

Thus, the binary system which is the mathematical heartbeat of the computer, evolved out of the natural number system. The tiny electromechanical switches are timed to operate at unbelievable speeds; in some cases, millionths and billionths of a second. Few of us can imagine what one billionth of a second is; the time it takes to begin imagining it, is not that fast. Computers essentially operate in astronomical time frames - the invisible microscopic world of electrons and photons, the mystical dance of physics and mathematics. Thus, an 8 bit byte that represents the letter K is processed instantly in computer time. The digital code of binary mathematics is a very interesting development. In the digi-tech world of the 1990s and early 21st century, practically all media information was brought together on a common platform, a common denominator facilitated by the digital revolution. Voice, text, images, music, video, complex calculations and language translations can all be digitized (at blinding speeds) into ones and zeroes. Digital convergence, bringing about the merger of computers, TV and telephones, is only the beginning of an explosion of hybrid media products. The entire foundation of the world will be revolutionized by this new digital reality. The universal languages of mathematics and physics have found their medium; everyone will have to do a reality check, for as Shaka Zulu stated in the film Shaka, “nothing will be the same ever again.” The semiconductor properties of silicon have made it one of the most widely used metalloid elements in computer chip manufacturing. Silicon is one of the most abundant elements on earth and constitutes about 28 percent of the crust of the planet. The element cannot be found in a free elemental state, but is retrieved in the form of silicon dioxide (SiO2 or Silica) and in the state of complex silicates. Silicon dioxide is a principle property of ordinary sand and nearly 40 percent of all common minerals contain silicon. It is abundant, widespread, very cost-effective and is really a perfect economical element for the complex production of silicon-base chips. Silicon can be found in so many different places that it is almost unlimited. 406 Global Economic Boom & Bust Cycles

Scientists tell us that one of the ways to process silicon is to prepare it as gray-black crystals. As a conductor of electrical current, silicon has proven to be a very good semiconductor, achieving levels of efficiency near the best metal conductors such as aluminum, copper and silver. In the world of physics, we learn that if a physical property of matter conducts electrical current under the influence of voltage, it can play a very important role in the advancement of technologies in many different areas. Other chemical elements such as germanium, selenium, gallium arsenide and zinc selenide are great semiconductors.3 For instance, gallium arsenide, a synthetic by-product from aluminum/ copper mining and lead refining, are the primary elements used to conduct the flow of photon (light) energy. However, silicon is a much more abundant element and therefore cheaper to use. That’s another reason why this technological revolution is going to transform so many different areas of advanced societies and it is also why Silicon Valley is globally recognized as a symbolic icon of the digital revolution as well as a regional powerhouse of technological innovation. CHIP DESIGN PROCESS Laser beam technology (a microscopic lithography technique) is used to etch chip designs onto silicon wafers. By the mid-1980s, many researchers were predicting that the physical limits of jam- ming additional circuits onto a silicon chip would be reached sometime in the 1990s. However, by 1994, the problem of physical limitations and concerns of switching to more costly materials was resolved by greater advances in chip technology. Researchers at IBM, Bell Laboratories, NEC, Hitachi, Toshiba and others concluded that the limit barriers for silicon chip density had been lifted. According to Paul M. Hom, IBM’s director of silicon technology research, “there’s no science limit for the next 30 years.”4 Thus, we can expect a continued increase in computer performance at low prices, thanks in part to the flexibility and abundance of silicon. Physicist Gordon Moore, who is a cofounder of Intel Corpora- tion, made an important observation back in the mid-1960s. He ob- Information Age Revolution 407 served that chip manufacturers were able to double the number of circuits on a chip every year which caused a dramatic exponential increase in power each time. As a result of this development, the actual cost of the circuit was cut in half. This became known as Moore’s Law in the chip-making world and chip designers used this axiom as a benchmark to increase the power of their designs. How- ever, by 1977, the doubling effect had slowed to 18 months, and by the mid-1990s, began to run into new barriers, slowing further Moore’s Law. Intel's website currently states (2012) that “The number of transistors incorporated in a chip will approximately double every 24 months.” Various analysts disagree on the accuracy or the length of time that’s involved in this process (whether it’s 12, 18 or 24 months) however, the fact of the matter is that it is not a law but a guidepost and over the past 45 years we have witnessed a relentless increase in the exponential power of computer chips. With the continued reduction in the transistor size, performance was improved; there was an actual decrease in cost and a significant reduction in the use of power. Microprocessors that incorporate all of the elements of a computer on one chip will continue to undergo design changes, making them more complex and dynamic. VLSI circuitry (very large-scale integration) designs allow for many processors to be placed on one “CHIP” which will continue to expand the capability of the computer to perform intricate interrelationship programming. With computers operating at speeds of 400 MHz and higher by the year 2000, the potential for computer creativity in many areas was expected to be phenomenal. Chip density reached unbelievable levels; as of 1995, manufacturers were able to cram more than 35 million transistors on a tiny silicon chip: 64-bit processors operated at nearly the same speed as the 1986 IBM 3090 mainframe computer. Scientists will pressed on to the ultimate limits of quantum mechanics physics that was mentioned earlier, reaching a point where the “solidity of an object” is impossible, and therefore, cannot retain a form. Nevertheless, scientists and engineers pressed on to develop ULSI circuitry (ultra large- 408 Global Economic Boom & Bust Cycles scale integration) that housed from 2,000,000 to 64,000,000 elements on a single chip which clearly gave business and home-base computer systems very dynamic brain power. By the year 2000, expectations were that top of the line microprocessors would contain more than 100 million transistors and that represented an astounding accomplishment. NEC and Hitachi announced in February 1995 that they had developed a random access chip capable of storing more than one billion pieces of information. The so-called gigabyte chip (1 billion bytes) for mass production, reached its prototype stage by the mid-1990s and became common- place by the year 2000. Desktop microcomputers in the home with one to two billion DRAM memories and five to ten billion byte hard disk with high-density storage capacities was a vision in the mid- 1990s that became a reality during the early 2000s. Looking back on the pre-gigabyte era, the expectation was that we would be receiving warp speed in these new systems and that the cost was estimated to be around $5,000. It is absolutely amazing of what has happened over the past 17 years. In 2012, we now have access to massive gigabyte memory systems and multiple hundreds of gigabyte storage capacities, in addition to the emergence of terabyte (1 trillion bytes) storage capacity systems. And the cost is under $1,000! Increased technological efficiency in etching more elements on silicon chips is dependent upon the type of laser beam used in the production process. During the early 1990s, ultraviolet light was the most commonly used laser beam in the manufacturing process. Re- searchers worldwide began exploring the use of X-ray lasers (so- called blue light lasers) as etching tools that can produce shorter wavelengths which meant that greater densities were possible. Ex- perimental designs using X-ray beams have created chips in laboratories with features at nearly .1 micron in size.5 This is almost beyond comprehension, but the reality of these technologies will ultimately change our thinking about space and time. In late July 1994, IBM, AT&T Corp., Motorola Inc. and Loral Corporation announced their intention to form an alliance to jointly explore the full potential of the X-ray etching process. The proposed venture had an estimated Information Age Revolution 409 budget of $100 million or more to bring into existence an economical solution to the next generation of chip making.6 That alliance was successful! RISE OF THE TECHNOLOGICAL REVOLUTION OF THE 1990s What we witnessed in the 1990s and the transition into the 21st century was a technological revolution on a global scale. It’s knowledge intensive, economically revolutionary and will ultimately (by global necessity) be environmentally conscious. The information and communications revolution of the 1990s (along with cheap oil) was the central force behind the massive move towards the internationalization and globalization of the world’s economy. Rapid adoption of new technologies and innovations by the majority of the nations of the world will continue to speed up this entire snowballing process. We are in the midst of a period of radical innovation in several related fields which is spearheading the move to drastically change products and processes. Economists tell us that when there is a clus- tering of these radical innovations, new industries emerge which bring major paradigm shifts in societies. These large-scale revolutionary changes have occurred in periodic cycles throughout history. Author Peter Dicken cites the descriptive term “changes in the techno-economic paradigm” to describe this phenomenon.7 Entire societies and their governments will have to re-think the philosophical basis of an economic system. A new “Adam Smith” like doctrine will be born along with the development of an entirely new economic philosophy and system. Capitalism and communism, as they are known in today’s world, will evolve into a new synergistic system. To a certain extent, man will be liberated by the machine; liberated from certain routine tasks involved in producing products and services. The crowning success of this will be this technological revolution of the thinking machine; the work horse of the new modern industrial age. 410 Global Economic Boom & Bust Cycles

According to futurists Alvin and Heidi Toffler, the new information technologies of the 1990s signaled the rise of an enormous power struggle on a global basis. In their words: “The changes we have recently seen in business, the economy, and politics at the global level are only the first skirmishes of far bigger power struggles to come. For we stand at the edge of the deepest powershift in human history.”8 In their book, Powershift, the authors were suggesting that the world was shifting gears for the 21st century. The late Dr. Cheikh Anta Diop, a physicist and African Egyptologist, made this observation in 1978 in his book entitled Black Africa: “Hydrogen-fueled automobiles will necessarily replace today’s gasoline- fueled vehicles...With the future appearance of hydrogen as the energy vector, a whole new technology of internal-combustion engines and various other types of motors must come into existence.”9 Similar observations by Diop on nuclear fusion, solar energy and the coming depletion of hydrocarbon fossil fuels established his belief in a future world civilization existing on more natural (non- polluting) and abundant sources of energy. As Director of the Ra- diocarbon laboratory at the Fundamental Institute of Black Africa at the University of Dakar, Diop envisioned a world of enormous potential beyond the confines that was established during the Indus- trial Revolution and the second half of the 20th Century. Scientist Gerald Kulcinski, Director of the Fusion Technology Institute at the University of Wisconsin at Madison, stated in Janu- ary of 1991 that an isotope of helium called helium-3 (HE-3) could be mined on the moon, liquefied and brought back to earth to be used in an atomic fusion process that would produce electrical energy. It is a fascinating concept, particularly as Kulcinski and other scientists speculate that the moon’s surface holds enough HE-3 to provide power for all of the nations of our planet for the next 5,000 years. According to Kulcinski, “After four-and-half billion years, there should be large amounts of helium-3 on the moon.” The scientific vision here is “nuclear fusion” which would be powered by helium-3, the evolution of the scientific generation of nuclear power Information Age Revolution 411 without splitting the atom and creating an abundance of unwanted nuclear waste and without the potential for nuclear disaster. In the nuclear fusion process, almost no radioactive waste byproducts are created, especially if helium-3 is used. Many experts believe that commercial-sized fusion reactors, or power plants generating sustainable fusion similar to what our sun does, are still about 50 years away from actual development. The National Ignition Facility (NIF) at the Lawrence Livermore National Laboratory (located about 50 miles east of San Francisco, Califor- nia) is another institution deeply involved in this scientific endeavor. In the film, Wall Street: Money Never Sleeps, a sub-plot in the movie presents a scientist working on the development of a “baby star” who needs $100 million to keep his research and development plans moving forward. Nuclear fusion is a very important wave of the future. This is the type of planning and thinking that must take place if the world is to solve some very pressing problems in the new millennium. The threat of diminishing resources and ecological disasters are real issues facing our world in the 21st century and beyond. THE ENTIRE WORLD AT THE CROSSROADS The entire world is at the crossroads and now is the time to completely understand that and not after the smoke clears in the year 2015; for the future will definitely belong to those who prepare for it! In this technology-intensive age, computers and networks have provided an expanded array of opportunities for individuals, organizations and companies, and digitization has transformed the world on many levels, breaking down barriers and creating something I call the Dinosaur Syndrome. We are witnessing the extinction of jobs, industries, products and services on an unprecedented level: examples include vinyl records and turntables, 8-track tapes, cas- sette tapes, video tapes, celluloid 35-millimeter film projector (replaced by the digital film projector) the expected slow death and burial of the combustion engine and the ultimate demise of the oil industry in the 21st century. 412 Global Economic Boom & Bust Cycles

This is an ongoing process and will continue uninterrupted on a path of total economic, scientific and technological revolution. We must understand that this revolution cannot and will not be derailed, but it must be controlled; it must be harnessed to serve the needs of the many and not just those of the few. It must not be allowed to run wild and loose; unrestricted in a world where many people are not fully conscious of the full capabilities and dangers of information age technologies. Digitization generates the phenomenon of creative destruction which accelerates the creation of more dinosaurs, more extinction and economic fallout. In other words, I question whether this current civilization is ready to adapt to the rapid or accelerated pace of this technological revolution. In the second decade of the 21st century, we will be faced with computers 1,000 times more powerful than the systems available at the start of the new millennium and the pace of change will be much more rapid: an onslaught juggernaut destined to restructure the world. This process is alive and feeding on itself, expanding and growing exponentially on many fronts, changing reality and our relationship to work, play, education, etc. The science fiction of the 20th Century will become reality in the 21st century. Given that technology is expanding the economic pie and improving our standard of living, one must be vigilant and aware that having the wrong skills in the future could be detrimental to one’s financial well-being. People need to think clearly about where they are going with their lives. This process has become much more difficult as the “digital revolution” quietly moves relentlessly into many fields, wiping out jobs, systems and industries that cannot conform to the new paradigm. In the context of a global scientific and technological revolution where most of the entire world is conscious and aware of the enormous potential of this dynamic era, the accelerated speed of innovation will be driven by international competition, as scientists and technocrats push the limits on what is possible. However, as digital technologies transform the world of work in ways that are not fully comprehensible by many people that are Information Age Revolution 413 being displaced, confusion and resentment will run high with millions of people that will be left behind. Hardware, software and networks are getting better with time, becoming more powerful and more ubiquitous. In addition, these developments have increased productivity gains but at the expense of wiping out jobs; many jobs that used to be the domain of people only, and not robots, artificial intelligence (AI) and mechanized systems. The expansion of AI is doing to white collar jobs what robotics did to blue collar jobs. As this process of software technology accelerates, one model suggests that as progress increases exponentially, jobs and wages will diminish and more jobs will be lost than created. In an era of rapid obsolescence and as certain skills become worthless, the need for understanding this phenomenon is critical by many people throughout the global economic system. Consider these areas that have been breached by information age technologies: self- service automatic checkout stands at supermarkets, computerized phone operators and answering services, robotic janitors, digital cameras, computerized laser surgery, demise of the record store, the slow decimation of print and book publishers, and the technology revolution in the production and distribution of music and film products. And that’s a short list! We should also consider the following observations, especially when we examine the crisis facing the American worker: (1) A lot of medical diagnostic work will be done overseas to cut down on costs (2) Given the higher cost of software programming in the U.S., computer programming is now considered a commodity, separated into component parts with the actual work sent to other low-cost physical locations around the world (think India) (3) Corporations are focused on hiring less and using new labor technologies to replace workers. The trend, over time, will be to price the American worker out of the marketplace either with technology or low-cost talent in other countries. Given the dynamics of the digital revolution and the vast global workforce, this trend is not likely to shift in favor of the majority of Americans. Automation has helped manufacturing cut 5.6 million jobs since the year 2000. The growth and strength of this 414 Global Economic Boom & Bust Cycles sector had previously provided low-skill workers with middle-class paychecks. Those days are gone, and most likely, forever. The world is being transformed dramatically in ways that are reminiscent of the transition from the horse and buggy to the automobile; from the bow and arrow and sword to gun powder and guns; or when we witnessed the birth of the atom bomb as it ushered in a new era of warfare: the entire world had to stop and pay homage to these new global realities. In 2012, that is what we are looking at, but to many people it is obscure, unrecognizable and complex. And mass media has not delivered the hard truths about our era, the deeper message of change. This will delay the process for finding adequate solutions for a displaced global workforce. Popular media keeps us dazzled with all of the new gadgets and new communication devices and software, however, the real deeper message is hidden in the details: the second economy that is being built step by step in the massive invisible world of digital technology. During the Industrial Revolution, General Purpose Technolo- gies (GPTs) such as steam power, electricity and the internal combustion engine, revolutionized the world and brought enormous change to many technological fields and industries throughout global societies. GPTs have broad applications and help to promote innovations in other companies and industries that make use of them with implementation at every level of industrial society. These are the technological innovations that are so powerful that they inter- rupt and accelerate the breadth and width of economic progress. In the Information Age Revolution, computer technology is the most powerful GPT of this era. According to W. Brian Arthur, author, economist, technology thinker and pioneer in the science of complexity, “This second economy that is silently forming-vast, interconnected, and extraordinarily productive- is creating for us a new economic world. How we will fare in this world, how we will adapt to it, how we will profit from it and share its benefits, is very much up to us.” Arthur further tells us that this economy is destined to surpass the physical economy within the next two or three decades and that we are transitioning Information Age Revolution 415 not by small increments that will serve as an appendage to the current global system, but something that will ultimately replace the current models and systems that dominate the global economy. As the transition period continues to move stealth-like and builds momentum, a lot of jobs will disappear into this second economy and many will not be replaced. We need to be cognizant of the fact of how many of these jobs are vanishing and in what space of time this is all happening. The promise is that this new economy will be a major engine of growth but may not be a big provider of new jobs. Jeremy Rifkin, author of The END of WORK, clarifies this point by reminding us of past developments and transition periods: “In the past, when new technologies have replaced workers in a given sector, new sectors have always emerged to absorb the displaced laborers. Today, all three of the traditional sectors of the economy - agriculture, manufacturing, and service - are experiencing technological displacement, forcing millions onto the unemployment rolls. The only new sector emerging is the knowledge sector, made up of a small elite of entrepreneurs, scientists, technicians, computer programmers, professional educators and consultants. While this sector is growing, it is not expected to absorb more than a fraction of the hundreds of millions who will be eliminated in the next several decades in the wake of revolutionary advances in the information and communication sciences.”10 Rifkin published this book in 1995, at the start of the Internet revolution. And now in 2012, we are witnessing the momentum building up to accelerate this process. As the service sector is decimated, new companies that emerge are not hiring a lot of people or producing a large base of new jobs. The emergence of highly successful information age companies such as Google, Facebook, Netflix and Twitter don't have very many employees, and therefore, cannot be considered major drivers of employment. These companies will operate, function and be profitable by knowing how to do more with less. Many are starting up small and are remaining small due to the ubiquitous use and nature of information age technologies. The reality is that highly skilled workers and superstar talent is favored in this technology-intensive era and this will be the case for the remainder of the 21st century and beyond. Thus, the last frontier of the 416 Global Economic Boom & Bust Cycles digital economy offers no abundance of new jobs; it’s an industry that requires fewer workers with specialize skills and creativity. According to David H. Autor, economics professor at the Mas- sachusetts Institute of Technology, the American economy is being “hollowed out.” His overall assessment is that automation and outsourcing is essentially wiping out the jobs in the middle tier, and now “job growth at the top is slowing because of automation.” Most of the new jobs are coming in at the bottom of the economic pyramid. Middle-skilled jobs that are both routine and geographically portable have lost considerable ground in America: the job tasks in these jobs can be written in software and done faster and cheaper by machines. If a low-cost human being is required, the corporate response is to outsource the job to the lowest cost country in the global labor force. This is the wave of the 21st century and why the American worker will continue to be priced out of the market and why American unions have lost considerable power over the decades: our wages are among the highest in the world and few companies want to pay the price when they can use robots and a cheaper labor force in another country. According to authors Erik Brynjolfsson and Andrew McAfee, “many workers…are losing the race against the machine because technological innovation has speeded up, leaving many people behind.” In their book entitled, Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productiv- ity, and Irreversibly Transforming Employment and the Economy, we are reminded that the emergence of this era is a game changer and that the world will need to prepare for this monumental transition period, and soon. Quite literally, people are being left behind and it’s not just individual workers; the impact is also affecting many levels of society. Race Against the Machine tells us “And it’s not just workers. Technological progress - in particular, improvements in computer hardware, software, and networks - has been so rapid and so surprising that many present-day organizations, institutions, policies, and mindsets are not keeping up.”11 I agree with these au- Information Age Revolution 417 thors and it’s clear that the pace and speed of technological innovation has been and will continue to be rapid and relentless to a point where people will not understand what this technological juggernaut is leaving in its wake. Nothing will be spared: it’s all a numbers game, and if something becomes obsolete, it will be buried and we will keep moving forward as a civilization. There will be very little time to mourn the loss of our jobs and industries as the revolution continues to move forward at light speed and in Internet time. It may be that as a civilization we are not adjusting our thinking fast enough to consider the full implications of the digital revolution, that it may indeed overwhelm our abilities to control and direct the process of transition and full implementation into the new era. This will not be an easy or clean transition because there is no perceived threat or major concern by people in power. Brynjolfsson and McAfee remind us that “the issue of technology is not central to the discussion of job loss; it still remains on the fringes and is not taken seriously.” Thus, when economists examine the period from 2007 to 2009, when 12 million people lost their jobs, the analysis is framed in the typical garden variety recession/recovery scenario with no consideration of what may be different this time. This time is different; we are in the final transition stage of the end of the industrial era and the start of a new chapter in human economic history. THE THIRD INDUSTRIAL REVOLUTION AND DIGITAL TECHNOLOGY In April 2012, The Economist published a special report on the digital revolution in production and manufacturing. The magazine labeled this new era the “Third Industrial Revolution” and went on to reveal some startling things about the enormous technological changes that are transforming entire industries, systems, processes and business entities. The future of manufacturing is rapidly transforming into an operation and production performed by intelligent machines. In coming years, fewer people will be involved in the actual physical construction of a product. Software, robots, automated systems will design, mold and produce the end product in 418 Global Economic Boom & Bust Cycles record time. Conventional production equipment is becoming smarter (AI) and much more flexible. The days of huge factories with tons of people are numbered. Production efficiency is being driven by robots, smart machine and sophisticated software, all of which are making human workers much more efficient at what they do. An example given in the special report presents the case of a Nissan British factory in Sunderland. We are informed that this factory began operations in 1986 and, as of 2012, is the most productive in Europe: “In 1999 it built 271,157 cars with 4,594 people. Last year it made 480,485 vehicles - more than any other car factory in Brit- ain, ever - with just 5,462 people.”12 The digitization of manufacturing has created this new industrial revolution similar to the technology transformation in other industries such as music, film, photography, office equipment, telecoms and publishing. We are looking at the convergence of a number of incredible technologies: advanced software, AI, advanced robotics, new revolutionary technologies and systems (3-Dimensional printing and additive manufacturing) new composite materials such as carbon fibre and a broader range of Internet networking (collaborative manufacturing services) that is literally reshaping the world of manufacturing in amazing ways. This is how The Economist describes it: “The old way of making things involved taking lots of parts and screwing or welding them together. Now a product can be designed on a computer and “printed” on a 3D printer which creates a solid object by building up successive layers of material. The digital design can be tweaked with a few mouseclicks.”13 Medium-size and small firms, as well as individual entrepreneurs, will be empowered by the broad-sweeping powers/changes of digital manufacturing. The barriers to entry are falling and creating new opportunities in an industry that has been dominated by large business entities with deep pockets. Many people will have an opportunity to do things that were completely out of reach even a decade ago. We are moving from mass production towards the direction of more individualized production. Thus, many jobs that left America for cheaper labor costs on the other side of the world, will Information Age Revolution 419 be coming back as millions of Americans join the new industrial revolution; the third industrial revolution of the 21st century. Low wage workers turned China, India, eastern European countries and others into the workshops of the world. With access to cheap oil, the Internet and other advances, major corporations made outsourcing and off shoring growth industries that powered a new global reality. Now this movement will begin to reverse itself, particularly as the price of energy (oil) continues to rise and the third industrial revolution kicks into high gear. With more companies investing in automation and improving the level of productivity, over time the need for cheaper labor costs will not be the central factor of production. Machines and robots will continue to reduce the cost of labor. The issue of transportation or shipping costs will become a major factor that will derail some of the outsourcing movement that has drained millions of manufacturing jobs out of the American economy. China became the manufacturing hub of the world due in part to ultra-cheap labor costs. However, analysts have shown that America is more productive (achieves greater productivity) in this arena employing only 10% of the workforce used by China. The mandate of the digital revolution in manufacturing and factory production is that the key to the future is greater productivity in the use of technology. This is the next phase in the onslaught digital revolution and it will generate an enormous global impact. Greater manufacturing breakthroughs envision fewer people in the process. According to Susan Hockfield, president of the Massachusetts Institute of Tech- nology (MIT) there are associated benefits in this process that will produce other types of jobs: “It is true that if you look at the array of manufacturing technologies that are coming out of MIT, many of them are jobs free, or jobs light…But that is no reason not to want to do that type of manufacturing in America, because feeding into jobs- light processes is a huge supply chain in which there are lots of jobs and large economic benefits.”14 420 Global Economic Boom & Bust Cycles

3D PRINTING AND ADDITIVE MANUFACTURING The EuroMold fair held in November 2011 showcased the next generation of automated machines that are set to dominate the manufacturing process in coming years. An assortment of new machines is the building blocks of this “third industrial revolution.” Three- dimensional (3D) printers build things by “depositing material layer by layer,” in a process known as “additive manufacturing.” 3D printing is eliminating the issue of economies of scale and essentially makes it much easier to develop prototypes and finished products. The streamlined process for set-up costs is the same for one product or many, similar to making printed paper copies on a copy machine. These machines are programmed to work independently and are better at making many things that are too complex for your standard factory setting. This is getting close to having a “genie” in the factory, and again, it all gets better or more sophisticated with time. We are rapidly moving to the point where all repetitive, routine tasks are done by machines, or machines and humans working together. The early stages of this technology are impressive. As it evolves, it will move from making specialist parts for automobiles to assembling an entire complex piece of equipment. This is the factory of the future, and the ultimate goal of that future is factories manned entirely by robots and stand alone complex manufacturing machines. Every- thing in the factory of the future will be run by advanced software. Some of the human jobs in this environment consist of designers, engineers, IT specialists, marketing staff and logistics experts. Originally conceived as a way to build one-off prototypes, 3D printing has evolved to the point of producing finish goods. Addi- tive manufacturing is the stage at which the finish products are designed and built. Mechanical parts, many consumer goods, shoes, clothing designs, architect models, etc. employ the process of 3D printing to develop a prototype. If any changes need to be made, they can be done in a matter of hours and not several days or weeks. The amount of time, energy and resources saved in this process is Information Age Revolution 421 very significant. The following are some of the developments that have evolved in this field:

♦ In 2011, additive manufacturing was used by surgeons in the Netherlands to print “a new titanium jaw for a woman suffering from a chronic bone infection.” ♦ Cybaman Technologies (a British firm) has built a machine called the “Replicator” (about the size of a refrigerator) which is capable of additive and subtractive manufacturing. In a process known as reverse engineering, the Replicator can scan an object and essentially produce the data required to build an exact copy or replica of it. ♦ Consider this: “FANUC, a big Japanese producer of industrial robots, has automated some of its production lines to the point where they can run unsupervised for several weeks. Many other factories use processes such as laser cutting and injection moulding that operate without any human intervention.”15 ♦ 3D Systems, the maker of a variety of additive manufacturing, industrial and prototyping machines, introduced a new 3D printer consumer model called the Cube. With a price point of $1299.00, this new product will help to shape and drive the “personal manufacturing revolution.” A designer or inventor will be able to operate from home with this scaled down version of 3D printing. ♦ Additive manufacturing is a standalone operation that, once the design has been programmed into the system, the machine can print continuously around the clock. The ultimate design is to be able to input raw materials in one end of a machine and receive a complete fully inspected product as the output. That’s where this is going. MATERIALS SCIENCE AND NANOTECHNOLOGY An exciting new material that has risen to the top of the charts for use in the manufacturing process is Carbon fibre. This composite material is replacing steel and aluminum, and is lighter, stronger and more durable as a finish product. Flexible as a raw material, 422 Global Economic Boom & Bust Cycles

Carbon fibre when shaped, cured and infused with epoxy resin can be as strong as steel but with only half the weight. These qualities of strength and lightness have made this material ideal for the production of many types of objects. Boeing and Airbus use Carbon fibre in the production of aeroplanes instead of aluminum. In fact, the large-scale use of this material began in the aerospace industry. What we see now and going forward is the merger of materials research and manufacturing in a continuing process of innovation. We will also continue to see further scientific research as nanoscale technology is fully incorporated in the production process. The following are some of these new developments:

♦ Nanotechnology and product engineering are moving closer to the center of product development or product enhancement. Genetic engineering is actively considered for use in new product designs. Consider the prospect of self-cleaning glass, viruses used to create batteries or the use of viruses as catalysts for turning natural gas into oil and plastics: micro-organisms genetically engineered to perform a task. Much of this was unthinkable 25 years ago, especially at the application stage. ♦ In China, Arthur Huang is turning rubbish into useful products. One of his inventions is to take discarded husks from rice and barley to create a natural bonding agent. He is also creating very useful products out of recycled plastic waste. The whole idea of turning rubbish into useful products is great for the environment and human conservation. New materials, cheaper robots, smarter software, 3D printers and a host of collaborative online services will all be part of the catalyst that will restart the global economy after the depression era. Millions of small and medium-size businesses and entrepreneurs will benefit from these exciting developments in the third industrial revolution. ROBOTIC TECHNOLOGY The future will witness a dramatic increase in machines making machines in ever greater complexity and precision. Extreme world- Information Age Revolution 423 wide competition will place the robotic worker in the center of all major manufacturing production and heavy industrial development. Economic competition will accelerate the pace at which industrialists and manufacturers (worldwide) implement completely robotic factories and fully automated systems. Computer technology has reached a point where it can develop and produce a product from start to finish. The science of robotics, along with other technological marvels, will continue to automate hundreds of job functions and tasks throughout the 21st century. Millions of jobs will eventually be lost and replaced by machines. Robots are involved in the production of everything from VCRs to customized computer chips, and the Japanese became the acknowledged experts in utilizing robots in solving practical problems in everyday life. Robotic technology has become synonymous with lower labor costs, around the clock operation, precision and speed, and the most reliable work force on the planet. Robots don’t call in sick, don’t have relationship problems, don’t have drinking or drug problems, and for the most part, are not likely to curse their boss out. Robots are constantly improving and will continue to get better over the passage of time. Efficiency, reliability, accuracy and triple-A performance are just some of the attributes associated with this rapidly growing workforce of the 21st century. The big objection to the robot worker is that they don’t pay taxes, but perhaps we can remedy that by making the owner or corporate entity pay taxes for individual robots (just a thought). For decades, the primary threat of the robotic worker was in the factory, assembly line, manufacturing, checkout counters, routine task arenas and the middle-skilled worker, but that no longer is the case. Automation and artificial intelligence is making inroads into high-skilled professions as well. Welcome to the world of the robotic lawyers, doctors, pharmacists, scientists, accountants, etc. For instance, consider machines that can locate cervical cancer on pap- smear slides; robotic lawyers and paralegals analyzing over 3 million documents in 3 days to prepare for a case (e-discovery software) or robotic workers making fundamental scientific discover- 424 Global Economic Boom & Bust Cycles ies, and you will get a sense of where this is all heading. This is just the beginning because robots and artificial intelligence only gets better over time; there will be an unrelenting push for improvements and global competition will help to drive this spirit for excellence. Robots are being built to have more dexterity, and the next generation of robots will be capable of understanding voice commands and will be safer to work alongside people. To the person that’s planning a career and looking to enter the workforce, I would say beware of all routine jobs, they are being wiped out! The big question is: can a certain job clearly be automated? If the answer is yes, then it is probably best to choose another profession. The concept of robotic mechanisms is an ancient one, but the practical application and evolution of the automated worker began to take shape during the Industrial Revolution and the start of assembly line production. The basic term robot comes from the Czech word robota, which means compulsory labor. Rooted in the automation movement, the robot is considered a subcategory of automated devices. The dream of building a realistic robot could not be realized until the invention of the computer in the 1940s. A field of study known as Cybernetics, born during this period, is based on interdisciplinary science focused on communication and control systems in machines, organizations and living organisms. The study of feedback mechanisms (the fundamental principle of automation) led to the development of electronic brains and programming systems designed to simulate human movements in mechanical devices. One of the first true robots to appear on the scene was called Shakey, and was designed and built by researchers at Stanford Research Institute in the late 1960s. By the 1970s, a serious effort began to take root for the mass production of robotic mechanisms. ROBOTIC EXPLORERS In July 1994, an important technological event was given widespread media coverage. A robot by the name of Dante II debuted in Information Age Revolution 425 cyberspace and gave the world a glimpse of the role many robots will play in our future high-tech society. Dante II (a spider-like, eight- legged robot, standing 10 feet high and weighing 1,700 pounds) was involved in a mission of research and data analysis on Mount Spurr, a volcano located about 80 miles west of Anchorage, Alaska. The robotic system was equipped with 1,000-volt electric power/fiber- optic cables, eight video cameras, a laser range-finder, chemical sensors and a sophisticated electronic brain with AI programming that was critical in guiding Dante II through difficult terrain consisting of deep mud and snow, and dangerous crater gases. Dante II was able to move three feet per minute and had a 1,000- foot hookup with a generator and satellite transmitter that allowed scientists, engineers, and Internet users to observe the entire operation via cyberspace. Built by John Bares and colleagues at the Ro- botics Institute of Carnegie Mellon University in Pittsburgh, PA, Dante II was heralded as the forerunner of robotic devices that will be used as explorers to other planets, involved in deep oceanic research, and used in dangerous industrial environments. Dante’s ex- ploratory experiment represented the beginning of a period of scientific adventures by robotic mechanisms, some of which will take Internet users (or a similar communication system) electronically on visits to the Moon, Mars and other destinations in space. By collectively experiencing the journey through the robot’s electronic senses, mankind will truly go where no man has gone before. Robonaut 2 or R2 was sent to the International Space Station in November 2010 aboard the space shuttle Discovery. The $2.5 million NASA robot collaboration between NASA and General Motors became a recognized part of the space program. R2-like mechanisms are very likely to become a part of the assembly line process and will be used in more dangerous types of occupations that are hazard- ous to human beings. In 2012, NASA’s Mars rover Curiosity began a two-year scientific mission of the Red Planet. Built and equipped with the latest technologies, Curiosity is representative of a major milestone in space exploration. 426 Global Economic Boom & Bust Cycles

ARTIFICIAL INTELLIGENCE (AI) At the core of the development of AI is the human desire to replicate the thought processes and related activities of the human mind. Advances in parallel processing in computer designs will continue the drive for smarter machines. Author Richard Jenkins provides insight on some of the early premises of AI developmental research: “Studies of the human brain determined that its neurons, numbering in the tens of billions, work together in parallel to create intelligence. By copying some of the brain's processing strategies, researchers hope to build computers capable not only of solving large scientific problems but also of reproducing human intellect.”16 AI attempts to bring about a linkage between words, ideas, and associations. The two major approaches that AI has taken are the physiological and psychological; the study and development of high- tech computing systems and penetrating research into the nature of human thought. With so many unknown complex thought processes going on in the human mind, the ultimate goal of AI, which is to create humanlike electromechanical androids, may never be fully realized.17 However, advances in the near future will produce some very interesting and remarkable robotic devices. Expert computerized systems and other variations of artificial intelligence (AI) involving higher-order thinking will increasingly allow complex problems to be resolved very quickly. A problem or task that may have taken a few days or a week to resolve can now be solved in a matter of minutes. These computerized software systems will allow man the free time to explore and devise problems of greater complexity. In 2012, we are at the beginning of a new 10-year cycle that will witness, among other things, computers understanding a great deal about language. Complex communications, digital pattern recognition technologies, and faster processors with improved algorithms embedded in software have placed this revolution on a fast track. These technologies are much more powerful than their predecessors of a quarter century ago, encroaching on an area of human activity Information Age Revolution 427 that is central to human development and control: mental and cogni- tive skills. Digital technology has entered this arena and it will get better over time. In the book, Race Against the Machine, the authors present an example of software capable of analyzing and sorting through 570,000 legal documents in two days. The authors tell us, “Clearwell’s software uses language analysis and a visual way of representing general concepts found in documents to make it possible for a single lawyer to do work that might have once required hundreds.” Given these advances, the legal sector is likely to employ fewer people in the future in the U.S.: e-discovery software will cut down on the manpower required in this field. We are also alerted to the fact that Google has been testing driverless cars for years, and now (in 2012) this technology will begin to move forward more aggressively. At a Mobile World Congress (a conference held in late February 2012) in Barcelona, Spain, Google executive chairman Eric Schmidt stated that several U.S. states were drawing up regulations to facilitate the use of the new driverless vehicles on state roads. He also made the point that “People who predict that holograms and self-driving cars will become reality soon are absolutely right.” AI will only get better with time, a significant growth reality for the remainder of the 21st century and beyond. EXPERT SYSTEMS The most practical application for narrow fields of specialized knowledge has been the development of expert systems. These computerized systems are designed to behave like human experts on particular subjects. They consist of a collection of facts and rules that can provide educated guesses about problems in a variety of fields. Many of these programs can also estimate the probability of their conclusion being correct and present a line of reasoning. For instance, an expert system in medicine designed to assist in patient diagnosis, will analyze a patient’s laboratory test results, review the medical history and examine disease symptoms, and then provide a physician with a set of recommendations based on the analysis. 428 Global Economic Boom & Bust Cycles

Thus, what’s contained in these programs is the expert knowledge of a professional or group of professionals in some specific area of expertise. All expert systems permit users to query them about the reasoning behind their decisions; this characteristic is important in the interactive training environment.18 Expert systems will continue to evolve with various hardware and software advances and will contain a greater number of modular programs designed to increase the depth and intelligence of a specific subject. The continued development in high-level software languages will be the main source for providing stronger reasoning and intelligent capabilities for many optical disc systems of the future. The ability of expert systems to automatically write conventional computer programs is just one aspect of this movement. Optical-disc systems have begun to incorporate these new designs in order to enhance the overall potential of providing a truly creative interactive environment. GLOBAL MARKETS AND COMPUTER TRADING PROGRAMS A dramatic increase in the globalization of economic and financial activities has brought about the emergence of a world economy never before seen or developed in all of world history. Vast networks of tightly-linked computerized stock, currency, and bond markets greatly simplify the process of global investing and economic transactions. The program trading platforms that were utilized in 1987 and cited as partly responsible for the Crash of ‘87, have been eclipsed by newer, faster and more efficient models that include more of a global analysis and greater technical features. Indeed, volatility in the markets is driven more so by high-frequency traders using programmed systems that buy and sell stocks thousands of times a minute based on computer-programmed algorithms. These systems are designed to take advantage of rapid price changes, looking for weaknesses in market conditions and exploit situations for short-term gain: thus, they are very active in volatile market settings. High-frequency traders can account for up to 60 to Information Age Revolution 429

70 percent of market activity (swings of hundreds of points within minutes) during days of high market volatility, such as, what we witnessed during the week of August 8th 2011. Stan Choe made this observation in his article during that very volatile week, “High-frequency trading programs make up half of trading volume in a normal market day but 70 percent or more on a volatile one. The programs pounce on stock changes to make just slivers of a penny but do it so often that it adds up.”19 The power of these trading platforms was also on full display during the flash crash of May 2010. On May 6, 2010, the Dow lost almost 1,000 points in 20 minutes before recovering. By 2010, the new electronic exchanges (BATS, DirectEdge, etc.) were controlling approximately 85 percent of all the trading volume in the market with 15 to 17 percent of the volume flowing through the New York Stock Exchange (NYSE). In 2005, these systems accounted for 30 percent of market activity in the U.S., so the use of these platforms has become more pervasive. The major players are using supercomputers, co-location connections with the major exchanges and the most sophisticated trading platforms in the universe. Major computer systems now dominate a massive part of daily market activity. It’s all technical analysis and mathematical algorithms. According Mark Cuban, the successful entrepreneur who sold his Internet start-up in 1999 (the year before the tech crash: good timing) to Yahoo! for $5.9 billion in stock: “The only people who know what business Wall Street is in are the traders…Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible…evaluating countries as an investment is now easier than evaluating companies.” The high-frequency traders that dominate this arena are Direct Edge, Goldman Sachs, Barclays, Credit Suisse and Hedge Funds: they are the new insiders with co-location systems in close proxim- ity to the exchanges. They are using supercomputers with enormous speed and programming models that employ complicated mathematical formulas (algorithms) probability and statistical models moni- toring real-time data taking advantage of very small movements in 430 Global Economic Boom & Bust Cycles price. Welcome to the “Information Age” paradigm of Wall Street. And remember, these technologies will only get better with time. FUEL CELL TECHNOLOGY In principle, a fuel cell operates like a battery; however it does not run down or require recharging. It is capable of producing energy in the form of electricity and heat as long as fuel is supplied. The fuel cell relies on chemistry to generate power and not combustion (such as the process of the combustion engine). Emissions are very low and in some cases zero. Hydrogen made from renewable energy resources provides a clean and abundant energy source. When hydrogen is used as an energy source in a fuel cell, the only emission that is created is water and this can be electrolyzed to make more hydrogen - the waste product supplies more fuel. The chief economic problem is developing cost efficient methods for generating mass quantities of hydrogen. Sources include various types of fossil fuels (natural gas, methanol, ethanol, petroleum distillates and others) and water. Some of the projected applications of this exciting new technology include the following:

FUEL CELL AUTOMOBILES: Zero emission hydrogen fuel cell automobiles. Fuel cell cars could produce fewer “system-wide” releases of green house gases. Studies conducted by General Motors and Ford have concluded that fuel cell car engines could be built for about the same price as an internal combustion engine. As reported during the second quarter of 2001, at the General Motors Desert Proving Grounds in Mesa, Arizona, the company tested its fuel-cell vehicle, the HydroGen1. In this prototype, the power came from an electric motor supplied with current from a fuel cell that ran on pure hydrogen. The fuel cell system consisted of a block of 200 fuel cells connected in an arrangement that facilitated the flow of hydrogen and oxygen. The results was a system that reacted electrochemically to form water and generate between 125 and 200 volts of electrical energy, hence, power. Information Age Revolution 431

General Motors had set a commitment to have a fuel-cell vehicle on the market by 2010 (a commitment made before GM collapsed in 2008-2009). In line with this projection, GM announced in mid-June 2001 that it had bought a 20 percent interest in Quantum Technologies Inc. (based in Irvine, CA). This company was developing a hydrogen tank that could withstand 10,000 psi which would enable a driving range from 300 to more than 500 miles between fill-ups. Standard internal combustion vehicles using gasoline can travel up to 400 miles between fill-ups. This industry is getting close to a practical solution that will be far-reaching and widespread throughout the global economy. Auto companies are still investing significant amounts of money in hydrogen and fuel cells. However, the Obama administration has shown very little interest in hydrogen vehicles and this should change. These vehicles are still in the experimental stage with on-board storage systems representing the biggest problem. Recent developments in this area include a revolutionary storage system developed by Israeli scientists and entrepreneurs. They devised a method and on- board system of storing hydrogen that provides a novel solution to a central problem of the hydrogen revolution. Instead of using metal or composite cylinders as storage units, the new system would tightly pack and compress hydrogen into an array of glass fibers (similar to fiber optic arrays in networks that transmit data) that are organized into structured vessels of thousands of arrays. Each array would consist of 370 glass fiber veins which would be combined into a system of 11,000 arrays as a standard hydrogen tank used to fuel a car for up to 240 miles. It’s uncertain if the Israeli storage system will be the best method of storing hydrogen in a vehicle; however, it's clear that we are getting close to a solution to this problem. And again, a partnership between government and private industry would be ideal for accelerating the process in not only developing safe and reliable storage systems, but also the development of the infrastructure to support the new industry. Now is the time (in 2012) to completely embrace this revolution, not ten years from now. 432 Global Economic Boom & Bust Cycles

Stanley Meyer introduced in 1988 an automobile that could run on water - utilizing his water fuel cell injector system - and for the most part his technology was suppressed. We have to ask ourselves why, and the answer ultimately leads to the basics of control, power and greed. In the 21st century we have the technologies that will ultimately free us from $5.00 gasoline (in the U.S.) but it’s being suppressed, pure and simple. The forces that are holding back this revolution are those who are making gigantic profits out of the oil-based fossil-fuel economy and would clearly loose a major source of their wealth. No one really knows how much oil is left in the ground or when global demand for this limited resource will suddenly hit a brick wall. As a civilization, we are gambling with our future in a dangerous game of supply and demand, especially with the new powerhouse economies of China and India adding massive demand on a daily basis. Given the environmental concerns and the across the board need for clean energy efficient technologies, why are companies still allowed to even build combustion engine automobiles, a rapidly developing dinosaur technology? The minimum requirement should be hybrid vehicles, not gas-guzzling combustion engine dinosaurs. Transpor- tation adds about 13 percent of manmade carbon to the atmosphere and that number will continue to go up, not down. Electric and Hybrid Vehicles: Nissan and other car makers moved to the forefront with the electric vehicle option. In late 2010, the world was informed of the following: “The Nissan Leaf, an electric car aimed at attracting environmentally conscious motorists, will get the equivalent of 99 miles per gallon in combined city and highway driving, based on government testing…EPA’s tests estimate the Leaf can travel 73 miles on a fully charged battery and will cost $561 a year in electricity…GM’s entry, the Chevrolet Volt, uses an electric battery for the first 25 to 50 miles and a small gasoline tank to create an additional charge for another 300 miles.”20 In 2012, Jamaican businessman and entertainer, Paul Hurlock, built an electric car called the Electrogen. A self-taught inventor, Hurlock started working on this project in 1996, a complete battery operated vehicle. The car is powered by 12 lithium batteries that can Information Age Revolution 433 be charged by either sun or electricity; it has no engine. According to Paul Hurlock, “The sun charges three batteries and when the vehicles is started, those three are powered to charge the rest…it’s an on-board charging system. The car can also be used as a standby generator to power a house or complex.”21 The automobile industry is overflowing with possibilities from all-electric vehicles, vehicles powered by natural gas, to fuel cell powered vehicles and hybrid possibilities that include a combination of any of the above. Consider a plug-in electric and hydrogen vehicle as the car of the future. The sooner we solve this problem the better it will be for the global environment and the peace and stability of the global economy. In 2012, we need to be transitioning people out of 100 percent combustion engine automobiles and not putting them into new models. The world should be preparing for the new hydrogen age with a clear determination to minimize the use of fossil-fuel technologies. COMMERCIAL AND RESIDENTIAL FUEL CELL SYS- TEMS: Fuel cells for power generation in the home and other commercial facilities is nearly ready for prime time. As generators, fuel cells operate silently, reducing noise pollution as well as air pollution. They can operate as standalone units and need not be connected to a power grid. At the beginning of the 21st century, several companies were in the planning stage of creating and marketing fuel cell systems the size of a central air conditioning unit, which would be capable of serving an entire household’s energy needs. Some of the heavy hitter investors in fuel cell technology include, Toyota, DiamlerChrysler, General Electric, the U.S. Department of Energy ($100 million fiscal year 2001) and many other governments, agencies and companies around the world (major interest in Europe and Japan). The promise of an energy revolution with stand alone units in the home (off the grid) is very exciting and would benefit many people. The scientific and technological issues holding back mass production of fuel cell automobiles are not the same as those delaying production of commercial and residential systems for businesses 434 Global Economic Boom & Bust Cycles and homes. For years this technology has been tested in business environments and has proven to be a reliable and safe energy source. Some companies have had fuel cell power stations/systems in operation (testing) for over five years. The technology is ready or nearly ready for prime time and commercial use. In 2012, K.R. Sridhar (a rocket scientist) of Bloom Energy (a Silicon Valley start up) announced its successful development of the Bloom Box, a “fuel-cell powered” stand alone system of clean, reliable and efficient energy generated from the fuel cell system of electricity in a box. The beauty of this system is the following: (a) ordinary sand is used to form the solid ceramic squares (inexpensive material forming the core of the technology) (b) Oxygen and a natural fuel (natural gas, bio-gas, etc) are used to generate electricity. These devices are wireless and are designed to replace the big power plants and transmission line grids. Major corporations are testing this new technology: Fed-Ex, Wal Mart, Staples, Google, Bank of America, and eBay. Venture Capitalist John Doerr of Kleiner, Perkins, Caufield and Byers (KPCB) positioned his company as a lead investor in Bloom Energy and Colin Powell, former Secretary of State and Chairman of the Joint Chiefs of Staff, now sits on the board of directors. The oil-based industrial era will ultimately be replaced by hydrogen, the energy vector of the future. Cheap and unlimited hydrogen will be one of the main power sources of the future. This shift from oil to hydrogen is what Diop and others had predicted decades ago. A focused effort by government and industry should become a major strategy to build an energy efficient future. A concentrated focus with sufficient resources and capital will create new industries that will generate hundreds of thousands of jobs. This is the wave of the future and should be embraced by governments all over the world. LASER TECHNOLOGY Laser beam technology represents another critical scientific breakthrough that is playing a tremendous role in the overall advances of the Information Age. The semiconductor laser was invented Information Age Revolution 435 in 1962 and its first successful mass market development came in the form of the Compact Disc audio player. Light amplification by stimulated emission of radiation (LASER) became the spotlight (literally) for several technological advances in such diverse fields as medicine, photography, communication, nuclear energy, manufacturing, the military, semiconductor processing and basic scientific research. Sophisticated lasers are used in the microscopically detailed process of etching designs on computer chips. Without the magical power of lasers, this process could not be performed. Lasers are used to perform surgery, to blast plaque from clogged arteries, to bore holes in the skull, to vaporize lesions, to perform eye surgery, as manufacturing and production tools and in many other applications. Laser light is transforming a whole spectrum of things and represents the next evolutionary phase up the technological ladder. FIBER OPTICS AND LASERS The combination of glass fibers and semiconductor laser technology is one of this era’s greatest marvels. Scientific research discovered that a unique harmony existed between laser light and glass fibers which allows the laser light to travel great distances through the fibers maintaining the speed of light (about 186,282 miles per second). Each light pulse flowing through the fiber channels at astonishing speeds represents voice, text, images, moving pictures and other information sources. Fiber cable and laser light can transmit the entire contents of the Encyclopedia Britannica in one second. Engineers and scientists have come to recognize that fiber cable represents a 10,000-fold improvement over copper systems. In time, there will be a steady and continuous flow of “rivers of digital information” to all corners of the globe; this technological wonder will be as relentless and persistent as the blood-flow in the human body. Very high-speed telecommunication networks will serve as the main arteries of a dynamic communications paradigm. As we move forward into the 21st century, transmission rates will continue to expand beyond one trillion bits per second on a single pair of fibers. This astronomical number is the equivalent of 436 Global Economic Boom & Bust Cycles transmitting over 70 million simultaneous conversations. These are quantum leaps in technological advances and signal major paradigm shifts in worldwide communication. OPTOELECTRONICS In 1994, the U.S. Optoelectronics Industry Development Assn. (OIDA) reported that the component devices developed by the optoelectronic field are responsible for roughly $50 billion in sales revenues in various product categories. Such devices as $2 lasers in CD players, bar-code scanners, flat-panel displays in laptop computers, optical sensors embedded in structures to detect stress, laser printers, optical sensors that monitor the engine in automobiles, light- emitting diodes (20 billion made per year) and fiber optic probes in the wings of planes were just some of the areas this new wave of sci- tech devices were moving into. In the future, we can expect whole new categories of products to be built with the new revolutionary components created in this field. Entrepreneurs developing new product designs will have a wide range of choices in optoelectronic devices. One has only to imagine something and it probably can be built! Continuing research in this field is also moving towards the expansion of storage capacity in computer systems. The development of optical storage devices is an area of tremendous scientific concern. Researchers are exploring the possibilities of recording information as holograms and the potential of using blue lasers (short wavelength lasers) as part of a system to store vast quantities of data. Consider the scenario of storing 18 trillion bits of information on a 12-inch disk or holographic memories with multiple gigabyte capacities in the size of sugar cubes: these are some of the new technologies we will witness in the near future. If that seems startling, how about computers that operate entirely by thousands of tiny lasers, each one the size of a grain of salt, organized in patterns of integrated circuits, similar to integrated transistors. Consider also microprocessors that process data in images instead of bit by bit. The fact that one image could represent a million or billion bits of Information Age Revolution 437 data makes this a truly remarkable statement. When we start moving images around the way we presently move bits, the unbelievable will clearly become reality: the word revolution will not even be appropriate here. As technology continues to improve, we can expect to see upwards to trillions of data per second flowing through fiber-optic channels. High-speed, low cost communication and computer systems will rapidly become a significant component of the emerging worldwide Information Superhighway. Science fiction is becoming reality, for scientists are dreaming of Quantum Computers, computer systems that are driven completely by laser light. Such systems, says Seth Lloyd, physicist and nanotechnologist, “would be...capable of running 100 million times as fast as a Pentium.”22 Mr. Lloyd and other scientists are imagining the infinite possibilities inherent in today’s technological revolution. Each major technological breakthrough is setting the stage for even greater advancements. There are few limitations in this technological push in the 21st century! The competitive rush of these new technologies (is feverish) and is bringing about a paradigm shift of profound significance: patterns of behavior, traditional ways of conducting business, and various industry frontiers will all experience radical changes in coming years. As one scientist has stated, “We are increasingly moving from the world of the electron to the world of the photon, the basic unit of light.” The Age of Light is destined to reshape the world! TECH-CENTRIC WARFARE Warfare is becoming more high-tech with new weapons and the use of more computers, drones (unmanned aerial vehicles: UAVs the size of a private jet down to the size of large insects) and other types of robotic mechanisms. For countries like America, cuts in military budgets means that defense must learn how to do more with less. That’s where technology leads the way. Expect to see more high-tech weapons, cyber-systems and defense systems in the future. 438 Global Economic Boom & Bust Cycles

SUPERCONDUCTIVITY A superconductor is a material that allows transmission of electric current without any loss of power, while ordinary conducting materials, such as wire and copper, will experience some lost of power due to resistance. The astonishing thing here is that when the resistance drops abruptly to zero and the material is cooled below its critical temperature, an electric current flowing in a system of superconducting wire can “persist indefinitely with no power source.” Scientific experiments have demonstrated that currents in superconducting wire can last for years without lost of power or the need for applied voltage. Some commercial applications include the development of compact supercomputers, advanced medical imaging equipment, and levitated trains. High speed levitated trains and ships will begin to move towards center stage as major modes of transportation systems for the majority of advanced societies. Enormous infrastructure projects will need to be implemented to overhaul obsolete systems. The science of superconductivity is fascinating and will clearly revolutionize the field of electric power generation in the 21st century and beyond. Energy efficiency in a “clean-tech” world can become a reality in the 21st century. This is not a pipe dream! SOLAR AND WIND ENERGY In March 2012, Dr. Kent Moors (Global Energy Strategist) published an online article entitled: “Germany Set to Invest $260 Billion in a Renewable Revolution” The central reason this headline and article captured my attention was the fact that a major government is harnessing its vast resources (and like the Japanese in the 1970s) and making a determined effort to transition its people into a clean energy future. In the wake of the 2011 nuclear disaster in Japan, Germany made the historic decision to begin the massive phase out of nuclear power throughout the entire country. This is precisely what is needed on a global scale, and what I hope the United States will implement some- Information Age Revolution 439 time before 2015. However, it is Germany that will lead the way and set the example of mass implementation of clean energy technologies on a nationwide platform. Dr. Moor’s analysis is very informative as he tells us: “…what the Germans are deciding to do is already being called the biggest restructuring of the national energy landscape since the end of World War II…The government will initiate a campaign valued at more than $260 billion to harness wind and solar power…This will involve huge wind farm areas in the Baltic and massive new high-power transit lines nationwide. The goal is to have at least 35% of the nation’s power needs generated from renewable sources by 2020…Germany has become the first nation to really tackle the rising energy crisis. To succeed, the country will need new technologies and fresh approaches, some not even yet on the drawing board.” In order for all of this to work, Dr. Moors tells us that it will require “new technologies, infrastructure, improvements and breakthroughs.” Thus, the implementation of the clean tech revolution will inspire the development of new innovations and bring into existence new industries and job growth. As stated earlier in this chapter, the transition must begin now while there is time to make the moves without any serious disruptions to the global economy. My hope is that the German push for the “clean energy revolution” is real and that it goes far enough to break the barriers of control, power and greed that have held back the milestone inventions of the past. The German initiative could inspire other countries to follow their lead, and that is what we need to get the global energy revolution of the 21st century blasting full ahead on all fronts. Now is the TIME, not 20 or 30 years from now as some analysts would have us to believe. I’m thoroughly convinced that this civilization has the technologies that could completely revolutionize the world in the space of one decade. ROBERT F. KENNEDY JR.: “RENEWABLE ENERGY IS KEY TO U.S. GROWTH” As an apostle of the clean energy revolution, Robert F. Kennedy Jr. makes the case that the Obama Administration has a good plan and energy strategy for the future of America. In an October 2012 440 Global Economic Boom & Bust Cycles interview with The Daily Ticker, Kennedy revealed some important realities about the strength and vitality of wind and solar energy. In his role as president of the environmental group Waterkeeper Alli- ance, Kennedy is actively working to protect America’s rivers and water supplies. He is also financially promoting a green revolution in America, with an understanding that there are clearly no sound reasons why this should not be done on a massive scale. He reminds us that, “We need to be energy independent but we can’t look into the future by looking in a rearview mirror and say that we’re going to do that through carbon.” The wave of the future is alternative energy, the entire green revolution and all of its manifestations. As partner in a venture capital firm, Kennedy and associates are building one of the largest power plants in the United States, and it is based on solar energy. This solar plant will cost $3 billion a giga- watt, take three years to build and will be located in the Mojave Desert. To build a nuclear plant of comparable power delivery and distribution, it would cost $15 billion. A nuclear facility is much more dangerous to operate and the nuclear waste has to be buried safely for over 30,000 years. Once the solar plant is in full operation, it will essentially provide (as Kennedy informs us) “free energy forever.” In the long run, this will be a cheaper energy source and much more efficient than either coal, oil or nuclear. The same types of efficiencies can (over time and with government assistance and subsidies) be achieved with hydrogen, wind, superconductivity and other forms of green technologies. Kennedy reminds us that: “We can do it cheaper, we can do it more efficiently, but we need a national commitment to do that...You’ve got China, you’ve got Germany, you’ve got the rest of the world who are looking forward, who are building these new technologies and we have the lead. We ought to be continuing that lead and selling them these new technologies not just lagging behind sitting on our hands...”23 The old technologies of the industrial age (coal, oil and nuclear- fission power) will not go away peacefully. In America, billions of dollars of subsidies every year are provided to the oil, coal and nuclear industries, and that will continue until we make the full clean energy transformation in the 21st century. Information Age Revolution 441

TURANOR PLANETSOLAR As the first solar-powered vessel to circumnavigate the planet, Turanor Planetsolar has proven what can be done with solar power in the area of transportation by a water vessel. The journey lasted 19-plus months with layovers in 28 countries. The futuristic-looking 100-foot catamaran covered more than 37,000 miles and traveled an equatorial route to take full advantage of abundant sunshine. It is interesting to note that this boat was constructed mainly with lightweight carbon fiber and powered by four electric motors that presumably received their power/energy source from sunlight. Upon the completion of this historic voyage, the expedition leader, Raphael Domjan told observers: “We are extremely happy to have achieved this first world tour with solar energy. We have shown that we have the technologies as well as the knowledge to become sustainable and safeguard our blue planet.” The German solar energy pioneer and chief investor of this project, Immo Stroeher, plans to take the opportunity to establish greater use for solar energy and described PlanetSolar as the ambassador of that effort: “…We now have to take advantage of the fame of PlanetSolar in order to promote the use of solar energy.” This is the kind of breakthrough that will move us closer to our goal of energy efficiency and away from the domi- nation and addiction to oil. Governments all over the world need to do everything humanly possible to free our planet from the AGE OF OIL. BIOTECHNOLOGY The biotechnology revolution at the dawn of the Information Age is pointing to the development of some remarkable things. Some of the possibilities include cloning of animals (and possibly humans sometime in the 21st Century) genetically engineered crops and other food substances, genetically engineered cells, new revolutionary drugs and gene therapy and other types of major advances. With the mapping of the human genome (which advanced computer technology made possible) scientists and corporations began the process of applying for patents (ownership) of individual genes. Con- 442 Global Economic Boom & Bust Cycles sider the possibility of sophisticated gadgets or miniature systems composed of both living and non-living tissue, biochips and other such creations. In April of 2001, physiologist Sandro Mussa-Ivaldi of Northwestern University Rehabilitation Institute of Chicago reported the incredible development of a new generation of animal/ machine hybrids. In his experiments, he was able to demonstrate the use of a lamprey eel’s brain to operate a wheeled robot. A major factor that will continue to increase progress in this arena is the min- iaturization, density and complexity of computer chip devices. We may also witness the development of a cure for blindness, cancer, diabetes and other life-threatening diseases. Thus, there is a clear potential for both good and evil in mankind’s quest in controlling nature. Science fiction will become reality in the 21st century! What has been envisioned in such films as The Matrix, Star Trek, Star Wars and others, will come to past on some level in this futuristic dynamic world. The science of biotechnology will bring about incredible creations, which no doubt, will generate huge worldwide religious debates over the issue of mankind’s involvement in the creation of complete organisms in the laboratory. With the production of the first Frankenstein and the drive to create some version of a Superman, the world will need to come to practical terms with this new technology. There are clearly enormous dangers lurking in this arena, which I don’t believe this civilization has the moral, ethical or peaceful capacity to deal with. NANOTECHNOLOGY This technological development is straight out of science fiction. Here, we are talking about building machines on a molecular scale, microscopic devices that are programmed to perform specific tasks. The goal in nanotechnology is to be able to snap together the fundamental building blocks of nature easily, inexpensively and in almost any arrangement that scientific designers desire. Consider the possibility of building computer systems with mole quantities of logic elements that are molecular in both size and precision and are Information Age Revolution 443 interconnected in complex and highly sophisticated patterns. The other often repeated goal in this arena is the promise of building “self-replicating” devices that can perform incredible tasks with great precision. Nanobots, nanotubes, nanosystems and other such future shock developments are on course to become a part of our everyday reality. Corporations and governments worldwide are pumping billions of dollars into this incredible technological field of expertise. In a book written by author Ray Kurzweil entitled, The Age of Spiri- tual Machines, a prediction is made that nanobots will be capable of making food by 2049. Carbon nanotube technology and large robots have been recommended as part of the construction process for building the proposed project named “Shimizu Mega-City Pyramid” in Japan’s Tokyo Bay. The scope and scale of this technology is absolutely out-of-this-world. We are on the threshold of some really incredible things straight out of the science fiction of the 20th century. INTERNET AND TELECOMMUNICATION REVOLUTION The Internet Revolution of the 1990s, opened a door to a broad range of communication opportunities, a door that will be pushed wider as we proceed through the early years of this bold new millennium. As stated in Chapter Six, the Dot-Com Era created a global awareness and belief system for the new Internet economy. Given the rapid pace of this revolution and the wider implementation of broadband, expectations are that by 2050, 40 percent of the world’s population should have access to the Internet. With the expansion of broadband on a global basis, the number of users will naturally increase. According to Secretary-General Hamadoun Toure of the In- ternational Telecommunication Union (ITU) “Broadband is the next tipping point, the next truly transformational technology. It can generate jobs, drive growth and productivity, and underpin long-term economic competitiveness.” In addition, the telecommunication revolution has expanded to include smart phones, tablets, laptops, e-readers, TVs with set-top 444 Global Economic Boom & Bust Cycles boxes, Cloud technology by Apple and Amazon and billions of mobile Apps speeding throughout the communications universe. Con- sider the fact that in 2012, 90 percent of the global population has access to mobile phones. Also, consider that by 2015, the population of smart phones will reach one billion users. According to Karsten Weide, an analyst at IDC, “Soon, more users will access the Web using mobile devices than using PCs. It’s going to make the Internet a very different place.” E-commerce revenue is expected to hit $963 billion by 2013 and $1.29 trillion by 2015. The number of people shopping online keeps increasing. Big advertising firms are rapidly expanding to the online space as well as Mobile Advertising (cell phones, smart phones, etc.) changing the marketing and advertising models to accommodate the new era of the 21st century. We are clearly in the midst of a tremendous growth period in regards to this incredible telecommunications revolution. When we look back at the late 1990s and the birth of the commercialization of the Internet, we can clearly see that out of the ashes of the Dot-Com collapse emerged much stronger business models that supported revenue generation with solid links to the old economy. The so-called New Economy went through a metamorphosis and was reengineered and given stronger legs to navigate the economic and financial terrains of the new era. That era has expanded and will continue to move in directions unimagined at this point and time in 2012. We are in the midst of an enormous technological revolution. THE DIGITAL FILMMAKING REVOLUTION COST OF PRODUCTION Digital and computer technology gradually brought about a dramatic shift in the actual cost of producing major motion pictures. The special effects wizard, George Lucas, had focused much of his time and energy toward merging the creative advances of high-technology with that of filmmaking. Since the extraordinary success of his first Star Wars film in 1977, Lucas channeled most of his profits and resources into Lucasfilm Ltd. and several related high-tech com- Information Age Revolution 445 panies. Feeling that Hollywood was too slow for his thinking and out-of-touch with the rapid advances of the rapidly expanding technological age, Lucas set up shop in Northern California (near Sili- con Valley and the San Francisco Bay Area) and began his independent, high-tech movement in filmmaking. Time and the microcomputer revolution of the 1980s proved that Lucas was right about his fundamental shift in film development. High-technology brought about a major shift in film production as digital imaging transformed the special effects and content development of film. By using new computer/digital technologies, Lucas and company started making crowd scenes with just a handful of actors and elaborate background period scenes that were completely computer generated. At his Industrial Light and Magic company, the real-life looking dinosaurs that were featured in Jurassic Park were developed using these new emerging technologies. The technology of Computer Generated Images (CGI) would only get better over time. If the dinosaurs in Jurassic Park were forerunners of a new era in special effects, then what we witnessed in Avatar was the next quantum leap in the digital universe: the cinematic motion picture will become a much more powerful medium in future periods. Lucas was clear on this issue in the mid 1990s as he stated, “I think we may have reached a level here where we have actually created reality, which of course is what we’ve been trying to do all along.”24 The excitement and rapid advances in the film industry are reminiscent of the roaring atmosphere of the 1920s that included the birth of the sound era. In addition, the shift from the celluloid projector to the digital projector (when it started to take place) was swift and brutal: 99 percent of theaters had the standard celluloid projectors in 2004, by the end of 2012; the number is expected to be 37 percent of cinemas. Digital 3-D technology and the film Avatar played a major role in setting this trend. According to David Hancock, head of film and cinema research at IHS, “Before Avatar, digital represented only a small portion of the market. This single film has driven up demand for digital 3-D technology at the expense of traditional 35-mm cel- 446 Global Economic Boom & Bust Cycles luloid.” After 122 years, the celluloid 35-millimeter film projector will be absorbed by the Dinosaur Syndrome. Art-house cinemas will keep celluloid film alive as a relic of the past, entertaining us old timers who will yearn for the nostalgia of by-gone eras. SOME CONCERNS ABOUT 21ST CENTURY SCIENCE AND TECHNOLOGY It’s clear that the brave new world we face in the 21st century will be earth-shattering and borders on the miraculous. It is also clear that there is no turning back! Science and technology will be taken to its furthest limits, and then some. Global competition between corporations and governments will continue to drive this movement. As a civilization, we must question and debate what and how these new developments will ultimately benefit our world and the human species, because now, we are definitely moving to a much higher level in the development of enormous scientific power. On the one hand, I’m excited about the tremendous potential progress that can be made with exciting new technologies, but on the other, I’m disturbed and suspicious about the potential of what I call the “destruction scenario.” It’s very easy to see how some of these very powerful technologies could be allowed to spin out of control, particularly if they fall into the wrong hands. We have enough James Bond movies, and other terrorist, criminal and corporate scenarios to remind us of this threat. However, it is also clear to me that as a civilization we must move to the next phase in this global technological revolution. This must and will happen! But we must proceed with checks and balances if this is to work. What follows is my closing remarks and sermon on this matter as it related to the Y2K millennium crisis. Y2K REVISTED In closing, I’d like to raise one final millennium issue regarding an important technological message delivered by the Y2K problem. As a futurist, I'm very much concerned about the directions we are Information Age Revolution 447 heading in with our technological progress. In the 21st century, the science fiction of the 20th century will become reality. Y2K stood at the gate of the 21st century as a symbolic omen and master teacher of what can go wrong when we mismanage and incorrectly program our computer systems to perform improperly. This is the time of a major turning point in world history and in our world civilization. As a civilization we must wrestle with the deeper message that Y2K presented, the message of the evolution of technology and that we must be careful in the control of its growth and proliferation. What Y2K vividly brought to the surface was the massive dependence on computers our modern society had acquired. And as we move further into the 21st century, this dependence will experience a dramatic increase in ways that we have not fully contemplated or imagined. What does this mean? It means that as we develop systems with greater complexity and with more powerful brain-like functions, we must be deeply aware of not creating Y2K-like conditions in these mechanisms. Like the priesthood programmers of a half-century ago, we now stand at the dawn of a new era with access to the most incredible power in world history. We must be careful not to misuse it or to create conditions that will foster the development of self-destructive doomsday technology. Is this possible, given our current level of technological evolution? Yes, and as one species on this planet, we must guard against technological insanity. In Y2K, we were talking about repairing a simple piece of date- sensitive program coding that became complex because of the programming languages and their structures. When we look at bioengi- neering, robotics, nanobots and computer chips structured on the basis of biological materials, we have to seriously wonder about the end results. Are we ready for this? I would venture to say we’re not! Nevertheless, let us not fail to see and hear the deeper meaning of Y2K as we move into the next phase of the Information Age Revolu- tion. 448 Global Economic Boom & Bust Cycles

SUMMARY/ANALYSIS The Information Age Revolution has entered the implementation phase that will begin to deliver and produce a full range of new technologies. As we proceed through the second decade of the 21st century, we are very likely to witness radical transformation in various industries and industry sectors. This will be a time of major conversions with complete adoptions of revolutionary methods and systems that will present higher levels of technological efficiencies. The entire world is at the crossroads and now is the time to completely understand that and not after the smoke clears in the year 2020; for the future will definitely belong to those who prepare for it! Dynamic new companies, alliances and partnerships will evolve from industry conversions and new technologies. And with a fully functional global economy in place, complete with instant global communication systems, competitive struggles in the business world will move to new levels where national borders will no longer define a company’s or industry’s range of activities. The free enterprise system, accompanied by the unlimited power of the Informa- tion Age Revolution, will move quickly to build out the new technological foundations of the 21st century. The result of the convergence of all of these new revolutionary developments could spark the emergence of more frequent boom and bust cycles. Thus, it will be very important for analysts and investors (particularly the individual investor) to pay close attention to the vast changes and paradigm shifts that are destined to redefine the world we live in. Opportunities, as well as setbacks, are likely to come quickly and arise out of unexpected innovations and major breakthroughs. Fuel cell and nuclear fusion may not be quite ready for prime time; however, with strong government support and collaboration, the promise of these technologies can be brought to the point of efficiency and durable performance. The rapid advance of technological evolution will continue to create new industries and destroy old industries, and this will be happening on a much faster basis. Information Age Revolution 449

In 2012, the human population on the planet earth is approximately 7 billion people and growing. By 2030, the global population of people classified as the “middle class” may reach the level of 4.9 billion people, which represents a lot of consumers with discretionary income. There are enormous challenges ahead: the need for food, fresh water, jobs, energy, housing, clothing, transportation, etc. will place a great deal of strain on an already deeply strained global economic system transitioning through the Information Age Revo- lution. Keeping massive numbers of people employed will require new innovative approaches, special job sharing arrangements, shorter work weeks and other creative ways of keeping people occupied and productive in this bold new era. As one writer has observed, “The whole notion of work and employment may change over time.” Welcome to the 21st Century Digital Age. 450 Global Economic Boom & Bust Cycles

NOTES (1) The invention of the transistor marked the birth of microelectronics and it's considered the first electronic device with the ability to conduct electrons within solid materials. Development of the transistor took place at Bell Laboratory in Murray Hills, New Jersey. (2) Jose V. Pimienta-Bey, “Moorish Spain: Academic Source and foundation for the rise and success of Western European Universities in the Middle Ages,” Golden Age of the Moor, Ivan Van Sertima (editor: Transaction Publications, New Brunswick, 1993) p. 205. NOTE: The Moors were largely responsible for the scientific Renaissance that took place in Europe during the medieval period of the 12th and 13th Centuries. (3) During the late 1980s, gallium arsenide surfaced as a semiconductor with greater potential than silicon for speed and flexibility. It was reported by scientists that the material allowed for a faster switching system and was 50 times faster than the best available silicon transistors. Some of the other interesting features of gallium arsenide are: (1) As an element, it is more resistant to radiation influences than silicon circuits (2) It emits photons and the circuitry is both electron and photon sensitive (3) the gallium arsenide circuit requires less power than its silicon counterpart (4) the element can operate at higher temperature conditions; it has a greater tolerance than silicon towards higher temperatures. However, the downside of this element is that it is a more expensive proposition, and unlike silicon, is only capable of producing low-density circuit wafers. The element is about 34th in terms of its abundance in the crust of our planet. It is considered a metallic element. (4) Otis Port, “The Keys to the Future,” Business Week/The Information Revolu- tion 1994, (May, 1994) p. 60. (5) The etching process takes place in microns which are millionths of an inch. Since the early 1970s revolution in chip design, evolutionary developments in the art of chip-making enabled engineers to etch lines on silicon that were 6.5 to 0.5 microns in size. After seven technology generations, the fine art of chip design and computer advancements is shifting gears into light speed. (6) Associated Press, “Chipmakers Form Research Alliance,” San Francisco Chronicle, July 28, 1994, p. B3. (7) Peter Dicken, Global Shift: The Internationalization of Economic Activity, (The Guilford Press, New York, 1992) p. 98. (8) Alvin Toffler, POWERSHIFT, (New York: Bantam Books, 1990) p. 11. (9) Cheikh Anta Diop, Black Africa, (Westport, Connecticut: Lawrence Hill & Co., Publishers, Inc., 1978) p. X. Information Age Revolution 451

(10) Jeremy Rifkin, author of The END of WORK: The Decline of the Global Labor Force and the Dawn of the Post-Market Era, G.P. Putnam's Sons, 1995, pg. xvii. (11) Brynjolfsson, Erik; McAfee, Andrew (2011-10-17). Race Against The Ma- chine: How the Digital Revolution is Accelerating Innovation, Driving Produc- tivity, and Irreversibly Transforming Employment and the Economy, (Kindle Lo- cation 16). Digital Frontier Press. Kindle Edition. (12) Special Report: Manufacturing and Innovation, “A third industrial revolution,” The Economist, April 21, 2012, pp.3-20. (13) IBID. p. 15 (14) IBID. p. 5 (15) IBID. p. 19 (16) Richard A. Jenkins, Supercomputers of Today and Tomorrow: The Parallel Processing Revolution, (Tab Books Inc., Blue Ridge Summit, PA., 1986) p.10. (17) Scientists are experimenting with networks of specially designed computer chips called silicon neurons, custom designed to perform similar to the data capabilities of brain cells. The Frankenstein and/or Superman concept may evolve out of some enterprising mad scientist's laboratory, particularly if man continues to press on with the idea of creating androids made of entirely biological materials. In addition, the issue of cloning human beings came on stage in early 1997, which indicates the rapid speed and changes that are taking place in these scientific arenas prior to the new millennium. Science fiction is rapidly becoming reality. (18) Khafra K Om-Ra-Seti, Analysis of the Optical Disk Industry & Business Plan for a Start-up Company - KMT, Inc. (Master's Thesis, San Francisco State University, San Francisco, May, 1987) pp. 19-21. (19) Stan Choe, “Stocks plunge again on Europe's debt woes,” The Sacramento Bee, August 11, 2011, pp. B6 and B7. (20) Ken Thomas, “All-electric Nissan Leaf achieves 99 mpg equivalent, EPA tests show,” The Sacramento Bee, November 23, 2010, pg. B6. (21) Brian Bonitto, “Jamaican inventor builds electric car,” Auto and Entertain- ment, January 27, 2012, online, pg. 1. (22) Charles Platt, “A Million Mhz CPU?,” WIRED, January 1995, pp. 124-129. (23) Henry Blodget, “Renewable Energy Is Key to U.S. Growth,” The Daily Ticker, October 23, 2012 (online interview). (24) Thomas R. King, “Lucasvision,” Wall Street Journal, March 21, 1994, p. R20. CHAPTER NINE CHINA: THE NEW GLOBAL SUPERPOWER

“When our thousands of Chinese students abroad return home, you will see how China will transform itself.” Deng Xiaoping “Choose a job you love, and you will never have to work a day in your life.” Confucius

hina’s evolution from a Third world nation to an economic Csuperpower in record time has been an amazing metamorphosis. Every aspect of the global economy is now affected by the rapid emergence of China as it quickly became a global powerhouse. China is a nation of 1.3 billion people and its leaders have used authoritarian communism to harness the power of capitalism. The rise of China marks the beginning of a great transformation in the modern era, and its emergence brings new challenges and opportunities to the global economy of the 21st century. China should be considered a civilization state and not a nation state. The political and philosophical unity of the country is based on a strong sense of civilization among its people. It is the world’s oldest living and continuous (sustained) civilization, and the first to reemerge as a dynamic power in the modern era. Chinese people throughout the world continue to practice and promote the deep aspects of their civilization. HISTORICAL REVIEW The ancient history of China spans over 5,000 years and the written history goes back over 4,000 years with many dynastic eras. It has managed to survive intact as a unified nation for over 2,200 years. Over a period of many centuries, Japan, Korea and other Asian nations borrowed from Chinese art, language, literature, religion and technology. The major philosophical teachings of Confucianism,

452 China: Emergence of a Global Superpower 453

Daoism and the Ying/Yang principle have influenced the thinking of many generations of people throughout the entire world. In science, technology and other areas of development, China has pioneered in traditional Chinese medicine and acupuncture, chemistry and alchemy, government systems, weapons and systems of warfare, development of paper, the compass, gunpowder (first discovered and used in China during the Han Dynasty - 206 BC to 220 AD) fireworks, the first prototype of a printing press with movable type, abacus, umbrellas, kites, silk cloth and porcelain. When we look at the period of ancient history that gave birth to a unified China, we see that separate kingdoms endured centuries of warfare to achieve the genesis of a unified civilization. It was under the leadership and autocratic rule of Emperor Qin Shi Huang (259 BC - 201 BC) - the first emperor of China - that the Seven Warring States or Seven Kingdoms (Qin, Qi, Chu, Yan, Han, Zhao and Wei) were unified to form one great Chinese empire, solidifying the boundaries of what is considered modern day China. After hundreds of years of warfare a unified Chinese nation was born. Today on display in Beijing is the over 8,000 life size Terracotta Warriors, Horses, Chariots and other artifacts commemorating the powerful army (history tells us that Emperor Qin had an army of over one million men) used to unify this great nation. It was Emperor Qin who commis- sioned the building of the Great Wall of China. After the war of unification, the emperor institutionalized unity throughout the kingdom. He instituted the following main decrees: ♦ A decree to consolidate a system of weights and measures. ♦ Currency reforms - the use of a unified system of copper coins throughout the kingdom. ♦ A standardized writing system for the entire nation. Legend has it that prior to his death, Emperor Qin was in search of immortality. It appears that he achieved that goal in the name and longevity of the nation he forged into a unified whole: CHINA. THE 20th CENTURY After the global defeat of Japan that brought World War II to a 454 Global Economic Boom & Bust Cycles close and severed Japan’s grip on mainland China and Taiwan, there began - between 1945 and 1947 - an intense struggle and battle (the Chinese Civil War fought for the supremacy of the mainland) between the communists under Chairman Mao Tse Tung (December 26, 1893 - September 9, 1976) and the nationalists under General Chiang Kai-shek (October 31, 1887 - April 5, 1975). The communists emerged victorious and forced Chiang Kai-shek and the nationalists (the Republic of China - ROC) onto the island of Taiwan (historically known as Formosa). In 1949, the communist party came to power and established “The People's Republic of China” (PRC) under Chairman Mao Tse Tung. Under Chairman Mao, orthodox Chinese communism was instituted and practiced for over three decades. After Chairman Mao’s death in 1976, change began to take root in the communist system in the personage of Deng Xiaoping. Deng Xiaoping (August 22, 1904 - February 19, 1997) was the chief reformer and architect who led China towards a market economy. He served as the paramount leader of the People’s Repub- lic of China from 1978 to 1992. His radical reforms, policies and directives were revolutionary and were often opposed by hardliners in the communist party who viewed Deng as a capitalist sympathizer. During Mao’s Cultural Revolution, Deng was purged twice (from the party) because of his views, however, in the end he managed to out-maneuver his opponents and rise to prominence and power in the communist party. He spearheaded China’s capitalist revolution and was considered the “architect” of a new brand of socialist thinking. His vision for communist China was a road to free markets and away from central planning that did not take into consideration market forces: Deng envisioned China as a socialist market economy. He began his era of reforms in 1978 and believed that it would take 20 years to catch up with the West. Thus, in the early stages of his revolutionary reforms, China was opened to foreign investment, the global market and to limited private competition. No doubt, Deng Xiaoping must have been impressed and/or influenced by the rapid economic growth and technological advances that took place in Taiwan, Japan and the other Asian Tigers over the China: Emergence of a Global Superpower 455 decades since the start of the communist revolution in 1949. Deng took the ultimate risk as a communist party member (a much more profound movement than Gorbachev and perestroika - the restructure and reform of the Soviet economy and political system) by seeking to introduce the advances of the West into the command structure of the communist model. To some extent, this was economic heresy and a sharp departure from the communist party line. How- ever, Deng (like the Soviets would come to understand years later) realized that in the years since World War II, capitalistic societies had created a higher standard of living for the majority of its working class people, in contrast to their communist counterparts. People in Western nations did not wait in long lines for hours in order to purchase basic necessities or luxury items: they had access to distribution networks that were more sophisticated and efficient in delivering goods to the public. Deng wanted this, as well as the scientific and technological advances in the West, for mainland China and its people. His goal was to insure that the PRC would be an advanced economic, scientific, technological and military powerhouse before the end of the 20th century. Deng’s first series of reforms focused on China’s rural economy; this would be socialism with Chinese characteristics. Deng introduced the doctrine of the “Four Modernizations”: the reformation of agriculture, industry, science and technology, and the military. An initial push was to establish village entrepreneurs and entrepreneurship inside China. The success of the rural reforms provided self- sufficiency to millions of farmers. By 1981, the farmers were feeding themselves. In 1972 President Richard M. Nixon became the first sitting U.S. president to officially visit mainland China. From February 21- 28, 1972, Nixon traveled to Beijing, Hangzhou and Shanghai, met with Chairman Mao and began the process of normalizing relationships between the two nations. This event ended 25 years of separa- tion between China and America. It was also in that same year that China became a member of the United Nations. And in 1978, under 456 Global Economic Boom & Bust Cycles

President Jimmy Carter, a new era of Sino-U.S. normalized relations began. After negotiating for over a year, and with the U.S. agreement to officially sever its diplomatic and military arrangements with Tai- wan, a Joint Communiqué on the Establishment of Diplomatic Rela- tions between the People’s Republic of China and the United States of America came into existence on December 16, 1978. In 1979, the U.S. recognized diplomatic relations with mainland China: the embassy in Taiwan was closed and replaced with a new embassy in Beijing. To solidify these new arrangements with the United States, Deng Xiaoping became the first communist leader to visit America since China’s revolution began in 1949. At the invitation of President Carter, the then Chinese Vice Pre- mier Deng Xiaoping visited the United States from January 29 to February 4, 1979. This was a very important diplomatic mission and was one of the most historic events of the 20th century. Deng Xiaoping made it clear that China’s top priories were economic and technological development, so his time in the U.S. included visits to the headquarters of Coca-Cola in Atlanta, Boeing in Seattle and the Johnson Space center in Houston. This was prime time for China to begin the process of establishing a new economic, technological and scientific paradigm for a Third World nation seeking to move aggressively into the modern era. For Deng, it was time for China’s economic and technological rise in the world! A NEW ECONOMIC MODEL FOR CHINA By opening the relationship with the West, the door was now open to start receiving the technology and scientific development of the West that Deng knew China needed. Four major coastal economic zones were opened in China to begin the process of economic development and market reforms. The initial focus was infrastructure: roads, ports, factories and manufacturing. In time, the coastal economic zones were expanded to include many more zones and the “Open Door Policy” was in full operation. It was also in 1979 that Deng Xiaoping initiated China’s one child policy, which was de- China: Emergence of a Global Superpower 457 signed to limit the nation’s population growth. Initially, it was to be a temporary measure, however, as of 2012, the policy was still in place. Under the Sino-British Joint Declaration signed on December 19, 1984, the United Kingdom agreed to return Hong Kong to China in 1997. Similarly, Portugal agreed in 1987 to return Macau to China in 1999 under similar conditions as the British deal. The political and economic model employed was “one country two systems.” The agreements decreed that both Hong Kong and Macau would continue to operate as bastions of capitalism unchanged for 50 years after the communist takeover. This essentially meant the coexistence of one political system in control of a different economic system: the coexistence of a communist political system and a market- driven capitalistic system. The 1980s would also witness a robust period of private enterprise. The standard of living for hundreds of millions of people was raised on an unprecedented scale. This all happened after the reforms and “Opening Up” of China’s markets. In 1988, Deng’s next level of reforms removed government control over prices, allowing for market forces to take root in mainland China. Following the sudden death of Hu Yaobang (a respected leading reformer) who died of a sudden heart attack on April 15, 1989, students began gathering near Tiananmen Square in a strong response to his passing. The size of the gatherings grew as students began to protest and state their grievances over corruption of the party elite, limited career prospects, rising inflation, and a push for continued economic reforms and liberalization, as well as freedom of the press. The discontent of students and a galvanizing movement of one million Chinese people of Tiananmen Square (and other parts of China) became symbolic of a communist regime in crisis. Government re- straint held steady until the “June Fourth” affair witnessed the People’s Liberation Army clearing Tiananmen Square of the protesters. Many people died and thousands were injured as widespread international condemnation of the government’s use of force against the protesters became a mass media event. Western governments 458 Global Economic Boom & Bust Cycles imposed economic sanctions and arms embargoes in response to the massacre. The market reform movement of Deng Xiaoping suffered badly from the Tiananmen Square events. This was a major defeat and setback for his economic ideals for China. In a move to maintain his political survival, Deng was forced into making concessions with socialist hardliners that remained firmly opposed to his market reform policies. By the end of 1989, Deng Xiaoping chose to formally resign from the government. Thus, market reforms were halted as the Communist Party adopted a more conservative economic agenda intended to slow the rapid changes initiated by Deng Xiaoping’s reform policies. For two to three years, the market reform movement was in limbo. In the interim, events in other parts of the communist world would ultimately influence policy shifts within China’s communist regime. The global communist movement was in complete turmoil. The collapse of Eastern European communism during the closing months of 1989 became the catalyst for the independence movements inside the Soviet Union. Ethnic and nationalistic yearnings began pouring out of many of the empire’s 15 republics, particularly the Baltic republics of Lithuania, Latvia and Estonia. Thus, the Soviet Union stood at the crossroads in 1989 transforming and being transformed by the mega-events happening inside and outside the nation. By mid- 1990, the unthinkable happened; the largest most prosperous republics were declaring independence and moving towards the creation of sovereign states: Lithuania, March 1990; Estonia, March 1990; Latvia, May, 1990; Uzbekistan, June 1990; and Ukraine, July 1990. By November 1990, it was clear to many astute observers that the Soviet Union was in an economic depression! Ration coupons were issued and used in many cities throughout the nation. By 1991, some 74 years after its founding by Vladimir IIyich Lenin (1870-1924) and the Bolshevik Party in the 1917 Russian revolution, the Union of Soviet Socialist Republics had collapsed from the massive weight and financial burden of the arms struggle, the inefficiencies of the China: Emergence of a Global Superpower 459 socialist command-style economic model and an internal great depression. A new era had arrived and no one could stop it. Clearly, these events did not go unnoticed by leaders throughout the communist government in China. Whether a hardliner, reformer or something in between, China’s communist leaders were in agreement on one thing: they were determined not to repeat the mistakes of the Soviet Union which had spent 20% of its GDP on the military industrial complex. They also did not want to see an internal collapse of the mainland with its 56 ethnic groups. Although Deng Xiaoping had lost influence and resigned from office in the aftermath of Tiananmen Square, as an astute politician he still remained a powerful figure (behind the scene) within the Chinese government. With global events moving in his favor and supporting his ideals for market reforms, Deng began to reassert his market reform agenda. In the spring of 1992, he conducted a southern tour of China, visiting Guangzhou, Shenzhen, and Zhuhai and spending the New Year in Shanghai. This tour - which ultimately became a major turning point in China’s political struggle over market reforms - was designed to give support to the need for further economic reforms. Deng criticized the hardliners that had gained power following the Tiananmen Square affair and praised the efforts and successes of Chinese entrepreneurship. In observing the collapse of the Soviet Union and the strengthening position of market driven forces in the global economy, provincial governors in various regions began to support the ideals of Deng Xiaoping. The Chinese Politburo in Beijing eventually bowed to the historic forces of change and began to support Deng Xiaoping and his economic revolution. This would be Deng’s crowning victory in his long and turbulent struggle to build a market driven socialist economy. From that point in 1992, and Deng Xiaoping’s declaration that the Chinese should “Get rich Glo- riously,” economic growth and prosperity took off in a gigantic burst of activities in a million different directions. This set in motion an enormous surge in entrepreneurial developments throughout China as well as the international drive to in- 460 Global Economic Boom & Bust Cycles vest in the largest developing economy on earth. Major investment firms and global corporations who had been waiting patiently (for over two years) for a clear direction in China’s market reform policies, reestablished their excitement about the potential opportunities to operate in such an enormous economy with cheap labor costs and a large consumer market. The massive migrations to the cities that began with the opening of the first economic zones in 1979, intensified as millions of peasants continued the march to leave the rural areas for the new urban centers. In fact, since the 1980s, more than 100 million peasants left the countryside to join the economic revolution; the largest migration in modern history. Since the start of the economic reforms, within a 25-year period, over 200 million people were lifted out of poverty. By 1994, China’s economy had been growing at a phenomenal rate of 10 percent per year. And by the end of 2003, China had the largest pool of entrepreneurs, engineers and business experts in Asia. This country was clearly on a mission to break through the barriers and operate on par with the other great economic powers in the world. Thus, the Mandate of Heaven was being fulfilled according to China’s ancient philosophical beliefs in a ruler’s position to fulfill the destiny of the nation and its people. CHINA AND THE WORLD TRADE ORGANIZATION (WTO) After 15 years of struggle to become a member of the World Trade Organization (WTO) mainland China’s membership was officially confirmed at a trade ministers meeting (November 9-13, 2001) in Doha, Qatar. China’s entry into the WTO, at a time when the global economy was slipping into a deepening recession, proved to be a crucial factor in global economics. With the two leading economies in the world (America and Japan) mired in economic contraction, a new economic global development was clearly welcomed. Given China’s huge potential buying power of 1.3 billion people, entrepreneurial culture, its incorporation of Hong Kong and Macau and its stated ambition to become a true economic superpower in the 21st China: Emergence of a Global Superpower 461 century, this massive undertaking to move a former communist/mixed economy country firmly into the free enterprise system, represented another major turning point in world history. And again, it must be noted, that the Information Age Revolution played a major role in helping to bring about this incredible historic development. Like the developments of the ECC and the one currency movement in Europe, China had been preparing for this event for a long time. Neither the government nor its highly motivated entrepreneurial class was likely to move slowly to seize market shares and consolidate interests on a global scale. This was prime time for China and its people and it would ultimately bring about a huge impact in the global economy. For instance, as business failures, plant closings and job cut backs steadily increased throughout the U.S. in 2001, Chinese companies were active in mergers and acquisitions of various types of American firms, particularly in the high-tech arena. The economic slowdown in America presented some real bargains for Chinese entrepreneurs. The acquisitions accelerated in 2002, benefitting the American economy in the long run, as major American corporations were rushing to set up offices and factories in China to participate in the new, friendly environment in the mainland. There were tremendous incentives to move quickly and effectively into these new unchartered waters. Many Chinese companies were compelled to build a strong corporate presence in the high-tech world of the Information Age. California’s export markets in farm foods, high- tech products and services, entertainment products and financial services experienced a significant boom in trade with China. As history has shown, China’s entry into the WTO was not a light weight event! ECONOMIC MIRACLE China is now viewed as a dominant global power and major economic force in today’s world. We are witnessing a major tectonic shift in global affairs; the sheer magnitude and scope of China’s power is being felt on many levels and economic fronts: currencies, commodities, the wholesale and retail price of goods sold, to name a few penetrated areas. In the second quarter of 2011, China became 462 Global Economic Boom & Bust Cycles the second largest economy in the world, taking the spot held by Japan for much of the past four decades. While Japan’s economy had been stagnating for more than a decade, China’s economy had been in high gear and growing at 9 to 10 percent per year. In fact, by 2012, China had maintained, for over 30 years, a growth rate of 9 to 10 percent per year. In 30 years of massive growth, China managed to accumulate $3.2 trillion in foreign reserves, the largest level of reserves held by any nation in the world. It is now the world’s biggest exporter and has the largest market for passenger vehicles: auto sales exceeded 18 million units for the years 2010 and 2011, one- quarter of the world’s production. By the first quarter of 2012, Gen- eral Motors had 2,900 auto dealerships in China and was planning to open shop in 600 more locations. Not to be left behind, Ford was planning to invest $5 billion in China and produce 15 new vehicles for the Chinese market by 2015. These are major commitments and clearly indicate expectations that China’s market for automobiles is going to literally explode to massive levels. Before all of these developments take place, the central planners of China should mandate that new automobile production not be based on the old 20th century combustion engine technology. China should be the first major country in the world to avoid the production of combustion engine automobiles. I will have more to say on this issue in Chapter Ten on “PEAK OIL.” Major corporations are making more aggressive moves to be a part of the China economic experience. General Motors, Siemens, Caterpillar, General Electric and others are setting up shop and in some cases, research and development centers in China. And because of its massive economic clout, China is determining the price of almost all global commodities. This nation consumes 53% of the world’s cement, 48% of the iron ore, and 47% of the coal. In addition, China is now the world’s second largest importer of oil, which will continue to have dire consequences in a world already facing potential shortages. In the year 2000, China was using less than 10% of the world’s energy; the U.S. was using 25%. By 2015, it’s estimated that each China: Emergence of a Global Superpower 463 nation will be using approximately 18% of the world’s energy. In regards to rare earth minerals, China has about one-third of the world’s deposits. These minerals have unique properties and play a critical role in technological applications ranging from energy-efficient light bulbs to hybrid motors to cell phones and fiber optics. China’s use and global distribution of its rare earth deposits have come under political fire in the West and will most likely be a major issue going forward in the 21st century. The rare earth affair is a vivid example of how nations will be struggling over limited, finite and depleting resources in the years ahead. There simply will not be enough natural resources to feed the voracious appetites of governments and global corporations seeking to dominant their respective fields, regions and territories. In response to China’s grip on rare earth deposits, in April 2012 Japan signed an agreement with Kazakhstan to develop these critical metals from new mining operations in this central Asian nation. The special news announcement signaled a strategic move by Japan to break free of the higher prices imposed by China: “Japan’s Trade Minister Yukio Edano will meet Kazakh government officials, including President Nursultan Nazarbayev, to sign the agreement in early May, making way for Sumitomo Corp…Japan Oil, Gas and Metals National Corp and Kazatoprom to partner in rare earth extraction.” China is building everything on a massive scale: skyscrapers, train stations, airports and entire cities. Analysts report that the Chi- nese are building a new ship every two weeks and 10 new cities a year. This nation now has over 118 megacities with populations exceeding over one million people. Foreign architects have been involved in these developments since the late 1990s. China’s urban planners estimate that 300 million of its people will be moving to urban areas over the next 15 years. The Pearl River delta was one of the first Chinese regions to open to foreign business in the 1980s and is now a rich giant manufacturing hub. According to the 2010 census, the growth of major metropolitan areas had been phenomenal with huge population growth: By 2010 Shanghai had a population of 23 million people; Beijing, 20 million; Chengdu, 14 million; 464 Global Economic Boom & Bust Cycles

Guangzhou, 13 million; and the Chongqing metropolitan area, 29 million. Cheap migrant workers formed the base of the huge worker revolution. In the early to mid stages of the economic reforms, many workers lived in dormitory conditions (and many still do) working for as little as $0.60 an hour, 12 hours a day (with weekends off). In the early 2000s, an ordinary line worker employed in a factory making Nike shoes could make $165 to $250 per month working eight hours a day, five days per week. The hourly rate for that job translates to $1.03 to $1.56 per hour, and this was clearly one of the better paying jobs available in the job market. Other jobs were not so generous. Depending on the industry and the company, hourly wages descended to levels as low as $0.25 per hour. If the manufacturer had hired an American worker doing the same job, the hourly wage would have been $13.00. Some workers are required to work six days per week and will make only $0.50 to $0.60 per hour.1 This is the primary reason why outsourcing and off-shoring became a huge business model for American and other international corporations seeking to lower their labor costs. This is also the primary reason why China quickly became the manufacturing hub of the world. Between 500 million and 750 million Chinese still live in rural poverty, so the economic revolution is still very much in the making. China is working hard to manage the physical shift per year of 15 to 20 million people from the countryside to urban areas. This is by far an enormous undertaking for any government. The “ant tribe,” a term that was coined by Lian Si, a professor at the University of International Business in Beijing who wrote a book with that title, is the name given to the millions of educated young people who live in heavily crowded slum-like conditions on the out- skirts of major metropolitan cities. This is the generation born after 1980 and are considered the most privileged generation in China’s long history. The rapid transformation, technological shift and prosperity of China are practically all this generation has experienced. In their lifetime China is emerging as a superpower on the world's stage, and this historic development has deeply motivated and encouraged China: Emergence of a Global Superpower 465 this generation to push for the highest levels of achievement. They are making whatever sacrifices that are necessary in order to achieve their goals in life, for they know that this is the time of China’s ascent in modern global civilization. The insatiable desire for education in China is globally recognized and its students are now rated number one in the world. With the exception of India, China’s monumental march to modernization for the majority of its people is a massive undertaking for one country, unlike any economic development in world history. The circle of trade and investments between China and America, the world’s two largest economies, is crucial. China’s economic growth is exposed to enormous risk of being derailed by economic collapse in the West. This was readily observed in the 2008 meltdown in America when, by December 2008, over 23 million Chi- nese workers had lost their jobs. Dozens of toy and textile companies were hit hard with the slowdown. In the wake of the 2008 credit crunch when consumer demand from the U.S. went into a rapid downturn, China implemented a massive stimulus program in order to keep the nation moving forward despite the massive slowdown. De- signed to encourage growth and domestic consumption, the $586 billion (4 trillion yuan) stimulus package was focused on ten key areas of the economy: transportation, environment, health and education, housing, rural infrastructure, industry, disaster rebuilding, taxes, incomes and finance. That effort was critical and kept the world from free falling into economic chaos. Worldwide, well over 30 million people lost their jobs during the worse economic calamity since the Great Depression of the 1930s. CHINA’S REAL ESTATE BUBBLE: MYTH OR REALITY In response to the 2008 meltdown, China implemented easy money policies to stimulate its economy: the world relied on China as a source of growth during the weak recovery period of 2009- 2012. According to a report entitled “Household Registration and Migrant Labor in China,” 23 million rural migrant workers lost their 466 Global Economic Boom & Bust Cycles jobs in the wake of the 2008-09 meltdown in America. The export industries were hardest hit and suffered immediate economic fallout from America. The report tells us that: “In the early months of the crisis (late 2008) high levels of unemployment among migrant laborers in the Pearl River Delta combined with claims for wage arrears and severance pay triggered mass protests, and angry laid-off workers clashed with riot police. The increasing number of “second- generation” migrant workers, more educated and rights-conscious than their parents, may be less tolerant of abuses and injustices and readier to defend their interests when badly treated.”2 Trillions of dollars in cheap credit was released by the communist government to help stem the tide of unrest and civil disturbance, however, much of the excess cash flowed into pumping up China’s real estate markets. Economic data suggest that real estate investments increased dramatically after 2008, a direct result of the stimulus program initiated by the Chinese government to counter the impact of the global recession. A clear indication of the impact is what occurred in 2009; new construction projects increased across the board throughout China. Large-scale urbanization and rapidly rising incomes was the justification for the extraordinary boom period. In an ironic twist of fate, the economic catastrophe that finally sunk the U.S. economy in 2008 took root and was adopted in China’s real estate markets. In the four years after 2008, the real estate bubble mentality worked its way into China’s economic system. During those critical years - 2009 to 2012 - when China maintained stability in the global economy, a housing and commercial property development boom swept throughout mainland China. This nation built around one billion square meters of housing per year during the global recovery period. For Chinese investors, the returns in other investment categories simply did not compare with the much higher returns in real estate. After the breakneck speed of decades of building and market driven real estate values, by 2010, 64 million homes and apartments were sitting vacant for six months or more with no apparent buyers or families who were willing to rent an apartment. Analysts cited two key reasons for this phenomenon: (1) Most families in China China: Emergence of a Global Superpower 467 have no interest in renting an apartment; they would rather own the roof over their heads. This is a very strong preference in China; the Chinese would rather live in a purchased property (2) For many years, real estate was the investment of choice by Chinese investors looking for strong returns (for their savings) and a safe haven from the pressures of inflation. Encouraged by the increase in property values in recent periods, rapid growth in the economy and an investment vehicle less volatile than the stock market, investors viewed real estate developments as great opportunities. Both buyers and developers/builders were able to take advantage of low interest rate bank loans to purchase land and properties. This was a boom similar to what happened in America. The housing boom generated enormous economic activity in other sectors of the economy: in 2010 the country produced 627 million tons of steel and 1.87 billion tons of cement; 44.3 percent and 60 percent of the world’s output, respectively. Nearly 43 percent of the world’s construction machinery, such as bulldozers and exca- vators, were produced in China. Demand for natural resources such as iron ore from Australia and Brazil, copper from Chile, lumber from Russia and Canada, and equipment from Japan, America and Germany would be affected by a slowdown in housing. Many domestic and international corporations would take a solid hit to their bottom lines. China’s conversion to private homeownership in the 1990s, and subsequent private ownership property laws in 2004 and 2007, has provided a basis and strong foundation for Chinese investors to store a significant part of their savings in real estate. An in-depth article written in Foreign Affairs (December 2011) sheds light on some very important issues regarding China’s real estate bubble and how it was initiated. According to Foreign Affairs: “China’s leaders engineered a lending boom that expanded the country’s money supply by roughly two-thirds. Real estate was already the preferred place for the Chinese to stash cash; now, investors had that much more cash to stash. Prices rose accordingly: In many locations, the cost of prime new properties doubling in just two years.”3 468 Global Economic Boom & Bust Cycles

Large and small Chinese investors provided the fuel for this bubble. The Foreign Affairs article further explains the strategy of many investors that were focused on long-term gains and appreciation in property values: “For more than a decade, they have bet on longer-term demand trends by buying up multiple units - often dozens at a time - which they then leave empty with the belief that prices will rise. Estimates of such idle holdings range anywhere from 10 million to 65 million homes; no one really knows the exact number, but the visual impression created by vast “ghost” districts, filled with row upon row of uninhabited villas and apartment complexes, leaves one with a sense of investments with, literally, nothing inside.”4 Thus, it appears that many of these properties were kept empty by investors due to speculation reasons and as a long-term store of wealth. It is these large construction projects that have played a significant role in helping to fuel the 9 to 10 percent growth rates over the past 30 years. Thus, manufacturing, supported by strong export demand, and the construction industry, with the building of everything from single family homes to entire cities, have been the main engines of growth. Therefore, China’s growth was not driven (in large part) by domestic demand. A major part of the economic growth of China has been the enormous government-funded infrastructure projects, particularly in real estate developments. As of late 2011, these investments accounted for 49 percent of Chinese GDP. Many of these projects are sitting empty and in some cases over five years. And many of these construction projects were funded by government-controlled banks with newly printed money. One has to question the wisdom of this strategy, especially in light of what happened to Japan starting in the early 1990s. Japan had a long boom period (See Chapter 5) followed by a devastating bust cycle that lasted over 15 years. Stock market and real estate values descended into a prolonged period of deflation. It’s worth noting that during Japan’s real estate bubble, housing prices peaked at 3.8 times GDP. In China’s housing boom, home values reached 3.5 times GDP in February 2010. Analysts are questioning whether China is on the same path as Japan. Japan experienced decades of China: Emergence of a Global Superpower 469 growth in an enormous boom and then fell into an enormous deflationary bust period. Similarly, China has experienced decades of enormous growth during an extraordinary boom period and now may be faced with the prospect of a deflationary bust period. In 2012, what we see happening in China is this: (1) real estate prices have started to fall and the bubble appears to be deflating. China’s Banking Regulatory Commission has “ordered domestic banks to weigh the impact of a 30% decline in housing transactions in ‘stress tests’ aimed at determining the health of the Chinese financial system.” With a tightening of credit and restrictions on how many properties can be purchased by potential buyers (discouraging speculation in the real estate market) China’s gigantic real estate markets are beginning to unravel. (2) Viewed by the West, the commercial property development in China is extremely over-built. Speculative credit will start to leave China as the descent in property values begin in earnest. (3) The massive fiscal stimulus used to build infrastructure may prove in the end to be a massive case of mal- investment, a deadly sin in capitalism. (4) And like Japan, China has pumped more money into its stock and property markets in order to revive the wealth effect for local and domestic consumers. In order to escape the “Japanese Bust Syndrome” China will need to implement a strategy for major domestic consumption in the face of the dynamics of imminent decline in both Europe and America. This is a bubble that is still in the making and is a colossal crisis, even in China where yearly migrations of millions of people is an ongoing process. This nation also has other peculiar anomalies in its real estate development markets, one being the world’s biggest shopping mall which has been 99% vacant since 2005. Billed as the largest amusement park in Asia, “Wonderland,” is another unfinished construction project in China. Situated (on 100 acres) on a location 45 minutes away from the center of Beijing, work on this development was stopped more than a decade ago. Farmers were uprooted and displaced in order to make room for this massive development that ultimately went nowhere. In traditional capitalistic economic thinking, these projects represent a bad allocation of resources and 470 Global Economic Boom & Bust Cycles funds. China’s ghost cities and malls, and vacant condo complexes has been the curious fascination of many analysts throughout the world. In 2011, more than 1,000 real estate agencies closed their doors and desperate developers started offering a new BMW with the purchase of a new home. These were similar tactics used by developers in the United States during the early stages of its housing bust. How- ever, I don’t think they were offering new BMWs! China’s enormous property price bubble is deflating either slow or fast in various cities throughout the nation. The question for many analysts is whether it’s a gradual and smooth deflation or something much worst. According to Robert Z. Aliber, a former professor at the University of Chicago, “In China, the housing boom is a far bigger source of growth than is widely recognized, and it’s totally unsustainable.” In recounting his research on China’s real estate bubble, Aliber tells the story of a former student who moved into an apartment building that consisted of several hundred condo units; however, the student was the only one living in the complex. The other units were all purchased by investors, most of whom were speculating that the prices would continue to rise. Aliber investigated further by visiting the office of an upscale developer in Beijing who was selling 1,100 square foot apartments for $600,000. With the bursting of the bubble, prices began to fall and those who bought at the top (paying $600,000 or more) began to take on losses. Unlike the subprime crisis in America, where small down payments (or no down payments in some cases) were the standard, in China most Chinese investors made substantial down payments on the properties they purchased. So when values go down, the loss is an immediate hit to an investor’s equity and net worth. For example, a $600,000 investment that crumbles to $450,000 in a few months is a heavy loss to absorb by an individual investor. But these are clearly the kind of losses that can occur when a high-flying real estate bubble reaches a point of implosion: the music stops and whoever is sitting in the musical chairs is left holding the inflated properties! This story China: Emergence of a Global Superpower 471 is the same whether we are talking about Japan, America, Spain or China: real estate bubbles are deadly serpents that will bite you in the end if you don’t get out in time. After evaluating the rent versus the purchase price of properties in China’s over-heated real estate market, Aliber discovered that prices were 50 or 60 times rents. This is a very high number and indicates that the market is in bubble territory. His bottom line was that, over time, overall prices would probably decline by 60%. Other analysts and economists are also thinking along the line of a 60% or greater decline in property values as the crisis unfolds. In Anyang city, thousands of angry small investors protested in the city’s train station in hopes of bringing to light (to the leadership in Beijing) the savings they lost in real estate scams in their region. The operators of these Ponzi investment schemes disappeared after their bogus promises of high returns began to unravel as real estate prices fell. In Shanghai (October 2011) property developers caught in the storm of falling real estate prices, began slashing prices by one third on their new luxury condos. Property owners that had recently paid full price for these units were outraged by the sudden and steep price reductions, and demanded refunds. Windows were broken and showrooms were smashed as investors reacted strongly to the loss in property values. In November 2011, new home prices fell 35 percent in Beijing, and according to Homelink (a property agency) prices may continue to fall for some time. In the super-hot markets of Beijing and Shanghai alone, developers had “built up 22 months’ worth of unsold inventory in Beijing and 21 months’ worth in Shanghai.” Local landowners, Chinese speculators and international investors are deeply concerned about the direction of this crisis. In the Foreign Affairs article we are informed of the familiar human hardship that accompanies the bursting of a bubble: “In a few cities, such as coastal Wenzhou and coal-rich Ordos, the collapse in property prices has sparked a full-blown credit crisis, with reports of ruined businessmen leaping off building rooftops; some are fleeing the country. The central bank’s decision on December 5 to lower the reserve requirement ratio for the first time in three years signaled a broader move 472 Global Economic Boom & Bust Cycles

to pump money into the economy. Beijing has directed banks in Wenzhou to extend emergency loans to troubled borrowers.”5 A key sign that things were getting out of hand was the dramatic rise in the inflation rate from 1.5 percent in January 2010 to a high of 6.5 percent by July 2011: real estate investment had been growing annually by nearly 30 percent. Central authorities stepped on the brakes and credit expansion was tightened. This placed severe pressure on developers trying to hold on to their overstocked inventories. Without the means of raising fresh capital (many tried to acquire bank loans and unsuccessfully went through an assortment of private lending sources that included, in some cases, loan sharks) developers began the painful process of liquidations in falling real estate markets. Price cuts and liquidation discounts went from 30 to 50 percent. In 2011, 3.6 billion square meters of property was under construction but only 709 million square meters were actually sold. Over-capacity continued to plague the system. On the surface, it appears like the bursting of this bubble may follow the path of Japan’s experience or deflate in an American- style meltdown. However, Ann Lee, author of What the U.S. Can Learn from China, thinks that the risk of implosion is unlikely. She argues that China’s low debt-to-GDP ratio of 21.5 percent does not place this nation on the brink of collapse: America's debt-to-GDP was slightly less than 100 percent in 2010. Lee also reminds us that the Chinese carry small debt loads compared to their American counterparts. The Chinese household debt-to-GDP ratio was just 12 percent in 2008, whereas, the American household debt-to-GDP had already reached 100 percent by 2007. In addition, Ann Lee provides a very important observation when she states: “…housing is the only financial asset for many Chinese. Excess housing units that sit empty won’t get abandoned because they were secured with substantial down payments of 50 percent or more and so function as a store of wealth. Some have been paid for in full in the same way some investors hold gold bullion in vaults as a hedge against inflation.”6 This certainly helps to explain the existence of the ghost towns and why China’s leaders are not in a state of panic over this situation. When we examine the trillions of dollars American investors China: Emergence of a Global Superpower 473 lost in the Tech bubble collapse of 2000 and the massive wealth destruction of the 2008 meltdown, what China’s real estate investors have done since 2008 represents a better strategy in the long run. The cooling off measures Beijing employed in the spring of 2010 (which were mainly confined to Beijing and Shanghai) included the following: (1) a stipulation for larger down payments (2) residency requirements for home purchases (3) limits of the number of units families could purchase and (4) tougher qualifications for mortgages. The goal was to tame inflation and to stop the rapid rise in the price of housing. According to the China Index Academy (an independent real estate firm) by November 2011, home prices had declined for three consecutive months. By February 2012, the average new-home prices had fallen for six consecutive months. Analysts were predicting that home prices would fall between 10 percent and 20 percent on average in China, which would allow for a soft landing rather that a hard landing, an outcome the government was attempting to engineer. People who bought at the top of the bubble (similar to the American experience in 2006-2008) were furious to see the rapid decline in prices and the loss of equity in their homes. In evaluating 2011, EconoMonitor.com informed its readers that “The first signs of a downturn emerged in August, when China’s top 10 property developers reported unsold inventories totaling RMB 318 billion (US $50 billion) up 46 percent from the previous year…developers were coming under increasing pressure to liquidate those inventories for cash.” Some analysts expect that China’s growth rate will fall to 4 to 5 percent by 2014, taking into consideration that there is still a slow recovery in China’s main export markets in the U.S., the European Union and Japan. An economic slowdown in China (especially if it is significant) would generate huge repercussions throughout the global economy, having a major impact on America and the Euro- pean Economic Community. A major slowdown in China would also have a significant impact on commodity prices. If the country suf- fers a hard landing, the global commodity bubble will suffer a hard 474 Global Economic Boom & Bust Cycles landing as well, at least in the short term. Millions of middle class families have their savings tied up in real estate, especially their primary residence. A drastic bubble collapse would have a devastating impact on the entire nation. According to James Richards, author of Currency Wars: The Making Of The Next Global Crisis, “China's economy could slow to a 3.5% growth rate.” Compared to 9 to 10% growth rates over the past three decades, the deceleration to 3.5% would represent a crisis not only for the global economy but would bring dire consequences to its internal economy. According to the World Bank, China’s growth rate was 9.1 percent in 2011 and is expected to slow to 8.2 percent in 2012. A sudden descent into the 4% territory would be a very significant economic development. Moving forward in 2012, China will need to focus more on internal domestic consumption for continued growth and prosperity for its citizens. China consumes too little, while the U.S. consumes too much. Economic policies for 2012 will push for more domestic consumption and investment. To increase consumption, the government will consider tax breaks, rebates and raising the minimum wage to generate more household disposable income. If China hopes to avoid being derailed by the next global meltdown or its own bust crisis in real estate, it will have to focus less on an export-led economy and more, much more, on a domestic economy managed for greater consumption and internal development. An overly skewed export- led economy is not a sustainable model. I think the Chinese economic planners and architects understand this but they are struggling hard to bring balance to a system that is required to support the needs of over one billion people. Indeed, it’s a tough balancing act. This may explain in part why the communist urban planners allowed the building of so many cities, malls and condo projects which were allowed to sit vacant for many years: the long-term strategy may be to simply build all of this stuff while they have the economic resources to do so, and at some point develop an economic model that makes it affordable for millions of people to occupy the ghost cities and other developments. China: Emergence of a Global Superpower 475

At present (2012) most people in China simply can’t afford these properties and there is very little demand. With an average yearly income of roughly $3,500, most people in China can’t afford to pay the asking prices for these properties: prices are too high - $70,000 to $100,000 for certain condo units. Plus, there is no long-term financing available similar to the 30-year mortgage plans in America. Perhaps, long-term mortgage plans will be part of their solution for the mass occupation of these vacant properties. I don’t think anybody knows if anything like this can work, however, if there is a chance for success, the Chinese may find a way. As of the first quarter of 2012, the bursting of China’s real estate bubble appeared to be contained. Another massive stimulus package will likely be implemented in order to deal with the decline in property values, however, let us hope that it will not be a repeat of what happened in Japan during its bust period. Beijing is planning to build 36 million subsidized flats by 2015: this huge development plan is designed to provide affordable housing for low-income earners, while also maintaining some level of investment-led growth in future periods. According to the IMF World Economic Outlook report for 2012, China is expected to achieve a soft-landing in regards to its real estate bubble. The 12th five-year plan that covers 2011 to 2015 placed great emphasis on moving the nation towards greater domestic consumption and away from a strictly export-led economy. During the first quarter of 2012 China’s retail sales grew a whopping 14.8% (the first quarter growth rate in the U.S. was 0.8%). This was impressive and provides a clear indication that the country is moving in the right direction in creating a more sustainable economic model. So what we were starting to witness in early 2012 was a huge increase in domestic consumption. China’s domestic consumer spending began to account for a much greater percentage of total GDP growth. If this is a sustainable trend, then the impact of the bursting of the real estate bubble may be mitigated by stronger countervailing consumer forces in the economy. 476 Global Economic Boom & Bust Cycles

SCIENCE AND TECHNOLOGY China is no stranger to science and technology. However, in the decades after World War II, it fell behind the West in many critical areas of scientific development. China built its first atomic bomb in the 1960s, so it became a nuclear power a decade or so after the birth of the nuclear age. And like the early 1980s Japanese Fifth Genera- tion Project, China is now working to be at the forefront of science and technology in the 21st century. In the 20th century, China sent hundreds of thousands of students to top universities in over 113 countries worldwide. Now they are going home to participate fully in the Information Age Revolution in China: biologists and geneti- cists, architects, technicians, computer programmers, engineers, space scientists and a host of other disciplines. In 2003, over 700,000 engineers graduated from Chinese universities. Additionally, a 2003 China initiative was to launch research in 12 key technologies: super-scale integrated circuits, computer software, information security systems, E-finance, functional gene chips and biochips, electric automobiles, magnetic levitation trains, new medicines, water pollution control, modernizing traditional Chinese medicines, space science and others. The country is working diligently to be a leader in semiconductor technology and high-speed trains. China is aiming high to be a scientific superpower in the 21st century. Over the past five to seven years, many Western-educated Chinese scientists have returned to China to set up research insti- tutes and companies. They are helping to establish and transform China into this expressed vision of a scientific superpower. China has invested billions of dollars into this endeavor on practically all fronts. China is making scientific innovation one of its top priorities in the 21st century. This is happening on many fronts in both the business-to-consumer and business-to-business sectors. Researchers tell us that much of the consumer product innovation stays in China, largely because the market is large enough and the new innovations do not have to be adapted for a global audience. Since 2005, there has been a doubling of patents awarded to Chinese inventors. Ac- China: Emergence of a Global Superpower 477 cording to China Internet Network Information Center (CNNIC) internet use in China is soaring. The number of users has increased from 94 million in 2004 to 513.1 million in 2011. Also, in 2011, the number of people surfing the web using mobile phones was 356 million. Of course, for a nation that’s devoted to education and science and technology, internet use will continue to be an explosive development. China’s 12th five-year plan builds on the extraordinary economic journey the nation has been on for several decades. The new plan recognizes the need for greater innovation, building a more balanced economy that is not overly focused on exports and external investments, and the need for environmental protection. The new “Five- Year Plan” launched in 2011, placed a lot of emphasis on indig- enous innovation. In the life sciences and biotech industries, China has in development 22 Silicon Valley-like research and innovation centers throughout the country. China is making great progress in the pharmaceutical arena and as of early 2012 has 20 chemical com- pounds (developed and discovered in China) undergoing clinical trials. THE GREEN TECHNOLOGY COMMITMENT A good indication that the country in headed in the right direction in regards to energy and the environment is China’s commitment to green energy: this nation has a long-term and evolutionary strategy. China’s investment in green technology will accelerate in 2012 as the nation takes advantage of its manufacturing capabilities and continued financial support for the industries involved in clean energy technologies. The year 2011 was a good year for China’s green-tech companies: 28 of the world’s clean-tech IPOs came out of China. China is rapidly becoming the world’s largest market for renewable energy technology, particularly in the case of solar energy where Chinese companies are improving the efficiencies of the solar panels. This is a nation that has the power and force to initiate the broad- base transformation from the Age of Oil to the Green Technology 478 Global Economic Boom & Bust Cycles

Era. They have every reason to use all of this era’s new technologies to make that transformation. Other nations will follow their lead. The Asian region, along with Germany, can and should lead the “Green Energy Revolution” of the 21st century. The United States clearly has the capabilities but does not have the complete political will to firmly commit to the economic demands of the energy transformation of the 21st century (this may change with the re-election of President Obama in the November 2012 elections). According to the Pew report of 2010 citing the development and use of renewable energy: Germany now obtains more energy from renewable sources than it does from nuclear power, coal or natural gas. As a major player in the wind and solar energy fields, China will very likely work closely with Germany on many of its green energy projects. In addition, the Chinese government has a goal of putting five million hybrid and battery electric vehicles on the road by 2020. China is aiming to become a major player in the desalination industry, not only because it needs water for its 1.3 billion population, but also because it wants to position itself as a global leading developer in this field. China wants to be a strategic player in supplying the world with fresh water. Beijing has proven that it is willing to lose money in order to perfect the technology and make it cost effective. The Beijiang Power and Desalination Plant, a $4 billion state-owned operation, produces desalted water that costs twice as much to produce than it sells for. However, China has become the planet’s biggest market for desalted water, and according to their current five year plan, the goal is to quadruple production by 2020. Thus, here again is another deep commitment, similar to the space program, to become a major player at all cost. The Chinese government is encouraging domestic companies to build desalination equipment and/or patent desalting technologies, such as the membranes technology (a process of filtering salt from seawater) that is prominent in the desalination process. The establishment of a national desalination industry is quickly moving to center stage. China also China: Emergence of a Global Superpower 479 hopes to expand on the membrane technology to be applied to sewage treatment, pollution control and possibly other areas of development. In 2012, we learned that Chinese companies had pioneered a new technology to transform sewage and wastewater into a viable energy source for heating and cooling buildings. Based on the similar energy production of traditional geothermal systems that cap- tures heat from the earth, NovaThermal Energy LLC, a company that is introducing the patented technology from China to America, provides a sewage-geothermal process that generates heat. The technology was developed by Jin Da Di Energy Engineering and Tech- nology Co. Ltd. in Tianjin, and NovaThermal was recruited to sell the process outside of China. News reports informed us that: “In China…several large buildings have successfully employed the technology for heating and air conditioning. These sites include a hotel and a 1 million-square-foot train station in Beijing, and a 450,000-square-foot high-rise apartment building in Tianjin, China’s third-largest city.”7 In April 2012, a pilot project was introduced at Philadelphia’s Southeast Wastewater Treatment Plant which began the development of this process in America. I consider this one of the most practical and economically feasible technologies in existence, utilizing the continuous flow of sewage and wastewater to generate energy. CHINA AND SPACE EXPLORATION While the United States is winding down its space program, China is ramping up its agenda for space exploration for generations to come. China is very aggressive in the area of space science and has a very ambitious program. Their space program was started in the 1980s and restarted in 1992 and has a budget of roughly $2 billion per year (by comparison, the U.S. space agency’s budget was about $15 billion per year). In 2003, China was the third nation on earth to put a man in orbit (Yang Li-wei) around the earth. In 2007, China launched a lunar probe that orbited the moon and took pictures. In 2008, Chinese astronaut Zhai Zhi-gang completed a 13- minute space walk outside the Shenzhou 7 spacecraft. The Shenzhou spacecraft (“Divine Vessel”) is an improved version of the Russian 480 Global Economic Boom & Bust Cycles

Soyuz capsule, the so-called workhorse of the Soviet program. In September 2011, China launched the Tiangong 1 space lab into orbit around the earth and that was followed by an unmanned robotic Shenzhou 8 spacecraft launch in November 2011. The November flight was to test the docking procedures with the space lab. On June 16, 2012 China launched its Shenzhou 9 spacecraft to rendezvous with the country’s prototype space station module Tiangong 1 (Heavenly Palace). In addition, as part of this 13-day mission, China placed its first woman astronaut into orbit, 33-year- old fighter pilot Liu Yang. By 2020, the nation plans to have a 60- ton space station in full operation. China’s new five-year plan calls for launching a space lab and collecting samples from the moon by 2016. Their plan is to build more powerful manned spaceships and space freighters and to land its astronauts on the moon. China has a long-range consistent and steadily progressive space program that it will keep moving forward in a systematic pattern, building on its technological skills and capacities. They have a budget, a solid plan to execute step by step and they are following it with a disciplined focus to achieve some major milestones in the 21st century and beyond. Despite the fact that the space program is under the control and direction of the People’s Liberation Army, China’s Cabinet (the State Council) issued the following statement in a white paper stating Beijing’s position regarding space exploration: “China always adheres to the use of outer space for peaceful purposes, and opposes weaponization or any arms race in outer space.” In order to improve its communications’ capacity, China is planning to develop a 35 satellite global navigation system (the Beidou Navigation Satellite System) by 2020. Ten satellites for this system have already been launched and six more will be launched in 2012. In addition, China’s push to land a man on the moon has an economic mission as well: the extractable mineral wealth on the moon, particularly helium-3, an energy source that can be used on earth. CHINA AND EDUCATION My comments on education in China are very similar to what I China: Emergence of a Global Superpower 481 stated in regards to education in Japan: these Asian cultures have total reverence for the importance of education. Confucianism is the foundation of Chinese culture and it has the highest regard for education and study. It permeates throughout the culture that genuine success in life requires that one be educated and knowledgeable. There is an insatiable appetite for education in China and students take on the task of learning as a sacred duty to self, family and country and as a way of life. China’s leaders know that a major key to the success of their nation for technological competence in the 21st century is a dynamic educational system. In the journey of the 21st century and beyond, brain intensive industries will continue to dominate the economic scene, and the Chinese are working 24/7 to insure their place in this future by maintaining high standards in their educational system. In today’s China, the government funds all primary and secondary education. Educators in China are held in high esteem, as Ann Lee informs us, “The Chinese often call teachers Honorable Masters and accord them respect and priority in life.” Because of these very strong cultural traits and if China doesn’t fall victim to a consumption mentality, it is fair to say that this nation could lead the world in the areas of science and technology and educational pursuits in the next generation. And if the highest philosophical aspects of Confucianism are maintained, particularly in morality, nonviolence, and a lifetime of self improvement, then China’s ascent to global power can bring something very important to this current global civilization. Ann Lee states that the ethical, social, philosophical and political beliefs of Confucius are embedded in the DNA of most Chinese people, and ultimately, as China pursues its destiny in the 21st century and beyond, this may bring a new prospective and mission to world civilization. The Chinese government is backing the education of its people on all fronts. Special government programs cover the costs and expenses for Chinese students to study and earn PhDs in other developed nations. During the 2009-2010 academic year, nearly 128,000 Chinese students were enrolled in American universities.8 China will 482 Global Economic Boom & Bust Cycles continue to systematically apply the imperative of educational excellence for the survival and prosperity of the nation and its people. This imperative is happening in individual families as well, as enormous sacrifices are made by parents to insure that their children receive the best possible education available in China or in other parts of the world. From pre-school to the university, the Chinese individual is disciplined and motivated to develop his or her full potential. China has now surpassed Japan in producing more engineers, scientists, and mathematicians than any other nation on the planet. As a visiting professor at Peking University (Beida) Ann Lee gives us some idea of how hard Chinese students are willing to work in order to get their degrees: “The campus classrooms were occupied day and night, seven days a week by lectures. Both undergraduate and graduate students worked around the clock. Study breaks usually consisted of jogging around campus with a date or fellow classmates late at night. I never heard of a single frat party taking place anywhere on campus.”9 The last several decades has proven to the world that China’s leaders can run, organize and systematically educate a nation of over one billion people, which is a monumental achievement. But China has a long road to travel to become one of the most successfully organized nations in modern history. With its deep reverence for education, solid commitment to help educate its people, and high standards for civilization, China has a chance in fulfilling its mission in the 21st century and beyond. Finally, it's worth noting that the top concerns of many people in China are inflation, the price of a house, unemployment, health care, and education. CHINA AND AFRICA The continent of Africa is a key component of China’s strategy in the 21st century. As a developing nation, China is very much aware of the challenges that African nations face in the 21st century. After over a decade of China’s economic involvement on the continent, African leaders, business and government planners have confirmed China: Emergence of a Global Superpower 483 that China has brought greater development and prosperity to the continent than at any time since the beginning of the period of political liberation in the late 1950s and 1960s. These leaders attest that the Chinese have brought significant financing arrangements and much needed infrastructure development that has helped the African people to begin to rise up out of poverty and underdevelopment. Granted, that this is not a perfect relationship, but the Africans are saying that China has become a strong and reliable partner in the overall development of the continent. After decades of failed political systems and inept political leaders, disease and famine, and a host of other natural and man-made calamities, this very important region of the world may finally begin to move forward to a brighter future. And it is China that is playing a major economic role in this process. In December of 2011, The Economist published an issue entitled “Africa rising.” We are informed in this publication’s analysis that: “From Ghana in the west to Mozambique in the south, Africa’s economies are consistently growing faster than those of almost any other region of the world. At least a dozen have expanded by more than 6% a year for six or more years. Ethiopia will grow by 7.5% this year, without a drop of oil to export. ..Severe income disparities persist through much of the continent; but a genuine middle class is emerging.”10 A large part of mainland China is still rural and poor. About half of the population still lives in rural areas and account for about 10% of the GDP. The people in the coastal cities and Beijing are experiencing the boom as China continues its long march to become a developed nation. This is one of the primary reasons why the Chi- nese can work more effectively with nations throughout the continent of Africa and other developing regions: China is a developing nation experiencing the same problems and issues as other developing nations. If they remain open-minded and their strategy is long- term, China can be very beneficial to the long-term progress of the African continent and the African people. Africa is trying desperately to get beyond decades of proxy wars (the 45-year Cold War between the United States and the Soviet Union that in part used the continent as a battlefield) puppet leaders and mindless dictators, the 484 Global Economic Boom & Bust Cycles

AID’s epidemic, hunger and famine and a period of essentially chaos and under-development. African diplomats and business leaders attest that overall China has offered more opportunities and development than nations from the West. They state that China comes with expertise, technology and finance. The building of infrastructure is paramount in these early stages of economic development and China is delivering the goods. The 53 nations on the continent of Africa have found, for the most part, that working with China has been a successful joint venture. In 10 years time, China has made a difference. By the end of 2008, the trade between China and Africa had soared to over $107 billion on the continent. Africa is engaged with China on a fundamentally practical level: basic economic development. African leaders state that there are no endless discussions on what could be done by way of development: the Chinese just get busy doing the work and implementing the projects. China is putting a significant portion of its reserves to work in building new markets and relationships in the Third World. With a trade surplus and reserves, as well as its focus to foster and help build new markets in developing nations, it appears that China is attempting to position itself to survive the next economic slowdown and collapse. And that is a smart thing to do while the excess wealth is still flowing. Africans must remain aware of the economic dynamics of this relationship and work to push the process up the value chain: for those nations with vast natural resources, it is time to have major manufacturing facilities and high-tech developments take place on the continent. The so-called New African Policy should include a strategy and plan for nations in Africa to become fully developed high-tech societies in the 21st century. No doubt, China’s thirst for commodities is one key factor driving this relationship. Charles Goyette, author of The Dollar Melt- down, shares these observations on the China/Africa commodity connection: “If the entire globe is China’s target of opportunity, Africa is the bull’s-eye. Angola is China’s largest oil supplier, while it is active in the pursuit of oil China: Emergence of a Global Superpower 485

and other commodities such as coal, copper, and cobalt there and in Sudan, Nigeria, Zambia, and the Congo…The Chinese look for and get projects that provide resources and earn a return.”11 But there are also signs that China is looking to establish long- term relationships on the continent of Africa. African analysts are pointing to a long-term strategy of a massive marketplace for goods and services, as well as strong business and economic relationships for generations to come. According to many Africans, China is their number one trading partner! China is encouraging and helping Afri- can nations to establish industrial parks, new schools and the training of African professionals. There are strong indications and very practical reasons why China is looking long-term at African development: in a decade there will be an additional one billion Africans on the continent, bringing the total to nearly two billion people. Af- rica has a rising middle class and a young growing population: a continent rising out of decades of under-development. At a two-day China-Africa summit in late 2009, China’s premier, Wen Jiabao, promised to provide strong economic development support for African nations. In his presentation he stated that China would help Africa build up its financing capacity and also build 100 new clean energy projects. Some of the new energy projects would cover solar energy, biogas and small hydro plants. He stated that “We will provide $10 billion in concessional loans to African countries.” The premier reminded the gathering that China’s engage- ment with the continent of Africa dates back over five decades and included helping several countries struggle against the system of colonialism. Wen stated: “…China’s support to Africa’s development is concrete and real…Whatever change that may take place in the world, our friendship with African people will not change…Our commitment to deepening mutually beneficial cooperation…will not change, and our policy of supporting Africa’s economic and social development will not change.”12 SUMMARY For the past five centuries of global history, the West (primarily Europe and America) has been the universal measure of civilization 486 Global Economic Boom & Bust Cycles in the world. The entire world has been habituated to the global power and presence of the West since the 15th Century A.D. In the 21st century this position will be challenged. Due to economic and political realities, the West is slowly losing its dominant influence and hegemonic position in the world. Sometime before the end of the 21st century, the new hegemonic power in the world will not be the United States but will simply be a collective of developing and developed nations. Over 5.7 billion people (84% of the world’s population) live in emerging markets, and China is the strongest power in this arena. In 2012, the leading developed economies in the world; the Eu- ropean Union, the United States and Japan are on the decline. The big developing economies of China, Brazil and India are supporting high growth rates and are rising. To a great extent the growth of the developing economies depend on the health and stability of the big developed economies. However, in yet another sign that the world economy is changing, the emerging market economies of China, Brazil, India, Russia and South Africa (the BRICS nations) are demanding greater voting power in the IMF in exchange for their monetary support for that institution. This issue of a stronger voice in the IMF was presented as a bargaining tool as the IMF was seeking $600 billion from nations around the world to help build up its economic reserves (defenses) in the event of a breakout of economic turmoil in Europe. The BRICS nations have signaled that they are willing to help, however, since they are negotiating for a stronger stake in the global economy, it is a clear signal the dynamics of political and economic power in the world is shifting. It simply will not be business as usual. The BRICS nations as well as the G20 are rapidly becoming the more dominate organizations in global affairs. By 2011, China was growing seven times faster than the United States and according to the IMF, by 2016; the U.S. will no longer be the number one economic power in the world. By any measures, China is a fast growing nation and will continue on this trajectory for some time in the foreseeable future. There are major concerns by various nations around the world, particularly in the Asian sub-con- China: Emergence of a Global Superpower 487 tinent and the United States, that China’s growing power and influence in global affairs may overshadow the entrench hegemony and power of the West. However, the reality is that China has arrived, and this will by necessity, bring tectonic changes to the global economic, political and scientific framework. In time, China will become a knowledge-based economy fully networked as a developed nation. The cultural imperatives and its commitment to education will keep this nation on course to fulfill its mission as a leading scientific power before the mid-21st century. Of course, the economic emergence of China, as well as India (two nations with enormous populations) has started a race to acquire the remaining finite natural resources on this planet that support and make possible the foundation of a modern civilization. This struggle for the remaining fossil fuels and mineral resources will define the future relationships of the multi-polar world of the 21st century. My hope and scientific desire is that China will fully embrace the green technology revolution and begin the energy transition and transformation from the oil age to the hydrogen age within the not-too-distant future. While China is building out its new cities and infrastructure, it can begin to incorporate the new non-polluting technologies that will define the world of tomorrow. As of 2012, 80 percent of China’s energy came from coal producing power plants. To continue to add more coal producing power plants and nuclear power reactors to its power grids is not the best scientific path to follow. In addition, putting 18 million new combustion engine automobiles on the road each year also represents a disastrous policy, not only for China, but also the entire world. However, China’s leaders are aware of this issue and have struggled to address the economic challenge of peak oil. An April 2012 article highlights the commitment this nation has regarding this issue: “Chinese leaders saw electric cars as a way to curb demand for imported oil, which they regard as a strategic danger, and to help transform China from a low-cost manufacturer into a creator of profitable technology.”13 Beijing completely understands that as millions of Chinese purchase automobiles each year, that the best long-term strategy is that these vehicles be based and built on the advanced technologies of 488 Global Economic Boom & Bust Cycles this era: all electric vehicles, fuel cell technology, etc. Unlike the United States which is heavily entrenched in the oil-based era and deeply addicted to oil and all of its manifestations, China has the opportunity to spearhead a revolution in the various transportation industries and abruptly move our world into the next era. The Japa- nese revolution in the production of hybrid vehicles, fuel cell technology, natural gas automobiles and all electric vehicles has led the way. At one point, Toyota became the number one automaker in the world because its leaders understood the mission of our times. In 2012, the world has to finally begin this mission to stop the production of combustion engine automobiles. In China, the bare minimum requirement for the production of new automobiles should be hybrid vehicles. There is no unlimited source of global oil to sustain a massive influx of new combustion engine vehicle production no matter how efficient they are built: according to many oil analysts, we hit peak oil in 2006 and there is no turning back! Fortu- nately for the world, China has not chosen to ignore this reality! Finally, as a nation that is absorbing (at a rapid pace) a tremendous influx of consumer items from the West, a culture of consumerism may begin to distort some of the cherished values of this vibrant society. A news report surfaced in early April 2012 describing the actions of a Chinese teenager who sold one of his kidneys in order to buy an iPhone and an iPad. If greater consumerism leads to this type of extreme behavior, then many of China’s people, especially the older generation that grew up with very little creature com- forts and technology, will begin to question whether all these technological wonders are corrupting the moral fiber of their young people. Also, as China begins to immerse itself in all of the candies, soda water and junk food of the West, in a few short years various health problems associated with these non-nutritional food sources will begin to surface in the form of new consumption diseases. And although this is probably not an imported bad habit from the West, I came across a statistic that stated “the Chinese consume 50,000 cigarettes every second.” Now, if that is the case, then the leaders of China need to start a campaign disclosing all of the evils of smoking China: Emergence of a Global Superpower 489 cigarettes. In the United States we learned the hard way after decades of denial, that there is no future in smoking, only illness and death! NOTES (1) Clyde Prestowitz, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East, Basic Books, 2005, pp. 62-68. (2) Kam Wing Chan, “HuKou Reform: Notes and Commentary,” The House- hold Registration System and Migrant Labor in China, June 2010, p. 361. (3) Patrick Chovanec, “China's Real Estate Bubble May Have Just Popped,” ForeignAffairs.com, December 18, 2011, p. 2. (4) IBID. p. 2. (5) IBID. p. 1. (6) Ann Lee, What the U.S. Can Learn from China, Berrett-Koehler Publishers, Inc., 2012, pp.19-20. (7) Andrew Maykuth, “Sewage now a hot geothermal idea,” The Sacramento Bee, April 22, 2012, pp. D1-D2. (8) IBID. p.31. (9) IBID. p. 35. (10) Briefing Africa’s hopeful economies, “The sun shines bright,” The Econo- mist, December 3, 2011, pp. 82-84. (11) Charles Goyette, The Dollar Meltdown, Penguin Group, 2009, p. 180. (12) Tarek El-Tablawy, “Chinese premier pledges funds, aid to Africa,” AP As- sociated Press, November 8, 2009, p. 1. (13) Joe McDonald, “Chinese electric car push stalls: Technology Doesn’t match Beijing’s Hopes,” The Sacramento Bee, April 29, 2012, pp. D1 and D4. FUTURE SHOCK CHAPTER TEN THE COMING OIL SHOCK: PEAK OIL

“It’s basic economics and simple logic: as long as growth in oil supplies isn’t keeping pace with growing demand, oil prices will continue rising.” Stephen Leeb “Human beings survived for thousands and thousands of years without oil and without natural gas…We have never known humanity or life on this planet to survive without clean water.” Vermont Gov. Peter Shumlin

ince the birth of the industrial revolution everything eco- Snomic has been conditioned by oil. Oil is the bloodstream of the world economy; it keeps things moving, powering our modes of transportation, heating our homes, putting food on our tables, and a multitude of other indispensable products and services. But one thing we must not forget, and sometimes it fades in the memory of modern civilization, is that oil is a non-renewable, finite resource that is quickly being depleted at an unknown exponential rate, leaving experts and economists guessing about the remaining reserves. Our world is addicted to oil - it is key to all we do, to every facet of our economy - and a policy of keeping the world dependent on oil for as long as possible, is highly dangerous and shortsighted. In fact, oil needs to be surpassed by a new energy vector or vectors, and the sooner we get that realization by decree and mandate, the better it will be for the entire planet. Oil is one of the main culprits causing global warming and every year one billion gallons of oil is spilled into the oceans causing unknown damage to marine life and our eco-system. Up to 70% of a 42-gallon barrel of oil is refined into transportation fuels: gasoline (19.4 gallons) diesel fuel, jet fuel, rail- road fuel and maritime fuel. The rest is used to make over 6,000 products that permeate almost every facet of our earthy existence.

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Nearly 98% of all transportation energy comes from oil. So oil will not be an easily replaceable commodity. In 2012, it is clear that we have moved from an era of cheap abundant energy to an era of hard to get expensive energy: cheap oil literally made the world go around. The actual size of this problem is not well understood, especially by politicians, mainstream media and a wide spectrum of corporate executives that continue to build things that accommodate a future of abundant oil. With just 5 percent of the world’s population, for decades the U.S. consumed 25 percent of the world’s oil production. However, for four decades, the U.S. has lacked a cohesive energy policy. Ev- ery president since Nixon has called for energy independence and it has not been done; it’s a massive problem no politician wants to tackle unless forced into a historic situation where something has to be done. The 1970s was the wake up call, however, the U.S. continued on a path of importing oil and maintaining a foreign policy of protecting energy interests abroad. After eight decades in Middle Eastern Affairs, the U.S. has become a permanent fixture in the region with foreign policy centered on the production and protection of American oil interests. Oil addiction has dominated our way of life! With a consumption pattern of over 20 million barrels per day and rising, this is unsustainable and will ultimately lead to a devastating collapse. A BRIEF HISTORY OF OIL Over the past 150 to 200 years the industrial revolution promoted the widespread use of oil. Since 1860, Black Gold (oil) has dominated the economic life of nations throughout the world, and after decades of usage, has taken on an omnipresent nature that’s making it essential to the functioning of modern societies. Geolo- gists and others estimate that we have taken a trillion barrels of black gold from the earth and that there may be another trillion left. How- ever, embedded in that analysis is the fact that humanity has extracted the majority of the easy to find conventional oil that gushes out of the ground (under pressure) once it’s released. If in fact there The Coming Oil Shock: Peak Oil 493 is another trillion barrels of oil in the earth, much of it is unconventional sources and very difficult and expensive to produce. Of course we have to keep in mind that the use of oil is destroying our environment, the ozone and causing massive pollution throughout the planet. Thus, for various reasons, the 150-year party of cheap oil has come to an end: The Golden Age of Oil is over; an age that created a standard of living unsurpassed in any previous age. With the start of the 20th century, America’s thirst for oil was driven by new inventions, assembly line productions in cars, household products and a host of other things. For nearly 100 years the U.S. was on top of the oil pyramid. History tells us that the last major U.S. discoveries of oil were made in 1930, and by 1970, the U.S. had hit peak oil. Prior to the phenomenon of peak oil in the U.S., all of the big promising areas in the lower 48 states have been explored. Up until the 1950s the U.S. was leading the world in oil production and was essentially the Saudi Arabia of global oil. Dur- ing that period, two out of every three barrels of oil produced in the world came from the U.S. So until 1970, the U.S. produced more than two-thirds of the oil it needed: America was self-sufficient. It’s also interesting to note that in the early 1970s, half of the entire world was not a major user of oil. In September 1960, the Organization of Petroleum Exporting Countries (OPEC) was started by Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. This was a significant event and the development of a major trading block, which in time, would amass enormous power in global economics and politics. The initial five OPEC nations were later joined by Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria and Ecuador. One of the most devastating effects of the Vietnam War during the 1960s was the enormous impact it would ultimately have on the American dollar and the consequent deficit spending binge. This period set the stage for the turbulent 1970s and the wave of major restructuring in currency markets worldwide, which by extension, would ultimately have an inflationary impact on the pricing of oil. 494 Global Economic Boom & Bust Cycles

American deficit spending during the 1960s led the nation to a point where it became necessary to abandon the gold standard. The gold standard, where currencies were backed by gold, had supported the price of gold at $35 an ounce from 1934 to roughly the first half of 1971. With the Eurodollar and other currency markets flooded with American dollars, the price of gold had to be revised. It became uneconomical and too cheap to maintain gold at that price level. The dramatic drop in America’s gold supplies from $25 billion to $9 billion prior to 1971 laid the foundation for a series of major developments in world international finance and economics. On August 15, 1971, America, under the direction of the Nixon Administration, came off the gold standard in a move to devalue its currency. This lead to the total breakdown of the gold standard in the West and the beginning phase of the collapse of the Bretton Woods agreement negotiated in 1944-45. A new standard was introduced which would be based on a system of free floating exchange rates, where currency relationships are determined by the law of supply and demand. Gold prices were allowed to work their will and they did to the tune of $850 per ounce by the first quarter of 1980. These arrangements did not please everyone in the world community and the repercussions brought about many unpleasant results. OPEC’s initial response to this international maneuver was to raise the price of oil, a practice that continued throughout the 1970s. Thus, the break from the gold standard ultimately triggered the price hikes in the pervasive oil/energy markets. Collapse of the gold standard also ushered in a period of rapid growth in the world’s major currencies and the consequent push towards double digit inflation during the 1970s. The Arab oil embargo of 1973 was in retaliation of Washington’s support of Israel in the Mideast war. Oil production at home could not make up the short fall of imports from the Middle East. This crisis lead to gas lines and oil prices went higher. In 1978, the Ira- nian revolution witnessed another cut in oil imports from the Middle East and another major oil shock. This would be the second oil crisis The Coming Oil Shock: Peak Oil 495 of the 1970s. By 1981 U.S. oil consumption had dropped nearly 15 percent from its 1978 peak. Higher oil prices pushed for oil production developments in Mexico, on the Alaska North Slope and in the North Sea. As more supply came onto the market, this lead to lower demand, and hence, lower prices. By the mid 1980s, oil was selling for $25 a barrel in today’s dollars. OPEC’s market share in the global arena fell from 55 percent to 30 percent. Between 1979 and 1983, demand from the West declined (for Middle Eastern oil) by more than five million barrels per day or more than 10 percent of demand at the time. The final response was the collapse of oil prices in 1986. The American oil industry was devastated as world oil prices fell in the 1980s. Oil producing states such as Texas, Arkansas, Louisiana and Oklahoma fell into semi- depression. In the case of Texas, a domino effect shook industries throughout its economy. During the oil-boom years of the 1970s, many people invested millions of dollars in the Houston market and other major cities throughout the state. When OPEC fell in the early eighties, Texas went spiraling down, bursting bubbles left and right in several of its markets. Investors pulled out of Texas, and the savings and loan, banking and real estate industries began a period of steady decline which was still very much in progress as the world entered the 1990s. There were 200 bank failures in America in 1987 and most of them occurred in the oil depressed states. The 1990s began with a war that was strictly about oil; Iraq seized the oil fields of Kuwait and thus began the first Gulf War. On August 2, 1990, President Saddam Hussein of Iraq ordered his army to invade neighboring Kuwait. The world was thrown into a state of shock and America, as the world’s only mega-superpower, took the leadership role in stopping any further aggression by the Iraqi regime. Middle Eastern oil was at stake; Saudi Arabia, the largest oil producer for the western world and a major economic ally of America, was threatened. America, along with the aid of the United Nations, organized an international blockade and sanctions in a massive effort to isolate Saddam Hussein and his one-million man army. The Iraqi affair escalated into what appeared to be a massive buildup 496 Global Economic Boom & Bust Cycles toward a long-term presence of American troops in the Middle East. With the price of oil changing with every word spoken by Saddam Hussein or President Bush, the entire world was biting its finger- nails hoping for a peaceful settlement. With war cries being heard from all corners of the Middle East, the chance for peace did not look good. Eventually, America and the world fell into a worldwide recession by the escalation of this crisis. The political and economic realities of global oil business empires drove the world into a war during the first quarter of 1991. This brief war was decisively won by the American-led allied coalition which established a new political dominance in the region. The American victory was based on a number of factors, but most significant was the massive $1 trillion in high-technology investments in the defense industry during the 1980s that guaranteed superior air power, and the unprecedented economic, political and military coalition put together by Bush and company to stop the Saddam war machine. The cost of this high-tech war would total over $100 billion with the allies pledging to pay $53.5 billion of the total costs. Thus, the allies financed over half of the war’s expenses; Japan’s pledge alone totaling $13 billion! America literally had to pass the hat to finance this war. The success of Desert Storm strengthened the economic and political relationship between America and Saudi Arabia. It reached the point to where the Saudis had gradually assumed a position, similar to the Japanese, as one of America’s most important economic allies. The match between the world’s largest oil consumer and the world’s largest oil producer was a logical one. By 1992, Saudi Arabia would be supplying America with 24% of its oil imports, purchasing billions of dollars in military hardware and investing billions more in the American economic system. With the collapse of the Soviet Union and the fall of the Berlin Wall, a new world was being created in the 1990s; a world that dramatically increased the consumption of global oil. In addition, China and India were moving forward with greater development programs, building infrastructure and expanding into the Information Age Revo- The Coming Oil Shock: Peak Oil 497 lution. There would be a growing and steady demand for oil and other natural resources, a trend that had to continue given the fact that the entire world was attempting dynamic economic growth programs at the same time. The strain on finite resources was inevitable, and with the start of the 21st century, the economic strain, intense competition and imbalances were starting to unfold. Oil shock has accompanied, or at least been one factor linked to the onset of every U.S. recession over the past 35 years. When oil is above $85 a barrel we are likely to see a recession coming which is what occurred during the oil shock recession of 2007-2008. Oil was one of the triggers that ignited the meltdown. In July of 2008, the price of a barrel of oil soared to $147; the straw that finally broke the camel’s back. Oil and stock market prices had been moving in tandem in the pre-crash period of 2007. In the devastating crash of 2008 both prices fell during the meltdown. In 2012, we were in “oil shock territory” where the economy was choking on high oil prices. The price at the pump had remained structurally high: An oil shock recession was brewing. Oil prices remaining above $90 a barrel was a serious threat. What did that mean? It meant that even a small but strategic event could trigger escalating prices in the short run and create panic and long gas lines in a very short period of time. One such fuse that could ignite the next oil shock is Iran. The U.S. and the world accused Iran of having a nuclear weapons development program which it has denied. In early 2012, the price surge in oil prices started reflecting all of the buying by investors and speculators anticipating conflict in the Middle East. If an actual event occurs, prices will move higher, and in some cases, a lot higher. Analysts began speculating in the media that Israel may attack Iran in late summer or early fall. As Iran reduced its exports to the West, particularly to EU nations, prices moved higher and stayed there. Inflation, the threat of an “Oil Shock Recession,” Middle East tension and Iran, the potential threat of a euro collapse and turmoil in Europe were key concerns of global markets as we headed into the summer of 2012. 498 Global Economic Boom & Bust Cycles

PEAK OIL Peak oil is a point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. M. King Hubbert predicted that the production in U.S. oil fields would hit peak oil in the early 1970s. Oil production rose steadily in the 1950s and 1960s, however in 1970, production began to decline. In December 1970, oil peaked in the U.S. at 10.2 million barrels per day. According to Hubbert, an oil field will peak once half of the oil in that field has been extracted. From that point forward the field would be in a period of steady decline. This production cycle is represented in a bell-shaped curve that illustrates the rise, the peak and the declining period. Hubbert concluded that when all of the low-hanging fruit had been picked (easy conventional oil fields) the peak would have been reached and a period of decline would commence. This analysis is the same for oil fields throughout the world; what happened in America, which had been the leading oil producer in the world until the 1970s, would happen in the rest of the world. Hubbert’s process has been used thousands of times for thousands of different fossil fuel reserves. It is a highly respected procedure in the fossil fuel energy industry and, for the most part, it is considered a reliable analysis. The North Sea oil fields boomed for 30 years producing 15 billion barrels of oil and then peaked in 1999 for the Britain side of the productive oil fields. Since then, output has been on a steady decline. Alaska’s North Slope was a major find in America; however, it peaked in the mid 1980s and is now in decline. The source of the easy cheap oil is on decline. Production of the North Slope of Alaska and the North Sea of Europe were strong production regions 20 years ago but have followed the trajectory of Hubbert’s analysis. Europe peaked in 2000. The mother lode of crude oil remains in the Middle East. Complicating the issue of peak oil is the acquisition of accurate information on global oil fields. There is ample evidence that several key oil producers have been providing misleading information The Coming Oil Shock: Peak Oil 499 concerning the remaining reserves in their oil fields. For instance, OPEC’s reserves are overstated. Analysts have observed inconsistencies in the reports presented by several nations. A report, presented by geologist Dr. Colin Campbell and his colleague Jean Laherrere in 1998, gave reasons for major concerns: “For example, between 1980 and 1989, Saudi Arabia, the country with the largest reserves, reported only nominal changes. Then, in 1990, the country reported that its reserves had grown by nearly 90 billion barrels…A similar mystery enfolds the oil picture in Iraq and Iran. After a period in which its reported reserves had remained more or less constant, Iraq in1988 announced that they had more than doubled, to 100 billion barrels!...And Iran has followed an identical pattern, nearly doubling its estimate of reserves in 1988 after years of stagnation.”1 The reality is that OPEC has less oil than it claims, and we are living in the time of global peak oil when supply is limited and demand is rising. So it is reasonable to say that if the numbers are not accurate, no one really knows how much oil is left, particularly in the Middle East. Similar conclusions have been reached by other analysts trying to determine the amount of oil left in the world. Author and investor Charles Goyette informs us that: “When OPEC began basing production quotas on reserves, most of the member nations began making substantial increases in their reported reserves…In a display of candor, an Iranian oil official has claimed that Iran's official reserves are vastly overstated…In 2006, Petroleum Intelligence Weekly reported that Kuwait had only half its officially stated reserves…Several years ago Mexico found itself having to cut its official stated reserves in half.”2 With an energy resource so critical to the continuance of modern civilization, it’s amazing how the entire world is dancing along under a series of false assumptions and illusions about the true physical quantity of oil reserves. It’s extremely interesting that the entire world is dependent on oil production in the Middle East, which is questionable. Even if we did have accurate data on their oil wells (which I don't believe we do) most of these nations have either hit peak oil or are very close to that point. Stephen and Donna Leeb make a valid point as they write, “OPEC producers themselves are 500 Global Economic Boom & Bust Cycles reaching limits that will exacerbate the world’s oil woes. Increasing oil supplies sufficiently to meet the world’s needs for continued growth will soon be beyond anyone’s abilities.”3 The Middle East is really the last bastion of oil in the world with nearly two-thirds of the world’s proven conventional reserves. And the Saudis have not found a big new field in decades. Experts have taken note of technical reports indicating water coming up in the oil wells in some Saudi Arabian production sites. At the point when water begins to appear in a well, the productive life is over. There is a huge concern that the Middle East may not be able to produce the needed supply in future periods. The scary part about all of this is that nobody really knows. The fact of the matter is no one really knows if Saudi Arabia has peaked. Some analysts believe that Saudi Arabia hit peak oil in 2005 and that production has fallen 1.1 million barrels a day. Others believe that as of 2012, Saudi Arabia has not peaked. According to some analysts, Iran (the world's 4th largest producer) peaked in 1978 and its production has been falling for 38 years. Russia’s oil production has been falling since 1987. Charles Goyette offers this insight: “China, a net oil exporter through the 1970s and 1980s, has been a net importer for more than fifteen years. Indonesia, an OPEC member since 1961, gave up its membership in 2008 because it is no longer a net exporter. Thanks to its North Sea production, Great Britain became a net exporter in 1980. In the last few years it has again become an importing country. Mexico is consuming a greater share of its declining production.”4 This issue of peak oil is still strongly debated between those who believe that we will have another one to two decades of abundant oil versus those who believe in imminent shortage. The optimists point to a United States Geological Survey (USGS) study concluded in 2000 which states that there is at least 50 percent more oil left than what the pessimists predict. The report indicated that vast new reserves still remain to be found.5 However, in 2012, many Eu- ropean countries were paying the equivalent of $8 to $9 per gallon for gasoline and in the United States the price per gallon hovered around $4 for nearly two years (throughout 2011, oil traded above the $100 mark except for a few days). In addition, why are produc- The Coming Oil Shock: Peak Oil 501 ers now pursuing all of the unconventional sources of oil which requires a lot more financial resources to produce? Oil producers have accelerated unconventional oil production: shale, tight and heavy oil, bitumen and oil sands. There is a great deal of this unconventional source of oil in the U.S. and Canada. It costs more to produce this oil and this will continue to add upward pressure on prices. The “tar sand oil” in Alberta, Canada has deposits estimated at 1.6 trillion barrels of oil; an amount that exceeds the world’s remaining reserves of ordinary crude. This oil is a “residue created when conventional oil escaped from its birthplace deep in the earth’s crust and was degraded into tar by groundwater and bacteria.” Ev- ery step of the way to get this oil takes brute force. It’s essentially a mining operation. For each barrel of oil acquired, two tons of tar sand is strip-mined. Gigantic dump trucks the size of small office buildings haul 400 tons of this stuff in single loads to the next phase of the operation where the sand is washed in giant washing machines: “Torrents of warm water and solvent rinse out the tar, or bitumen, leaving wet sand that is dumped in tailing ponds.” The bitumen then has to be cooked in cokers where temperatures of 900 F breaks up the giant tar molecules to turn it back into crude oil. It takes three barrels of water to extract one barrel of bitumen. The Athabasca River is the main source of water used in these operations. The water has to be heated and that requires vast amounts of natural gas. This production process is expensive and is clearly driving up the cost of gasoline at the pump. Estimates are that the tar sands will provide up to 2 million barrels a day by 2014. When we examine deepwater oil drilling, a similar reality emerges in higher costs and difficulty in producing the oil. When things go wrong it gets real messy, especially when uncontrollable oil spills occur. Various types of oil spills have been happening in our world for nearly 70 years and they have all been detrimental to the environment, ecosystems and marine wildlife. The BP Oil Spill that happened on April 20, 2010 gave the world a startling example of waste and destruction. This was considered the worst ecological 502 Global Economic Boom & Bust Cycles disaster in U.S. history. In the Gulf of Mexico, the Deepwater Hori- zon rig suffered a massive explosion: it was a fiery inferno with flames soaring 200 feet into the air. The fire was fueled by a busted well head originating deep in the ocean floor. Of the 126 people on board, eleven died, 17 people were injured and 115 were saved. The world watched in horror as 60,000 barrels of oil per day or 2.5 million gallons of gasoline flowed out of the hole in the ocean floor. For days, they searched for a solution and there was none. Up to 16,000 miles of coastline was affected, including the coasts of Texas, Ala- bama, Florida, Mississippi and Louisiana. The gushing well wasn’t capped until July 2010. President Obama announced, and BP executives agreed, to set aside a $20 billion oil spill response fund for the massive cleanup and spill victims. This was the biggest oil spill in American history; 4.9 million barrels of oil spilled into the Gulf of Mexico. An additional 1.8 million gallons of chemical dispersant was poured into the affected area to deal with the crisis. Needless to say, the chemical dispersant and crude oil had an absolutely devastating impact on the marine life in the area. More than 600 sea turtles were found dead, 4,300 oiled birds were found and more than half of them were dead. Many other endangered species were impacted: whales, manatees and other marine life living in the area. A similar event occurred in Brazil on November 7, 2011. A major Chevron oil spill took place off the coast of Rio de Janeiro. Deep water drilling caused the spill of over 110,000 barrels of crude oil. Brazil fined Chevron $28 million. If there is such an abundance of oil on our planet, why are producers drilling one to two miles down in the ocean for oil and conducting mining operations to strip oil out of tar sands? These are the unconventional last frontiers and are indications that the world has reached peak oil in conventional sources of oil. The rates of decline in conventional oil fields that have passed their production peak are accelerating. What appears to be happening globally is the reality of a world that is quickly running out of cheap abundant oil in the face of extraordinary demand from developing and developed nations. The Coming Oil Shock: Peak Oil 503

In other words, global peak oil has arrived at a point in history when the entire world is trying to build modern high-tech societies. Global discoveries peaked in the 1960s and have been declining ever since. Many geologists, oil analysts, economists and others have given dates for when the world has or will hit peak oil. It’s clearly not a question of if, but when, this fateful event will occur. For many years, I was concerned about oil but not about an imminent collapse: I had bought into the argument of 2030 as being the end of oil. I speculated about the demise of oil without any deep study; now I study the demise. For me the realization is that when the world supply peaks, it will be difficult to meet demand. Uncon- ventional sources such as the Canadian tar sands are costly and extraction is ripping apart the environment. It’s called synthetic oil. The production is expensive and over time will become more expensive. Much of the same argument can be made regarding the environment and expensive costs when we consider deepwater drilling. In addition, the new reality of geopolitical oil markets is continued friction and conflict. We now have a permanent constriction in oil that will keep prices high. Thus, oil prices will rise and stay high due to the rising cost of production and insufficient supply. Some analysts have predicted that global production of oil peaked in 2002, for others the year was 2005 or 2006. Many geologists came to the same conclusion that global peak oil had essentially arrived sometime before the year 2010. The evidence appears to be overwhelming that we hit peak oil in 2006 and that the period between 2010 and 2015 will be the most vulnerable as the world moves towards a supply ceiling in 2015. Thus, in 2012, we were in the red zone. Many analysts and geologists gave 2010 as the year when the “oil squeeze” would set in and peak oil would bring declines and higher oil prices which is what the world was experiencing in the first half of 2012. As we move into the future, “supply constraints will result from irreducible and irreversible geological realities.”6 According to David Greene of Oak Ridge National Laboratory, world production will most likely peak about 2016 and outside the Middle East around 2006. Demand is rising while supply is falling! 504 Global Economic Boom & Bust Cycles

There is no precedent in human history for what will happen when a global civilization runs out of oil or is confronted with a major oil shortage. Increasing demand for oil and continued instability in the Middle East as well as speculators in the futures markets will keep the price of oil high, and by extension, gas high. Gas prices could suddenly skyrocket out of control. I'm now completely convinced that the West is burying its head in the sand on this issue of peak oil. The U.S. uses 25% of the available oil in the world yet this nation is not working on a comprehensive transition plan to deal with a time when there will be no more cheap abundant conventional oil. Even if we were certain that the world would run out of oil by 2050, I would still say that we should be actively pursuing a comprehensive transition plan, pumping trillions of dollars into research and development and infrastructure projects. A sudden collapse in the supply of oil will affect everything; oil is ubiquitous and permeates all aspects of modern civilization. We are beyond addiction to oil; we have made it an absolute necessity and allow it to have an almost divine presence. Experts tell us that it will take decades to comfortably make the technological shift away from oil. A sudden and dramatic break from oil means a lot of unpleasant developments: war, starvation, economic collapse, a huge number of dislocations and quite a few unknowns (X Factors) that would quite literally blow up in our faces. We do not want to gamble and wait to the last minute to do this. The end of cheap oil will force the development of new economic models. Globalization will be scaled back in favor of local- ization. As transportation costs skyrocket, corporations, governments, etc. will begin to produce more in their home markets. Local food production, energy conservation, lower energy usage and looking at what’s sustainable will be the new paradigm. Whole new economic models will be built and conceived on the new use of energy. We will have to learn to live without oil and focus on what’s sustainable and what’s renewable. The Coming Oil Shock: Peak Oil 505

THE TRANSITION PERIOD Politicians will react to an oil crisis but few will initiate forward-thinking solutions and actively start the process of living in a world without oil. The rule of politics is not to raise a problem if you don’t have a solution. So we can’t really expect a grand solution from politicians until we have a massive crisis on our hands. The dire reality is that the world needs a plan for the end of oil. What can we do today to prepare for tomorrow? Entrenched, vested interests are delaying the process: status quo delay tactics. Economists and others tell us that a comprehensive transition program should have been started in the 1970s during the first two major oil shocks. However, for decades, industry and politicians have been reluctant to tackle the problem largely because of the entrenched wealth and politics of oil. In effect, we are waiting until the last minute. But in 2012, the Day of Reckoning has arrived. We live in an exponential world where things are accelerating at a faster pace. Faced with a world in hyper-drive, it’s imperative that this civilization understands its predicament: At this point it really doesn’t matter how much oil is left in the ground; we need to start the transition period immediately. Predicaments have outcomes not solutions. This is why it is extremely important not to wait for some unknown Day of Reckoning to hit us in the face one unsuspecting morning when we wake up and find that the world is confronted with a massive oil crisis. We need to have a full blown comprehensive energy transition plan in complete operation. Our world is on a collision course with finite oil. The fields are going to top out, then trickle and run dry. No one knows for sure when this Day of Reckoning is going to hit. As stated earlier, predictions and estimates are all over the board: 5 years, 10 years, 30 years and right now. Geologists and economists are in deep discussions on when global oil has or will peak. It’s an event that is coming and no one doubts that point. But the question of when is a huge unknown and that’s not a comforting thought. What peak oil means in real terms is that it marks the change from an increasing supply of 506 Global Economic Boom & Bust Cycles cheap oil to a dwindling supply of expensive oil. When we enter this period, we can expect shortages, sudden price hikes, economic disruptions and desperate actions by nations to secure the last sources of oil on the planet. The “junkie syndrome” will be in full operation as oil starved nations struggle for survival. The world is confronted with a major paradigm shift. We need a comprehensive energy policy, something designed to give us real energy reform, but special interests may be blocking the advent of viable solutions to our energy crisis. To comfortably make the transition and build out the infrastructure will take 30 years. Analysts say that a 20-year transition period would avoid any major consequences. A transition period of 10 years will mean some economic consequences. For instance, it will take at least 10 years to switch out our automobiles. If we wait until the last moment for this crisis to unfold, the world will be faced with an utter disaster. According to Alfred Cavallo, an energy consultant in Princeton, New Jersey, “There are many things you can do to ease the transition…And you can have a very nice life on a sustainable system. Of course, not everyone is going to be driving SUVs.”7 One of the first things that should have happened in 2012 was a global agreement among governments and automobile manufacturers to stop the production of combustion engine automobiles. These vehicles are not practical in a world faced with a dwindling supply of expensive oil. In fact, people should stop buying combustion engine automobiles and then they will stop making them. The combustion engine vehicle is rapidly becoming a dinosaur and will eventually follow a path to extinction. Again, the mindset of this current era of leaders is steeped in the addiction of oil. In 2012, why were they still building combustion engine automobiles? President Obama stated in his 2012 State of the Union address that his administration would be pressing forward with clean energy initiatives for America: The Coming Oil Shock: Peak Oil 507

“The differences in this chamber may be too deep right now to pass a comprehensive plan to fight climate change…But there’s no reason why Congress shouldn’t at least set a clean energy standard that creates a market for innovation. So far, you haven’t acted. Well tonight, I will.” Obama has executive authority to get things done without Con- gressional action; he should maximize his use of that authority to implement clean energy programs. If he truly believes in fighting climate change and in building a dynamic renewable energy future for this nation, then he needs to act now and throw everything he can at the problem while he still has the power to do so. The Navy and the Interior Department were authorized to begin the purchase and development of huge renewable energy projects. He called on lawmakers to pass legislation that would create a standard for producing electricity from clean energy sources. Obama called for solar and wind projects to be developed on public lands. These projects would lay the foundation for providing renewable energy power for 3 million homes. Gridlock in Washington prevents the U.S. from establishing a comprehensive energy and environment policy. Early 2012 witnessed a strong uptick in oil speculation that played a role in keeping oil prices high. Speculation contributes about 15% of the price of oil. Political uncertainty is factored into this process, the so-called “Political Premium” (the costs the markets price into a barrel of oil based on uncertainty). In addition to these factors, oil prices stayed high (in 2012) due to global demand, the outlook on the global economy and perceived geopolitical threats to supply, such as the possibility of an attack on Iran. According to Sen. Bernie Sanders (I-VT) “What we need to do is …limit the amount of oil any one company can control on the oil futures market…The function of these speculators is not to use oil but to make profits from speculation, drive prices up and sell.”8 A gallon of gasoline increased 30 cents in one month. Speculators control 80 percent of the energy futures market. In 2011, excessive speculation added about $30 to the price of a barrel of oil. This in turn, drained the U.S. economy of approximately $200 billion in consumer spending in 2011. This is yet another reason why the world 508 Global Economic Boom & Bust Cycles must come to grips with the phenomenon of peak oil; investors have and will continue to make hay out of this crisis as long as there is opportunity to do so. THE OIL JUNKIE SYNDROME It is sheer madness not to pursue a transition program now (2013). In a world where India and China have awakened; the oil equation on the demand side has been permanently altered. In addition, the African continent is starting to pull out of its long period of economic underdevelopment with strong conditions for growth and development. Then there is the rest of the world, and we are all trying to feed daily on this finite oil substance like a junkie craving a daily fix to stay high for a day. But in 24 hours, the same craving has to be satisfied again, and so it goes, day in and day out. In 2012, we were looking at a global habit of nearly 90 million barrels per day and no one really knows how much of this stuff we have left. This civilization is insane to wait until the last day. Like the banks and the mortgage crisis of 2008, nothing gets done until it is too late. It will be crisis management. America is the most addicted to the oil drug; we have built an economy that is 100 percent dependent upon it. It is pervasive and we can’t escape the final verdict of the demise of oil. Since the 1970s oil shock, successive Democratic and Republican administrations have kicked the oil can down the road and are not willing to deal with the hard political realities. However, in 2013, we can’t kick it anymore. We are operating in the red zone, but this problem is not given top priority status. In 2013 and beyond, we need a New Deal on energy. There is this endless cycle of oil and the Middle East, a constant agonizing dependency and quagmire. The entire world is depending on Saudi Arabia and other OPEC countries as the ultimate source, the ultimate dealer and supplier of oil. What if they are wrong about the amount of oil they have left in the ground? Moreover, the U.S. has to maintain a permanent military presence in the region in order to protect its interest in oil. This is economic insanity. The Coming Oil Shock: Peak Oil 509

No action has been taken to stop the oil addiction even as worldwide demand is increasing exponentially. We are speeding towards a brick wall and no one wants to put on the brakes. Or put it another way; we are oil junkies and there is no tomorrow; just give us our fix today! The perfect metaphor for oil is the junkie that constantly needs a fix. After he shoots up he’s fine for a day, but the next day the monkey is riding his back again. There is no end to the craving; he either quits the habit or continues to live the hellish existence of constantly needing a fix everyday of his life in order to stay high. The moment there is no fix, he goes through the discomfort of withdrawal which is a harrowing experience. The entire world is now hooked on oil, a finite resource, like the junkie searching for his next fix for the day; countries all over the world are struggling to secure their share of this black gold, the next daily fix. This is not a sustainable situation, and I would argue that the current world civilization is playing a game no one can win. Like the junkie that has to go through withdrawal, countries all over the world that are deeply addicted will experience painful withdrawal symptoms. As oil junkies, we are driven by the insanity of oil; the addiction and ever-growing demand remains persistent, a daily necessity. Oil is ubiquitous. It permeates almost every aspect of our daily existence, from transportation to an entire galaxy of products and services we use: toothpaste, tires, ink, pipes, shingles, concrete, candles, adhesives, golf balls, Formica, packing tape, lipstick, rope, sham- poo, electrical insulation, crayons, synthetic fabrics, tape recorders, curtains, vitamin capsules, dashboards, putty, percolators, skis, insecticides, fishing lures, perfumes, shoe polish, petroleum jelly, fau- cet washers, food preservatives, antihistamines, cortisone, dyes, house paint, roller skates wheels, guitar strings, ammonia, eyeglasses, ice chests, life jackets, TV cabinets, car battery cases, insect repellent, refrigerants, typewriter ribbons, cold cream, glycerin, plywood ad- hesive, cameras, anesthetics, and many more. There are over 6,000 products made from oil. Food and oil are deeply intertwined. Oil is used in the food production process as muscle power, in the form of 510 Global Economic Boom & Bust Cycles modern day equipment and machinery, replacing man and animal power. It is also used in the development of fertilizers, insecticides and pesticides. There seems to be no escape from oil. We are trapped in this endless craze of supply and demand. When will it end? How will it end and are we prepared for the finale: the end of the Age of Oil? There are over 800 million automobiles (and counting) in the world that need to be fueled daily, and ultimately, people will respond to prices. The complex global supply and demand system will shut down in the face of rapidly rising fuel costs. That’s when the world’s leaders will react and not before before a crisis! A sudden collapse in oil would bring about political, financial and commercial collapse in regions all over the world. With the entire world hooked on oil, it means chaos and disaster. ALTERNATIVE SOLUTIONS A consensus had developed in 2012 suggesting that the U.S. (in making some preparations for the coming crisis) was moving in the direction of developing multiple sources of energy, both renewable and non-renewable. In Chapter Eight, entitled “Impact of the Infor- mation Age Revolution,” I mention several renewable technologies that deserve massive research and development funding, as well as, subsequent infrastructure development. Solar and wind energy, fuel cell technology and the hydrogen economy, superconductivity and nuclear fusion are just some of the areas that are ripe with enormous potential. Now is the time to begin the massive infrastructure developments, not some point in the future! A comprehensive transition period should be designed to prevent a gigantic breakdown in the U.S. and global economy due to a collapse in oil. The U.S. reportedly has over 700 million barrels of oil in its Strategic Petroleum Reserve (SPR). This amount should probably be raised to one to two billion barrels of crude oil, as a safeguard to manage a period of extreme crisis. I also consider that a system of decentralizing electrical power grids is a better long-term solution given the frequency of natural disasters, the potential for energy disasters and other unknown factors. New technologies should make it possible for many The Coming Oil Shock: Peak Oil 511 individual households to get off of centralized power grids. These massive grids are old and dilapidated and need to be replaced by more streamlined decentralized systems. The leading nation in the world for the use of ethanol fuel is Brazil. This nation currently has 14.3 million alternative vehicles on the road that will not be affected by the end of the oil age. Brazil is the first nation on the planet to have the best sustainable biofuel economy, and its sugarcane ethanol is now considered the most successful alternative fuel in the global marketplace. A major key to their success is planning: Brazil began its program of energy independence nearly four decades ago! NATURAL GAS Several leading experts and energy organizations have stated that the U.S. has vast natural gas resources. According to the Energy Information Administration (EIA) the estimated recoverable natural gas resources in the United States is roughly 1,279.5 Trillion cubic feet (Tcf). Natural gas is a fossil fuel comprised mostly of methane and is one of the cleanest burning alternative fuels on the market. It is also a non-renewable source of energy that could clearly support this nation through a comprehensive economic transition period. There are serious challenges in extracting this energy resource (environmentally) however, natural gas is now being billed as the “New Fuel Revolution” in America. This resource is in such quantities that America is exporting natural gas to countries all over the world. Upwards of $37 billion was spent by foreign companies and nations for natural gas during the third quarter of 2011. According to T. Boone Pickens, an American business magnate, financier and energy expert, “Natural gas is the critical puzzle piece that will help us to keep more of the $350 billion to $450 billion we spend on imported oil every year.” Pickens has stated that the nation’s Big Rig trucks can run on natural gas (using a form of compressed natural gas (CNG) or liquefied natural gas (LNG)) for less than $2.00 per gallon while reducing emissions. Many companies are switch- 512 Global Economic Boom & Bust Cycles ing over to LNG to power their diesel engine trucks, forklifts, generators, tractors and more. Some companies are even switching their diesel-fueled oil rigs to LNG energy. Thus, natural gas is used in homes, for commercial business use and can also be used to fuel cars and trucks. According to analysts, by the end of 2011, there were 14.8 million automobiles in the world capable of running on CNG or LNG. Various countries such as Iran, Pakistan, Argentina, India and Brazil have moved into this technological arena. In addition, existing gasoline driven vehicles can be converted to allow the use of LNG as well as retaining the capability of using gasoline. This is a viable option that requires the development of a LNG passenger vehicle infrastructure to accommodate millions of vehicles that will be converted for use with this new energy source. Pickens is also pushing solar energy and wind farms as additional ways for the U.S. to solve its energy problems and save money. In April 2012, the Obama administration began a process of building a working relationship with the producers of natural gas. Washington became more responsive to the full potential of natural gas as one of the ways to break America’s dependency on foreign oil. With the energy and economic realities starting to sink in, the Obama administration set up an interagency task force to coordinate the development of natural gas in the U.S. As part of this new initiative, such contentious issues as water pollution in fracking (hydraulic fracturing) in Wyoming and Pennsylvania, and the use of diesel in fracking and drilling regulations, were eased or relaxed by regulators.9 This drilling technique involves high-pressure injection of water and chemicals into the ground to split rocks apart in order to release natural gas and/or oil. With the boom in production a reality, opening America’s last fossil fuel energy reserves appeared to have strengthened Obama’s energy credentials for the 2012 election. The belief is that natural gas will be one of the new energy vectors prior to replacing oil. Optimists also presented evidence that employment in this sector is expected to grow by 600,000 jobs by the end of the The Coming Oil Shock: Peak Oil 513 decade. Heather Zichal, the top White House aide on energy, said in an interview, “We recognize that there is this important potential here, and we want to make sure we get it right…our thinking has truly evolved, both on the production and utilization side.” In the U.S. the option will most likely be to convert the majority of passenger vehicles to run on natural gas. This will require a national commitment to implement a natural gas infrastructure development throughout America. In May 2012, the governor of Vermont, Gov. Peter Shumlin, signed into law America’s first ban on fracking in drilling for natural gas. Opponents of this procedure cite the risk of contamination of drinking water supplies and other environmental hazards: Ground- water contamination by chemicals seeping into the groundwater is a major fear concerning this process. In his public announcement Gov. Shumlin stated, “I hope other states will follow us…The science on fracking is uncertain at best. Let the other states be the guinea pigs. Let the Green Mountain State preserve its clean water, its lakes, its rivers and its quality of life.”10 NUCLEAR POWER There are 104 nuclear fission reactors in the United States. The Nuclear Regulatory Commission (NRC) voted 4-1 in December 2011 to approve the building of two new nuclear reactors in the U.S. Af- ter over 30 years of a de facto ban on building nuclear energy reactors, the U.S. finally threw in the towel to restart the building of new systems. This was approved after this country and the world has had a full opportunity to view the enormous catastrophe of the Fukushima Dai-ichi meltdown. Allison Fisher, an energy expert for the consumer advocacy group Public Citizen, stated that “It is inexplicable that we’ve chosen this moment in history to expand the use of a failed and dangerous technology.” Considering Germany’s decision to abandon nuclear fission power, it appears that the U.S. may not be thinking clearly. Allison further commented that, “the U.S. is approving new reactors before the full suite of lessons from Japan has been learned and before new safety regulations that were recom- 514 Global Economic Boom & Bust Cycles mended by a task force established after the meltdown crisis at Fukushima have been implemented.” According to Michael Golay, a professor at the USA Massachu- setts Institute of Technology (MIT) the economic argument for gas- fueled power plants is a lot stronger than investing in risky nuclear reactors: “New nuclear plants are more questionable because there are economic factors right now which favor gas-fueled power plants and the fact that the economy is only growing slowly means that nationally the need for new generation is lower than people were expecting in 2007.” In regards to the building of new generation power plants, Golay offers this analysis: “A 1,000-megawatt (Mw) natural gas plant takes a few years to permit and build, and costs up to $1 billion for the most efficient, combined-cycle model. A similar-sized nuclear reactor however could take five to 10 years to develop and build, and cost well in excess of $5 billion.”11 It is also important to understand that uranium (a finite mineral resource) is a key ingredient in the development of the nuclear fission power, and like oil, is a rapidly depleting resource. Nuclear fission power is another relic/dinosaur of the industrial era and like the combustion engine, is on a path to extinction. Why is the U.S. committing five to 10 years and billions of dollars to a failed technology? Golay’s analysis was examined by Mexico and that nation chose to abandon a plan to build 10 new nuclear reactors. In recognizing its abundance of natural gas, Mexico decided to pursue a course of building natural gas power plants.12 However, as part of the pledge to expand nuclear power, the Obama administration offered the Vogtle nuclear project $8.3 billion in federal loan guarantees.13 The only conclusion I could arrive at was that this was the wrong decision especially in the wake of the meltdown in Japan. When major disasters like these occur, we as human beings must learn the valuable lessons from the errors and failures in the technology. It makes no sense to simply ignore and/or sweep aside the event and assume that it will not happen on our shores because we will have better safeguards. The Coming Oil Shock: Peak Oil 515

As Allison Fisher stated, this is “a failed and dangerous technology,” and it needs to be abandoned. The decision to move forward with new nuclear plants is flawed and resources would be better spent on renewable technologies and other options. In Chapter 11 of this publication I stated, world governments simply cannot predict nor protect their populations from the unexpected chaos and destruction of natural disasters. No matter how well-designed and newly constructed (with the latest technologies) nuclear power plants are built; there simply are no fail-safe systems that we can rely on given the unpredictable nature of natural disasters. This civilization has to factor in the explosive destructive power of natural disasters when considering the use and operation of such potentially harmful technology as nuclear fission. The risks of widespread radioactive fallout in a heavily populated region are just too great to keep such technology in operation. The first year-long struggle in Japan to contain the crisis was an eye-opener and should have been an important wake-up call to the entire world civilization to “Abandon Nuclear Fission Technology.” Nuclear power plants are also vulnerable to terrorists’ attacks and there is also the issue of nuclear waste that has to be buried safely in the ground. Nuclear fission is old industrial era technology that should be retired along with the use of oil. When it comes to nuclear power, the focus should be nuclear fusion research. After five decades of research, scientists should be getting closer to a practical solution in nuclear fusion technology. However, even if we are decades away from a working model, this should still remain the central thrust in this energy sector. Nuclear fusion would be a renewable and non-polluting technology. In mid August 2013, nearly 2 1/2 years after the nuclear meltdown of the Fukashima Daiichi power plant (SEE: Chapter Eleven), the Japa- nese Government reported that the Fukushima plant was leaking up to 300 tons of contaminated or radioactive water per day into the Pacific Ocean. Some experts stated that the problem could get worse with another explosion. This was further proof that nuclear fission power is a failed and dangerous technology that needs to be abandoned. 516 Global Economic Boom & Bust Cycles

AFGHANISTAN AND NATURAL RESOURCES In June 2010, a report surfaced that identified Afghanistan as having vast riches in mineral wealth. The value of the minerals were estimated at $1 trillion and as high as $3 trillion. The list of minerals, critical to economic development in the modern world, include huge veins of iron, copper, gold, cobalt and lithium which in recent years is super critical in the production of laptops, BlackBerrys and other high-tech components. The report indicated that Afghanistan could become one of the most important mining centers in the world. General David H. Petraeus, commander of the United States Central Command at the time, stated, “There are a lot of ifs, of course, but I think potentially it’s hugely significant.” Jalil Jumriany, an advisor to the Afghan minister of mines, commented, “This will become the backbone of the Afghan economy.” According to the extensive aerial surveys conducted by American geologists in 2006 and 2007, iron and copper deposits would make Afghanistan a major producer in the world. Other minerals such as niobium (a soft metal used in producing superconducting steel) and rare earth elements have been uncovered. The lithium deposits could turn Afghanistan into the Saudi Arabia of these types of deposits in the world. Currently, Bolivia has the world’s largest known lithium reserves. With a GDP of only $12 billion annually, the Afghan economy would achieve a major boost in productivity once the mining operations are moving forward. Natural resource developments in Afghani- stan represent a new frontier for hard to find minerals that are critical to modern civilization. OIL SHOCK OF 2012 The price of a barrel of oil moved from $75 in October 2011 to more than $100 by February 2012. Due to an oil refinery fire and other external factors in California, motorists in the golden state witnessed gas prices soaring to $5 (and higher) per gallon (for a brief period) during the third quarter of 2012. It didn’t take much to see rapid price hikes and long lines at the pump, especially in southern California. Even though Americans are driving less, this is not The Coming Oil Shock: Peak Oil 517 having much of an impact on prices. With oil inventories at very low levels around the world and with ever increasing higher demand from emerging markets (such as China and India) the pressure of higher prices will remain on this finite resource. And with the pressure on oil prices, gasoline prices will remain at or near $4.00 per gallon in America and $8 to $9 per gallon in various parts of Europe.14 Any sudden shock to the global economic system will have an immediate impact and send gasoline prices soaring. Some of the factors that could erupt and create calamity are as follows: (1) the Embargo on Iran in 2012 created imbalances and had several nations scrambling to replace the oil they are not receiving from Iran. For instance, Japan agreed to cut its crude oil imports from Iran by 20%. With all of its nuclear reactors shut down, Japan by necessity was forced to put pressure on current global oil production, and by extension, prices. (2) A sudden incident in the Strait of Hormuz, the narrow strait and shipping choke point, where the world’s transportation of oil takes place daily. Some 3.2 million barrels per day are transported through this narrow point headed for the West. Major disruptions could result in $200 to $300 per barrel oil. (3) A geopolitical event in other oil critical nations, such as Nigeria, the 14th largest producer in the world, Bahrain, Libya or elsewhere. (4) The European crisis could suddenly spin out of control and erupt into a full-fledge collapse. (5) In 2013 and beyond, the pressure will remain for global production of 90 million barrels (or higher) per day. And that is a tremendous amount of pressure! When oil supplies were taken off the market in the 1970s (twice) the price of oil quadrupled. The Yom Kippur War of 1973 wreaked major havoc on the U.S. economy: long lines at the gas pump, the stock market was knocked flat on its back with average shares loosing half of their value. The Iran-Iraq war of 1979 again quadrupled oil prices. Inflation soared with interest rates and mortgage rates following in tandem. During Saddam Hussein’s invasion of Kuwait in 1990, the price of oil doubled in one month and nearly tripled in three months. The price of oil had been rising to the $100 level in 518 Global Economic Boom & Bust Cycles

2007 and then soared to $147 a barrel in July 2008. A combination of factors came together on this one: Explosive demand by China and a series of wars and conflicts in Iraq, Sudan, Afghanistan and Nigeria quadrupled the price of oil, sending it to the record high of $147 a barrel. A few months later, we had the meltdown of 2008. This was one of the main reasons that caused the meltdown. When the recession settled in, the contracting demand ushered in a rapid decline in the price per barrel: $147 to $34 per barrel. By December 2008, a gallon of gasoline had fallen to $1.66 from a high of $4.11 per gallon. This was another example that recessions are preceded by oil price spikes 90% of the time. In 2012 it was Iran! The report by the International Atomic En- ergy Agency (IAEA) released in late 2011 included evidence that suggested that the Islamic Republic was clandestinely working on a nuclear bomb. Tehran claimed that it was developing atomic energy for peaceful purposes. That started the friction and the sanctions. Israeli saber-rattling and Iran’s defiant posture helped to increase the move to higher oil prices. In addition, Iran warned that it would cut off oil to Britain and France in retaliation for sanctions put in place by the EU and the United States. That threat alone pushed up oil prices. Business as usual in a world that is screaming and belching of problems of unsustainable natural resource depletion and pollution will eventually drown the entire world in unspeakable misery. Michael Ruppert, investigative journalist and author, calls it “the cataclysmic end of a paradigm.” SUPPLY AND DEMAND ISSUES To get a sense of how the demand part of the equation is changing rapidly, it's important to examine the emergence of China and the oil connection. China's thirst and acquired addiction for oil has this country running all over the world securing supplies and signing contracts in every corner of the earth: in Brazil, throughout the continent of Africa, Saudi Arabia, Iraq, Iran, Venezuela, Canadian tar sands and Kazakhstan. China is not expanding its political power; The Coming Oil Shock: Peak Oil 519 it has its empire: In its rush to build a modern, high-tech society this nation has acquired a voracious appetite for natural resources. China’s consumption grew from 8.2 million barrels per day to 9.1 million in just one year (from 2011 to 2012). The competition is fierce, especially with the U.S. In fact, the definition of China means intense competition for everything, especially natural resources. The reality is that China and India have to have more and more energy to continue on their path of growth. This is a trajectory that is permanent in the foreseeable future as long as it can be sustained. The mathematics for much higher oil prices is baked into the expected future economic growth patterns of emerging nations such as China. In 1994, China’s use of oil was minuscule and its streets were filled with bicycles rather than cars. In 2003, 2 million cars were purchased, 70 percent above the 2002 level. Oil more than doubled in price from January 2007 to July 2008 due to the sharp increase in demand from China. Consumption levels are expected to hit 11 million barrels per day by 2015. Within five years (with 2012 as the base year) China may add another 125 million cars on the road. Thus, China is just getting started and this momentum is irreversible. In 2012, the majority of the planet’s nations were trying to create modern societies hooked on oil. Worldwide demand was exploding. To get a sense of the supply side of the equation we need to examine the source of the dwindling supplies. OPEC, Mexico and Russia are now consuming 13 million barrels of oil per day: the oil dealers and producers are starting to consume more of their own oil production which means less oil for the export markets. With global demand exceeding 90 million barrels of oil daily in 2012, that means that new sources of oil will need to come online to replace the rapidly depleting global reserves. With OPEC members consuming more of their own oil at home and with conventional sources of cheap oil rapidly diminishing, we are left with the conclusion that this is an unsustainable situation. We have essentially a fall off of supply during a period of increasing demand. There is a 2% to 3% decline in supply each year. If the global market was to suddenly experience a 5% decrease in the oil supply, prices will double at the pump. If the 520 Global Economic Boom & Bust Cycles price of oil goes to $200 a barrel, we may be looking at $7 per gallon gasoline in the U.S. and something a lot worse in Europe and parts of Asia. The first major shock is likely to be gas lines similar to the 1970s crisis. We may also experience a 1973-style oil embargo by some critical nation in the Middle East. The International Energy Agency (IEA) reported that the world’s oil supply rose 1.3 million barrels a day in the last three months of 2011 while demand increased only 0.7 million barrels during the same period. Given this scenario, global markets should have experienced lower prices, however, that did not happen. Prices remained at or above $100 a barrel based on factors other than supply and demand. One of those factors was speculating bets by hedge funds and other money managers that oil prices would continue to rise. SUMMARY The end of the Age of Oil does not have to be a disaster if our current civilization and its leaders take the necessary steps for the massive preparation for a new age in clean energy. In America, the struggle will be intense and it will most likely result in a very difficult transition. In the U.S. and elsewhere, there are companies working on alternative petroleum-based products to replace the use of oil in thousands of products we use daily. As part of a strategy to reduce the reliance on imported oil, America has expanded its options with the oil fields and natural gas reserves of North Dakota. Considered the second-leading oil-producing state in the U.S., North Dakota produced 152.9 million barrels of oil in 2011. Natural gas production came in at 620.8 million cubic feet by March 2012. The state is planning $3 billion in infrastructure improvements to process natural gas and move it to the market. With 210 rigs, the North Dakota oil boom is making a small difference. Oil workers are making six-figure salaries in a tough economic environment. However, even with increased domestic production, Americans are not likely to see a substantial decrease in the price of gas at the pump. When we look at the ratio of energy returned on energy in- The Coming Oil Shock: Peak Oil 521 vested (EROEI) it helps us to understand why the oil we produce today is more expensive. During the early years of conventional oil production it took one barrel of oil to find, extract, and produce 100 barrels of oil: the ratio was 100:1. In 2012, that ratio was trending between 12:1 and 18:1 for imported conventional oil, and for some of the unconventional stuff (such as oil from tar sands) we were looking at between 5.2 and 5.8 to 1. These numbers are only going to get worse in a world of exponential growth and a constant increase in demand. We are looking at a global civilization fighting a desperate battle to cling to its oil addiction. This is clearly not sustainable. OPEC and Non-OPEC nations are still the oil barons of the world. The U.S. will continue to import two-thirds of its oil until it is no longer necessary to do so, or until the oil market finally collapses. Our foreign policy is focused on energy and will remain so for the foreseeable future. America is a nation on wheels; our cities were built based on the use of cars. That use was depended on $50 oil and $2.50 or less gasoline. All of that has changed and America will have to rapidly adjust to a new global reality. As a nation with 220 million passenger vehicles, there is an urgent need to address the issue of peak oil. But this revolution will have to be initiated at the grass roots level and by forward thinking green technology companies. The Obama Administration has promoted a clean energy initiative, however, support from Republican lawmakers and entrenched business interests has not materialized on a grand scale. As a nation, America is deeply divided on what needs to be done about Peak Oil: this nation is completely addicted and the attitude is “drill baby drill until we can’t drill no more!” This chapter is based on the premise that we are in the red zone and that time is short. We need to begin to finally tackle this issue before it becomes unmanageable. By instituting a comprehensive transition program to deal with the end of oil, our global civilization will have an opportunity to engineer a better solution to this inevitable crisis. The entire world has benefitted and enjoyed the Age of Oil, but that party is over: the clean energy revolution has arrived. 522 Global Economic Boom & Bust Cycles

NOTES (1) Stephen Leeb and Donna Leeb, The Oil Factor, Time Warner Book Group, 2005, p. 37. (2) Charles Goyette, The Dollar Meltdown, Penguin Group, 2009, p. 183. (3) IBID (The Oil Factor) p. 33. (4) IBID (The Dollar Meltdown) p. 187. (5) USGS World Energy Assessment Team, “U.S. GEOLOGICAL SURVEY WORLD PETROLEUM ASSESSMENT 2000 - DESCRIPTION AND RESULTS,” U.S. DEPARTMENT OF THE INTERIOR U.S. GEOLOGICAL SURVEY, 2000. (6) IBID, (The Oil Factor) p. 43. (7) Tim Appenzeller, “End of Cheap Oil,” National Geographic, June 2004. (8) Morgan Korn, “Oil Speculators Must Be Stopped and the CFTC Needs to Obey the Law”: Sen. Bernie Sanders, Daily Ticker (online) March 8, 2012. (9) Hydraulic fracturing or fracking (as it is called in the industry) has produced a boom in the production of natural gas in the United States. The industry has produced thousands of jobs and reduced our dependency on oil imports. The process involves injecting water and chemicals deep into the earth to crack shale rock, which allows oil and gas to be released and easily flow. (10) Dave Gram, “Vt. Becomes 1st state to ban hydraulic fracturing,” Associ- ated Press, May 17, 2012. (11) Edward Oliver Gonzalez, “USA NUCLEAR REGULATORY COMMIS- SION STILL HOGTIED AND IMPOTENT - PART 4,” energymaters.com, Feb- ruary 9, 2012. (12) IBID. (energymaters.com). (13) Matthew Daly, “NRC approves first new nuclear plant in 3 decades,” Asso- ciated Press, December 2011. (14) Tom Randall, “Highest & Cheapest Gas Prices by Country,” Bloomberg (online) May 12, 2012. CHAPTER ELEVEN TERRORISM, NATURAL DISASTERS: THE ECONOMIC X FACTORS

“Mesmerizing scenes of hell” Headline of September 11, 2001 “The 9.0 quake that hit Japan on March 11 was powerful enough to shift the earth on its axis and make it spin a little faster, shortening the day by 1.8 millionths of a second. It shoved the island nation one parking space to the east. But what felt like the end was just the beginning.” Time Magazine, March 28, 2011

n the year 2001, the world witnessed one of the most devastat- Iing urban assaults on a global superpower. On September 11, 2001 (911), America was thrown into a state of shock and complete disorder by a series of carefully planned and strategically executed terrorist’s attacks. Hijackers used jetliners as bombs to destroy the World Trade Center in New York and to damage the Pentagon outside of Washington D.C., in Arlington, VA. A wing of the nation’s military headquarters was completely demolished, while in Lower Manhattan millions witnessed the complete disintegration of the twin towers of the World Trade Center. It was a surprise attack that ech- oed remembrances of Pearl Harbor; however this seemed more sinister and calculating in its design and execution. The world watched in horror as the twin towers collapsed dragging thousands of inno- cent civilians to their deaths. By some accounts, this series of strategic terrorist strikes was the result of five to ten years of planning. It was a master plan designed to create major disruptions in the economic, financial and political arenas in America’s superpower global structure. The actual timing of the event coincided with the deepening of the bust period of the Boom & Bust Cycles of 1995-2000.

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When I started to clearly reflect on the delivery and execution of the strikes, I wondered why the terrorists had chosen this time period to execute their plan. Why didn’t they strike during the Y2K crisis or in the early stages of the bust cycle? And did they consider a scenario to strike during the height of the boom period in 1999, which could have conceivably generated a lot of chaos in the global markets? Another thought is that, perhaps they were not ready to conduct their operation until September 2001. My final conclusion on this issue of timing is that it was designed to be executed during a very weak economic period in the American and global markets. Since America is the strongest link in the global economic system, a strike during a vulnerable period could derail not only America but also the global economy. The significance of this design is that the nation would have limited abilities to bounce back quickly or recover from a rapidly expanding economic crisis. In addition, the symbolic strike on the World Trade Center and Wall Street (the financial capital of the world) had an enormous impact on the confidence and security levels of America and the free world. It was mesmerizing in its total impact; it was a day that America was stopped dead in its daily activities and was forced to stand still in a state of psychological trauma. For many the actual attacks appeared surreal, or like a movie or Tom Clancey novel. But this was reality, and America and the world quickly came to realize that the terrorists had raised (to the tenth power) the level of global terrorism for the 21st century and beyond. And now politicians and others would have to consider the fact that future scenarios of terrorists attacks would be on this level or greater in their design, economic impact, loss of life and destructive power. The X factor of terrorism like the X factor of natural disasters is a heavily-weighted issue of uncertainties, and is ultimately unknow- able. This tragic event marked the beginning of a new kind of cold war. In the days that followed the attacks, ripple effects and economic fallout moved swiftly throughout the United States generating major declines in many industry sectors. After nearly 18 months Economic X Factors 525 into the bust cycle, the massive American economic engine had slowed to a trickle, bordering on a major recession. Thus, prior to 911, the economic picture had already worsened to the point where America’s economic weakness was moving the world towards a global recession. The X factor of the terrorist’s strikes clearly extended the severity of the crisis and provided very little hope for a rapid recovery. For the plan to have a greater long-term impact, the timing of this event had to be a critical factor. This surprise attack was designed to generate massive disruptions on a global scale. SUPERPOWER TERRORISTS The multidimensional aftershocks of 911 were many and varied, particularly as America struggled to regroup and focus on the people responsible for this sinister tragedy. In the days and weeks that followed, the primary suspects that rose to the surface of the investigations were Osama bin Laden (the billionaire Saudi Arabian terrorist and former ally of America during the cold war years of the struggle against the Soviet Union in Afghanistan), the Al Qaeda global terrorists’ network and the Taliban government of Afghanistan that was providing sanctuary for Osama bin Laden. America moved quickly to declare war on global terrorism and the country came together in a display of patriotism not seen since the early days of World War II. On October 7, 2001, American and British forces began air strikes and bombings on Taliban forces in Afghanistan. 911 ECONOMIC FALLOUT In rapid succession, the economic picture worsened for many industry sectors, particularly as the American consumer market began to tighten its belt and cut back on discretionary expenditures. Fear and uncertainty gripped the nation on many fronts. Our sense of security and confidence was shattered in ways that dispelled any illusions or assumptions concerning world political and economic stability. We had to adjust to a new reality, a new and expanded global consciousness. What follows are some of the key economic and financial events that shaped and reconstructed the American landscape during the last quarter of 2001. 526 Global Economic Boom & Bust Cycles

THE WALL STREET SHUTDOWN The collapse of the twin-towers had a major impact on Wall Street. In addition to many key financial houses that had offices in the World Trade Center, the infrastructure of Wall Street was in shambles. The immediate chaos following the attacks resulted in the closure of the financial markets in America. The New York Stock Exchange, American Stock Exchange and the NASDAQ remained closed for a total of four business days; the longest shutdown since the Great Depression years. A key problem that prevented the reopening of the NYSE was the nightmare logistics of moving thousands of people in and out of the “Financial District,” which resembled a war zone. By the fourth day of the market closure, it was estimated that Wall Street firms had lost over $1 billion in revenues. This estimate assumed that Goldman Sachs Group Inc., Citigroup Inc., and Morgan Stanley & Co. collectively were getting hit for approximately $250 million per day in lost revenues. Many economists, analysts, news commentators and others began to ponder what “investor reaction” would be once the markets reopened. The broad consensus was that there would be an initial sell-off and downward pressure on stock prices. When the major stock exchanges reopened on September 17th, the sell-off was brutal, led by the media, airline and insurance sectors. As predicted, stocks of major U.S. airlines were severely hammered, loosing $12.2 billion in market value. UAL Corp. dropped $13.32 per share, closing at $17.50 for the session. AMR Corp. fell $11.70 per share to close at $18.00. Continental Airlines Inc. plunged $19.59 per share to close at $20.05 for the session. Industry reports indicated that the nation’s commercial airlines were already deep in the red prior to 911 with expected losses of $1.5 billion for 2001. What emerged from the collapse was the stark reality that many major airlines were facing bankruptcy due to their inability to “withstand the current cash-flow crisis.” Urgent distress calls were sent to Washington D.C. alerting the Bush Administration and Congress to develop a financial bailout plan to save the domestic U.S. airline industry. Congress ultimately approved a $15 billion bailout package; however indus- Economic X Factors 527 try executives and experts feared that this amount would not be enough. In a move to bolster confidence and support the markets, the Federal Reserve lowered short-term interest rates a full half-point. This represented the eighth interest rate reduction in the year 2001. The Dow fell 684.81 points to close at 8,920.70, down 7.1 percent for the session. The NASDAQ composite index fell 116 points to end at 1,579.55, down 6.8 percent for the session. Fear and uncertainty clearly engulfed the markets, as many fled to liquidity, precious metals, bonds and other safe havens. In the first five days of trading after the markets reopened on September 17th, the Dow Jones Industrial average had fallen by 14.3 percent (dropping 1,369 points), while the Nasdaq Composite Index lost 16.1 percent. Nearly $1.4 trillion in stock market valuation/wealth had been wiped out during this period. This pushed total losses for the year to approximately $4 trillion. It was interesting to observe what happened in the first 10 trading days of the crisis and to compare that with previous periods that experienced similar shocks to the economic and financial systems. The general question here is how do markets behave at the onset of a war, natural disaster, terrorist strikes on the scale of 911, and economic turmoil initiated by a sudden collapse in a critical country in the global arena. In general, stock markets hate wars, high inflation, and economic uncertainty, but tend to recover during periods of resolve (declarations to fight the enemy or implementation of a bailout program) economic stimulus programs, lower interest rates and clear indications of happy endings. For instance, in the first 10 trading days after the bombings of Pearl Harbor, the Dow was down 7.2 percent. Similarly, 10 days after North Korea invaded South Korea on June 25, 1950, the market decline was 7.2 percent. When Iraq invaded Kuwait on August 2, 1990, there was a 5.2 percent loss on the Dow in the first 10 days. And when we examine the loss for the attacks on the World Trade Center and the Pentagon, we witnessed the Dow declining by 7.7 percent during those critical 10 trading days. These initial downturns were reversed, in most cases, within a three to six month period of time. The initial shock of an event gen- 528 Global Economic Boom & Bust Cycles erates an initial sell off in the markets that is swift and brutal, and in most cases, overdone. During the week of September 24th, the markets staged strong rallies and recovered some of the lost ground. After the smoke cleared we discovered that many stocks had hit significant bottoms during the onset of 911, however, by mid-November many of these same stocks had either fully recovered or partially recovered from the deep devastation of the 911 collapse. On October 2nd, the Fed, in just over two weeks, lowered short- term interest rates another half-point or 50 basis points. This would be the ninth reduction of the year, driving rates down from 6.5 percent (at the start of 2001) to 2.5 percent, for a total of 4 percent! FEDERAL RESERVE ACTIONS Fed reactions during the initial stages of the crisis were swift and decisive. The Fed pumped $100 billion into the U.S. financial system to provide liquidity and to calm jittery markets. In addition, as mentioned above, the Fed timed the eighth interest rate reduction of a half-point (or 50 basis points) to coincide with the reopening of the financial markets. The federal funds rate was lowered from 3.50 percent to 3 percent while the discount rate fell to 2.5 percent from 3 percent. This would also be the third surprise move by the Fed (between regular meetings) in 2001. The announcement of the rate cut was made one hour prior to the opening of the markets. In a statement to the press the Fed indicated the following: “The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored...the FOMC recognizes that the actual federal funds rate may be below its target on occasion in these unusual circumstances.” There was also strong cooperation between the Federal Reserve Broad, the European Central Bank and other central bank counterparts. The Fed swapped $50 billion for euros with its European counterpart in order to insure liquidity for dollars in European markets. With the Bank of England, the Fed swapped $30 billion for pounds and $10 billion with the Bank of Canada for Canadian dollars. The ECB joined the Fed by lowering its key interest rate by 50 basis Economic X Factors 529 points, from 4.25 percent to 3.75 percent. The Fed was clearly committed to meeting the emergency demands on the money supply and received strong support from its international allies. However, as mentioned above, within two weeks the Fed lowered short-term interest rates another 50 basis points, in a yearlong aggressive stance to jump start an economic recovery. Then, at its next scheduled meeting on November 7th, the Fed reduced the benchmark federal funds rate by yet another 50 basis points, lowering it from 2.5 percent to 2 percent. It marked the 10th time that rates were reduced in 2001, and it essentially brought short-term borrowing costs to their lowest level in 40 years. Stock market response was strong, with the Dow rising 150.09 points to close at 9,591.12. The Standard & Poor’s 500 index gained 16.02 points to close at 1,118.86, while the NASDAQ closed at 1,835.08, up 41.43 points. The Dow and the Standard & Poor’s 500-stock index both recovered their losses from the 911 collapse by closing above levels recorded on Septem- ber 10th. After examining a series of reports on factory production, service sector activity and consumer confidence, the Fed had concluded that the economy’s fall and continued weakness had actually picked up speed in recent periods. In its supporting statements for the rate cuts, the Fed indicated that “risks are weighted mainly toward conditions that may generate economic weakness.” When the Federal Open Market Committee met again on December 11th to decide on any further actions, they declared another quarter-point interest rate reduction. Given the deepening nature of the recession (that became widely accepted as beginning in March 2001); the Fed stated that “the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.” For the year 2001, the Federal Reserve Open Market Committee reduced interest rates eleven times! INDUSTRY RIPPLE EFFECTS In general, the airline and entertainment industries were severely affected by the crisis. In the days and weeks following 911, many people canceled reservations with the airlines and other vacation 530 Global Economic Boom & Bust Cycles arrangements. Not many folks felt like getting on a plane after witnessing the hijacking of four jetliners in one day. And with the potential threat of Americans being targeted abroad, most were inclined to stay close to home. The resulting ripple effects were massive layoffs in the airline, entertainment and various other industries. Dis- cretionary spending by Americans took a nose dive very quickly, wreaking havoc on the hotel, casino, retail, travel, insurance and finance industries. The cruise industry was hard hit with waves of cancellations and sinking revenues. Renaissance Cruises ceased operations on September 25th while many other companies searched feverishly for ways to cut costs and implement layoff plans. And 911 firmly halted the 1990s boom times in Las Vegas (at least for the fourth quarter). With the steep drop in visitors, unemployment figures rose sharply. The Bellagio, MGM Mirage, Paris, Aladdin, Bally’s Las Vegas and others began laying off thousands of employees in order to deal with the drastic slowdown in patrons. Day to day headlines was spotlighting more layoffs, business failures, plant closings and additional evidence of economic fallout. Politicians were focused on cutting taxes, the reconstruction of New York, the buildup of American military and security systems, and on various types of fiscal spending measures. As billion dollar losses tore through the markets, the Wall Street Journal reported on Sep- tember 21st that members of the rich and famous Bass family collectively sold 135 million shares of Walt Disney Co. for about $2 billion. The reason cited for the enormous sale was the need to meet “liquidity requirements.” It was clear that certain industries, particularly in the entertainment and leisure arenas, had fallen on hard times. BIN LADEN RECESSION The scales were tipped on September 11, 2001, pushing an already weak economy over the brink. Mainstream economists stated that the economy contracted at the rate of 0.4 percent (after adjusting for inflation) during the third quarter of 2001. Given the devastating events of September, fourth quarter numbers were widely expected to continue into negative territory. Thus, with the economy Economic X Factors 531 contracting two consecutive quarters (the official conditions for declaring a recession), the widely anticipated recession would be in full motion by the end of 2001. But even without 911, the U.S. economy had exhibited very little advancement since the start of the bust cycle in April 2000. And given some other economic dynamics, such as the energy crisis in California and rising unemployment throughout the year, recession with a big “R” was certainly to be expected. Indeed, some economists from the Business Cycle Dating Committee stated in mid-No- vember that the economic expansion of the 1990s probably ended in March of 2001. Thus, at that point in time, the recession was ultimately in the eyes of the beholder (which is always the case). Even in the San Francisco Bay Area, hard hit by the Dot Com Bubble collapse, recession had been a reality throughout much of 2001 for many people, but for others it was a nonevent. With the national unemployment rate hovering around 5.5 percent in November, this was not registering as a major economic catastrophe: approximately 95 percent of American workers were still receiving pay checks. Some of these numbers appeared warm and fuzzy, but given a climate of extreme uncertainties, situations or circumstances could have change very quickly; that is the potential threat of the Economic X Factor. However, it is clear that the economic slowdown did reach a boiling point in September: the attacks on America torpedoed a lot of economic, financial and political foundations. And in the aftermath of the chaos, Osama bin Laden became the most wanted man on the planet earth. The title of an article appearing in the San Fran- cisco Examiner on October 19th proclaimed: “Blame recession on bin Laden.”1 Comments by San Francisco State University economics professor Daniel Vencill made an interesting but basic point that, “The uncertainty that prevails has made us hunker down in a sort of bin Laden recession.” In short, the reality was one of recognizing that these attacks did push us into a deeper economic contraction, and accelerated the speed (as the Fed indicated) of the downward spiral. By the week of October 27th, 3.72 million people were re- 532 Global Economic Boom & Bust Cycles ceiving unemployment benefits, the highest level since April 1983. During the month of October alone, 415,000 jobs were lost by Ameri- can workers. With business and consumer debt at an all-time high, it was questionable whether the expected impact of lower interest rates would provide a strong enough economic serum. According to Moody’s Investor’s Service, by November 2001, 185 companies had defaulted on $76 billion worth of bonds. And by mid-November, 219 publicly traded companies had filed for bankruptcy protection, a record year for major business failures. By the fourth quarter we had entered the bust period of the credit cycle which played a major role in the 1995-2000 boom years. Many businesses and individuals were focused (for a significant period of time) on paying down the monstrous debt acquired during the boom period. LONG-TERM INTEREST RATE STRATEGY By early November, the Fed strategy of lowering short-term interest rates 10 times throughout the year was having very little impact on long-term rates. Thus, another surprise move came in No- vember: the U.S. Treasury announced that it would stop issuing 30- year Treasury bonds. The stated purpose of the move given by the Treasury Department was to provide taxpayer savings by borrowing more money at lower short-term rates and less at higher long-term rates. To most bond experts, this was a direct move to try and reduce long-term interest rates. The 30-year Treasury bond had been a benchmark for all fixed-income investments, in particular, 30-year mortgage rates. Long-term mortgage rates initially fell by 15 basis points to 6.52 percent (with the potential for further drops in 2002). A stronger refinancing trend started happening, which is something the government viewed as a benefit and aid to its economic recovery programs. Additional tactics were implemented by the Treasury to continue the downward trend in long-term interest rates in 2002 and 2003. ARGENTINA DEBT CRISIS Another major international crisis rose to the surface during the Economic X Factors 533 month of October 2001: Argentina was on the verge of defaulting on its long-term debt obligations. Buried in the grip of a continuing three to four year recession and saddled with $132 billion of international bond debt, Argentina was desperately seeking relief and an opportunity to restructure its obligations. The big picture of this crisis is that Argentina threatened to become a greater problem than the Russian default and debt crisis of 1998 that sent the Dow crashing 512 points on August 31, 1998. The other major part of the Argen- tina Affair dealt with the potential ripple effect it could have on Latin American economies, particularly a disastrous impact on Brazil. Ad- ditionally, analysts noted that Argentina’s international debt accounted for between a quarter and a fifth of all tradable emerging market debt in the world. It was widely held and carried strong ratings and levels of safety among emerging market debt investments. However, after the September 11th attacks, these investments were viewed as higher risk and required much higher returns, similar to junk bonds. President Fernando de la Rua went on national television on November 10th and declared to his nation that the country was “in bad shape,” facing what he described as a “veritable catastrophe.” Of course, a lot of things hit the fan at that point, including major loans from the International Monetary Fund (IMF) and an initial package to restructure the debt load. In essence, Argentina wanted to swap old high-interest rate debt (16 percent and higher) for new securities that would have lower interest rates (7 percent or better) a plan that would effectively reduce its interest payments significantly and buy the nation some time. Various ratings agencies (including Standard & Poor’s) regarded this strategy as a de facto default on its $132 billion debt load. However, this plan was not agreed to by the IMF and international financiers without a price and some economic pain on the part of Argentina. IMF loan packages and restructure programs come laced with some painful austerity programs. Countries are required to tighten their belts, raise taxes, cut support programs, and cancel investment plans and other painful measures that inflict havoc on a nation’s 534 Global Economic Boom & Bust Cycles population. Argentina was no exception; some IMF measures included privatization of the social security system, cuts to the civil service, and strong commitments by all levels of government and the provinces to effectively freeze spending levels. Catastrophe was averted, but only time would tell how successful the plans would work, particularly as Argentina struggled with a deepening recession that included an unemployment rate of 18 percent. VULTURE CAPITALISTS AND THE BUST CYCLE Perhaps the greatest strengths of the American capitalistic system are the efficient checks and balances that exist within every phase of the business cycle and boom and bust cycles. During the boom period we see venture capitalists, investment bankers, angel investors and others supplying capital and expertise to build new and dynamic business enterprises. With the onset of a bust period, a whole new set of business dynamics and key players dominate the picture; a cadre of financial specialists that are focused on dealing efficiently with business failures and bankrupt enterprises. Welcome to the world of the Wall Street Vultures, where deals are made for a fraction of the original value of a company. The end result is that inefficient business enterprises are driven from the markets, repackaged, combined or consolidated into new and revived business structures. Cash is king, and for those who came out of the boom period with money and financial clout, they dominate the action by making very lucrative deals in an environment filled with broken companies. This is a clear demonstration of the law of the financial jungle and the survival of the fittest. Bankrupt companies such as Pacific Gas and Electric (PG&E), Montgomery Ward, Integrated Health Services, Owens Corning, Comdisco and others became candidates for the Vulture list in 2001. Some of the well known Vultures become saviors of fallen enterprises, while others concentrated on making a “fast buck” on acquisitions by breaking up business enterprises (selling off portions similar to the LBOs of the 1980s) and restructuring new deals on the Economic X Factors 535 remaining business units. Some of the so-called “Baron Vultures” were actually seeking to build promising new business enterprises out of the fallen victims they acquired. Thus, the ultimate result of the complete process was the clearing away (from the capitalistic economic system) of inefficient business enterprises, models and systems. The slate gets clean and the entire economy is poised for a new economic recovery period and the start of a possible new boom cycle. This is dirty work; however, the slate has to be cleaned of the business failures so that the economic system can more efficiently allocate resources. A society that can manage this difficult phase of the bust cycle, is capable of bouncing back sooner after a major economic slowdown. On January 30, 2002, the FOMC decided to “keep its target for the federal funds rate unchanged at 1-3/4 percent.” The Feds cited the following for this stated position: “Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent. With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favorable and monetary policy accommodative, the outlook for economic recovery has become more promising.” Thus with the start of 2002, there were early signs that the economy was struggling to emerge from the crippling downturn. However, given the fact that Enron Corp., Global Crossing Inc., and other major corporations were declaring bankruptcy left and right, it was certainly questionable whether the worse was over. NATURAL DISASTERS AND THE ECONOMIC X FACTOR In my books World Economic Collapse and Bubble Markets and Boom and Bust Cycles, I identified the unexpected occurrence of natural disasters as an unknown factor in the economic equation of events and cycles. Worldwide natural disasters during the closing years of the 1980s convinced me that these events were major contributing factors in the world economic decline of that period. 536 Global Economic Boom & Bust Cycles

Sudden and unexpected natural disasters have plagued mankind throughout the ages with massive damage, loss of life, and tremendous disruptions in economic and financial systems. We are vulnerable to the massive and uncontrollable forces of nature, and there is very little we can do except to pick up the pieces when the event is over. We do not know when or where these phenomena will strike next. Science is limited and predictions of future catastrophes are best left to unconventional thinkers. Nevertheless, like terrorism, these events are critical unknown factors in the scheme of things. The purpose of this analysis is to understand the economic consequences of these events and their impact on a world economic system. In the globally interdependent world of the 21st century a major catastrophe (either man-made or natural) in a critically important nation could have an enormous impact on the international community (similar to 911). The sudden shock, disorder and economic chaos generated by this unknown factor is important to examine and can lead to a broader approach of economic analysis, particularly in forecasting models examining the 21st century. The following pages (next five pages) are much of what I wrote in World Economic Collapse. It’s presented here as part of the examination of the Economic X Factor. ANATOMY OF A NATURAL DISASTER: S.F. BAY AREA EARTHQUAKE OF 1989 The San Francisco Bay Area Quake of ‘89 illustrates the economic consequences of a relatively moderate level natural disaster; one I experienced firsthand. As the fourth largest economic arena in America, the San Fran- cisco Bay Area metropolitan region was producing (in 1989) approximately $125 billion a year in revenue. The world famous Sili- con Valley and its surrounding support systems account for 15 to 20 percent of America’s computer related output. With healthy and vig- orous international links with Pacific Rim nations (many people consider California an integral part of the Pacific Rim) and a flour- Economic X Factors 537 ishing market for tourism, the Bay Area is one of the most important economic regions in the world. On Tuesday, October 17, 1989, nearly 60,000 baseball fans were assembled at Candlestick Park in San Francisco for the third game of the World Series. Billed as the “Battle of the Bay,” the Oakland A’s and the San Francisco Giants were locked into an intense competitive battle to see who would become the next world champion. Nearly 60 million American fans and millions more worldwide were preparing to watch or listen to this game that day on TV and radio. As world attention focused on San Francisco, approximately 21 minutes before the start of the game, at 5:04 pm, a devastating earthquake struck the Bay Area. Measured at 7.1 on the Richter scale, the quake lasted approximately 15 seconds, killing 67 people and injuring 3,757. Candlestick Park was spared any serious damage but the game was canceled and the dazed and bewildered fans were sent home. As a resident of San Francisco, I had learned to live with the occasional tremors that have shaken this bit of earth over the years. But as I sat in my office working on World Economic Collapse, I quickly realized that this was no slight tremor. In an earthquake, 15 seconds seems like a long time and one's entire life can be completely changed within that brief period. One feels a sense of awe, anxiety and humility before a force so powerful and so universal in its application. In just 15 seconds, the Bay Area was knocked to its knees. Had the earthquake lasted 30 seconds or more, this catastrophe would have generated much greater damage. That earthquake left a profound impression on me, and a deeper compassion and awareness in observing other natural disasters in various regions of the world. Although most of the damage occurred outside of San Fran- cisco, it was The City that received the media attention. San Fran- cisco and earthquakes are closely related; The City is fabled for its beauty, wild living and role as the victim of natural disasters. In the massive earthquake that rocked the Bay Area at 5:12am on April 18, 1906, San Francisco was almost completely destroyed. That quake 538 Global Economic Boom & Bust Cycles was estimated at 8.3 on the Richter scale, struck in two stages lasting one minute and five seconds and was, according to seismologists, 32 times stronger than the October 17th disaster. About 2,500 people died, and some 250,000 people were left homeless after raging fires and dynamite teams destroyed some 514 blocks of property. The movie San Francisco glamorized the events of the 1906 quake and helped to create the international reputation and mythology of the City by the Bay. ECONOMIC SHOCK The Quake of ‘89 happened just four days after an October 13th stock market crash that left the Dow Jones with a 191 point loss. The American economy was therefore hit by a couple of significant events that happened in the space of five days. The Bay Area was declared a disaster area as Senator Alan Cranston, Lieutenant Governor Leo McCarthy and members of state and local governments pressured Washington, D.C. for immediate aid to deal with the escalating property and infrastructure damages. The total cost of this disaster would reach $7 billion. According to the California Office of Emergency Services estimates, the quake left nearly 105,000 houses, 1,345 businesses and some 320 apartments damaged and in need of repairs. Other major structural damages included:

♦ The entire downtown area of Santa Cruz, including the Pacific Garden Mall, was heavily damaged. ♦ In Oakland, a mile long section of the upper deck of the I-880 freeway fell on the lower roadway and killed 42 people. ♦ A major section of the upper deck of the San Francisco-Oakland Bay Bridge collapsed. ♦ There was severe damage to residential property in the Marina district in San Francisco.

President Bush toured the Bay Area for six hours on October 20, 1989, visiting disaster areas in Santa Cruz, Oakland and San Economic X Factors 539

Francisco. On November 26th, the President signed a federal disaster aid bill which allocated $3.45 billion to the Bay Area. The economic fallout of the Quake of ‘89 left a variety of long and short-range problems for Bay Area residents. Normal flows of economic activity were permanently disrupted and many large and small businesses experienced sizeable drops in business activity. The major damage on the Bay Bridge, a key artery into San Francisco, dealt a significant blow to retail and tourist businesses, as East Bay residents were prohibited from coming across the bridge. For many hard hit areas, there would be no quick restoration of services. These included some of the following areas:

♦ In April 1990, the San Francisco Board of Supervisors voted to tear down the severely damaged Embarcadero Freeway, which some analysts felt had come within five seconds of collapsing during the quake. Some $120 million in federal funds would be needed to replace the double-decker structure, and it would take five to six years to complete the task. In the meantime, San Francisco’s Chinatown, Fisherman’s Wharf and North Beach areas, all major tourist attrac- tions, were affected by the closure. ♦ Additional closing of freeway sections in Oakland and San Fran- cisco would require years before they would be operational and safe. ♦ In Oakland, 139 commercial buildings were declared unsafe, and several of the low rent downtown hotels were closed. ♦ In August 1990, the property damage in Santa Cruz was estimated to be $112 million and rising. Its downtown section was devastated to the point where forecasters estimated that it may take up to ten years to repair the damage.

Had the Quake of ‘89 lasted 10 or 15 seconds longer, the psychological and economic results would have been far worse. For the most part, Bay Area residents continued to make the necessary adjustments to the dynamic changes created by the massive disaster. The threat that future quakes could be much more destructive is ever present and a constant reminder of an increasingly uncertain future. 540 Global Economic Boom & Bust Cycles

Seismologists are warning of future quakes along the San Andreas or Hayward fault lines. In fact, the message has grown stronger over the years as scientists have updated their predictions. In September 1990, the United States Ecological Survey and the De- partment of the Interior, in conjunction with several organizations, published a 23 full page report outlining the increased potential for large earthquakes in the Bay Area over the next 30 years. The geological evidence is compelling and studies strongly suggest that the next great quake will strike or be centered near heavily populated areas. It appears that we have entered a period of increased seismic activity based on historical data compiled on Bay Area earthquakes over a 150 year period. TOKYO CONNECTION A group of Japanese engineering specialists visited the Bay Area in January 1990 to assess the physical damage of the Quake of ‘89. For Japan, the subject of earthquakes is very important and one that holds a special meaning for this nation as a whole. Like San Fran- cisco, Tokyo, is situated in a very active earthquake zone, which means it must take very special precautions for any possible major catastrophes. The great Kanto Earthquake that struck on September 1, 1923, measured 8.3 on the Richter scale (at its epicenter in Sagami Bay) and left the city burning for over 40 hours, wiping out nearly 20 to 30 percent of all residential property. It nearly destroyed To- kyo and Yokohama and killed over 140,000 people. A similar quake, measuring 8.3 or higher on the Richter scale, could bring the Tokyo Metropolitan area to a standstill and have an enormous impact on the real estate and stock markets of Japan. Internationally, the ripple effect would be felt everywhere in the world. Japan is therefore an area of particular importance in reference to natural disasters; it’s a vulnerable geological region that is well connected to the main economic and financial arteries of the world. In response to the high risk of earthquakes in Japan, the Tokyo Metropolitan government instituted, among other programs, a 10- year $92 billion earthquake prevention plan with a scheduled 1996 Economic X Factors 541 completion date. Japanese engineers point out that their use of advanced construction technologies such as anti-vibration systems, giant rubber bearings and flotation systems will lessen the actual destruction of a large scale earthquake. Like the San Francisco Bay Area, Japan was expected to experience a period of increased seismic activity during turbulent periods in the 21st century. WORLDWIDE DISASTERS: LATE 1980s AND EARLY 1990s Other natural disasters that happened during the late 1980s and early 1990s were regarded as some of the worst catastrophes in modern history. Without warning, many regions in the world were severely hit by crippling disasters. Some of these events were as follows:

♦ Soviet Union-Armenia-December 7, 1988: An enormous earthquake struck Armenia causing $16 billion in damage and inflicting a tremendous amount of death and destruction. Mikhail Gorbachev’s speech before the United Nations had just ended when he received word of the devastation in his country. This enormous quake killed nearly 25,000 people, damaged or destroyed over 400 villages, 20 towns and nearly 300 farms.

♦ United States and the Caribbean-September 1989: Hurricane Hugo, generating winds from 135 to 200 miles per hour, tore through parts of the Caribbean and America destroying everything in its path. Before tearing through America, Hugo’s massive onslaught killed 24 people, left hundreds of thousands of people homeless, and caused over $700 million in damage on various Caribbean Islands. In America, North and South Carolina was hit hardest as coastal cities from Charleston North to Myrtle Beach were severely damaged. Mayor Joseph P. Riley of Charleston estimated damages for that city alone to be over $1 billion. According to the Federal Emergency Management Agency, Hugo cost America nearly $10 billion!2 542 Global Economic Boom & Bust Cycles

♦ Western Europe-January 25, 1990: A deadly storm with hurricane type winds struck Western Europe killing nearly 100 people and leaving hundreds injured. The storm swept through Britain, the Netherlands, West Germany, Holland, France, Belgium, Denmark, Scandinavia, Northern Poland, Latvia and Lithuania causing over $1 billion in damage. For many, this was the worst storm that had hit the region in the last ten years.

♦ Iran-June 21, 1990: A massive earthquake measuring 7.3 on the Richter scale hit Northern Iran. It caused billions of dollars in damages, killed over 50,000 people and injured over 200,000 in what would have to be one of the 20th century’s most devastating catastrophes. Nearly 400,000 people were left homeless in the destructive wave which heavily damaged or destroyed over 100 cities, towns and villages. Officials also stated that over 150,000 herd of cattle were wiped out, along with massive destruction in Iran’s major farming regions. Infrastructure damage to roads, irrigation systems, electrical power, the water supply and commercial and residential real estate was widespread. This disaster represented a prime example of the type of economic upheaval that could bring a country to almost a complete standstill.3

♦ U.S.-Mid-West, Kansas, Oklahoma, and Nebraska - April 27, 1991: A series of violent and destructive tornadoes tore through the Mid-West, causing severe damage and injuring hundreds of people. At least 48 twisters were reported across two states in the region on April 26th. Overall damage was estimated at $50 million with hundreds of people left homeless.4

♦ Bangladesh-April 30, 1991: A devastating cyclone slammed into Bangladesh in what one writer described as a “Biblical scale catastrophe.” Over 139,000 people lost their lives as 100 to 145 M.P.H. winds and 20-foot waves generated widespread flooding and massive disaster along the southeastern coast of this impoverished land of 114 million people. Over one million homes were lost and entire Economic X Factors 543 villages were wiped out, leaving in its wake an estimated $3 billion in damages. The entire cycle of this natural disaster uprooted millions of people and left them confronting the harsh realities of contaminated water, dysentery and starvation. Prime Minister Khaleda Zia appealed to the world community for massive aid to save the struggling survivors. Over $210 million was pledged by nations from all over the world, and America sent in an amphibious task force (on its way home from the Persian Gulf conflict) with thousands of Ma- rines and dozens of helicopters to help in the rescue operations.5

♦ Japan-June 3, 1991: In one of this century’s biggest volcanic eruptions, Mount Unzen - located on the southern Japanese island of Kyushi near Nagasaki - blew up and sent hot lava rushing down its slopes. Scientists indicate that about 75 of Japan's 250 volcanoes are active. Deep concern among experts and authorities centered on the possibility of Mount Fiji - the tallest mountain in Japan and considered a God of the Shinto religion - becoming active and dealing a fatal blow to the greater Tokyo area. The 12,385 foot Mountain is 62 miles from Tokyo, and its last major explosion occurred in 1707. A huge volcanic explosion of Mount Fiji could generate large earthquakes throughout the greater Tokyo area. Japan, like the Philip- pines, is part of a volcanic system known as the Ring of Fire circling the Pacific region.6

♦ The Philippines-June 9, 1991: A 4,795 foot volcano known as Mount Pinatubo erupted, causing thousands of people, including members of the U.S. military, to flee the area. Having been dormant for nearly 600 years, Mount Pinatubo’s eruption represented another volcanic disturbance within the Ring of Fire. The eruption led one observer to state that it “Looked like an atomic explosion.” More than 19,000 Filipinos were evacuated from three provinces surrounding the volcano’s slopes. Earthquake tremors, torrential rains and a massive outflow of volcanic ash turned the entire region into a major disaster area, uprooting over 200,000 people. Estimated damages totaled nearly $1 billion which also included the closing of 544 Global Economic Boom & Bust Cycles

Clark Air Base. Over 20,000 Americans were evacuated to the United States as a result of this huge catastrophe.7

♦ U.S. and the Bahamas-August 1992: Hurricane Andrew, the costliest natural disaster in U.S. history (up to that point), raged through south Florida and parts of Louisiana propelled by winds of up to 160 m.p.h. In its wake, some 250,000 people were left homeless, over 63,000 homes severely damaged or completely destroyed, and Homestead Air Force Base was totally wiped out. Overall damages totaled roughly $23 billion! The fury of Andrew was swift and lethal, and clearly demonstrated the heavy economic fallout of a massive natural disaster. With the American economy in the midst of a recession, the economic impact of Andrew was deeply felt throughout the entire nation.8

♦ Kauai, Hawaii-September 1992: Hurricane Iniki tore through the island of Kauai in Hawaii, and generated an estimated $1 billion in damages. It was “Paradise Lost,” as this tourist mecca was wiped out in a matter of hours. During late September, Congress, in an effort to keep up with the recent natural disasters, voted on bills to spend up to $11 billion in disaster relief funds and redevelopment expenses.

♦ The elements of nature sent a loud message in 1993: Summer flooding along the Mississippi and its tributaries caused billions of dollars in crop and property damages in South Dakota, Minnesota, Wisconsin, Nebraska, Iowa, Illinois and Missouri. An uncontrollable firestorm that struck Southern California in October scorched over 170,000 acres of land and wiped out more than 1,240 structures, including some fabulous properties in Malibu. Total costs amounted to nearly $1 billion. A similar firestorm in the Oakland hills during October 1991 destroyed over 3,000 homes. Insurance companies and federal disaster aid would be hit for nearly $3 billion for the two massive fires. Economic X Factors 545

♦ Southern California-1994: In 1994, Southern California was hit with yet another great catastrophe. A massive earthquake measuring 6.6 on the Richter scale, centered in the San Fernando Valley community of Northridge, dealt a major blow to this struggling region mired in recession. Extensive damages to schools, hospitals, roads and highways, water and sewer lines, and thousands of homes and businesses, placed severe economic pressure on the region. Gov- ernor Pete Wilson declared that the reconstruction costs could climb as high as $30 billion!

♦ Kobe, Japan (The Great Hansin Earthquake) - January 17, 1995: At 5:46 am on the morning of January 17, 1995, a devastating earthquake with a magnitude of 7.2 on the Richter scale, struck the region of Kobe and Osaka in south-central Japan. A densely populated area of about 10 million people, this region is considered the second-most important economic and industrialized region in Ja- pan. The quake was centered along a fault line running from Awaji Island through the city of Kobe and lasted for about 20 seconds. The huge disaster resulted in the deaths of 6,433 people, with the number of injured people reaching about 27,000. Nearly 100,000 buildings were severely damaged or destroyed, and more than 300,000 people were left homeless by the tragedy. The economic loss from this disaster would go down in modern history as one of the most expensive catastrophes: experts publish figures as high as $132 billion, with only about $3 billion covered by insurance companies. This was the first major earthquake to hit Kobe in 400 years! Very few analysts openly speculate about the possible economic impact of natural disasters. This is understandable, since no one knows if or when such events will occur. However, I feel that natural disasters, as unknown factors - Economic X Factors - must be given sufficient attention in a century that will likely be full of explosive issues. After Hurricanes Andrew and Iniki, some observers began to wonder about the possibility of future catastrophes and their economic impact on the insurance industry and other financial institutions. The rapid succession of these events and their deepen- 546 Global Economic Boom & Bust Cycles ing economic consequences were beginning to weigh heavily upon economic systems with limited resources. In May 1993, The Econo- mist reported that $23 billion was spent by the world’s insurers on natural disasters in 1992. Up to that point, that was a very large payout for natural disasters within a given year. The above analysis that appeared in World Economic Collapse and Bubble Markets and Boom & Bust Cycles, presented highlights of what appeared to be an intense period of natural disaster events. The broad scope of these disasters as well as the tremendous impact of 911-scale terrorism, presented potential and real challenges for the Information Age world of the 21st century. FIRST DECADE OF THE 21ST CENTURY: NATURAL DISASTER ECONOMIC X FACTORS Natural disasters during the opening years of the 21st century grew evermore devastating and severe. The frequency and magnitude of many of these events shattered records of previous decades and eras, and generated massive destruction and death. However, as we began to move into the second decade, it appeared that we had entered a period of extreme weather conditions and extreme natural disasters. Global warming was cited as a factor in the increase in natural disasters: Dangerous and unpredictable weather patterns; weather extremes overwhelming nations and regions all over the world. During the third week of November in 2011 top international climate scientists and disaster experts met on the continent of Africa (Uganda) and warned of a wave of more disasters. The group of scientists focused their attention on extreme weather conditions such as floods, droughts, storms, heat waves and tornadoes. Concentrations of greenhouse gases have hit record levels and are cited by scientists as one of the reasons for dramatic changes in global climate. According to the U.N. weather agency, since the start of the industrial era in 1750, concentrations of carbon dioxide in the world’s atmosphere are up 39 percent. These new figures are significant because the gases trap heat in the atmosphere, hence the global warming effect. Secretary-General Jeremiah Lengoasa of the Economic X Factors 547

World Meteorological Organization (WMO) has stated that CO2 emissions account for four-fifths of the rise in these dangerous gases in our atmosphere. CO2 levels are now at 389 parts per million; according to researchers, when it hits 450 parts per million the “worst of the climate disruptions” will occur. In addition, it appears that the “parts per million” average per year has started to accelerate: the average was 1.5 parts per million in the 1990s; the number was 2.3 between 2009 and 2010. The burning of fossil fuels, the loss of forests and the use of fertilizers are cited as the main factors in the increase of these gases in the atmosphere. In addition, the WMO issued a report that stated that there is at least a 66 percent chance that “climate extremes had been changed because of carbon emissions produced by fossil fuels and other human activity.” This was the first time this body/panel of scientists (organized by the United Nations and the World Meteorological Organization) had issued a major report with such depth and deep concern about the severity and increase of natural disasters. In addition, a growing body of scientific research shows that changes in the energy output of the sun account for most of the recent heating and cooling that we have experienced. It certainly could be a combination of factors, some of which is influenced by human activity. Economic losses are increasing, with more multi-billion dollar disasters becoming more common. The year 2011 went down in the record books as the most costly year for global natural disasters, clocking in at $378 billion in disaster losses, according to Munich Re, a reinsurance company. The previous record year for economic losses was 2005, resulting in a total figure of $262 billion. A major driver of the dramatic increases in disaster losses is the growing concentration of population groups in disaster-prone areas including more expensive properties. The Economist brings to light this important issue in its analysis on the increasing global costs of natural disasters: “However, even if natural disasters may be no more common and no more likely to kill people than before, there is no doubt that their economic cost is rising. This is because a growing share of the world’s population and 548 Global Economic Boom & Bust Cycles

economic activity is being concentrated in disaster-prone places: on tropical coasts and river deltas, near forests and along earthquake fault lines.”9 As result of these record losses, insurance companies began charging more for insurance protection. If governments, city planners and developers continue to build and place people in disaster- prone areas, then the Economic X Factor needs to be factored into the specific location and greater preventative measures provided for defenses against unpredictable calamities. Tougher building codes, early warning systems and better evacu- ation plans have saved many lives in many regions throughout the world; however, greater defenses are now needed to combat this era of increased activities in natural disasters. World governments need to allocate much larger budgets each year in preparation for major catastrophes. Both on a national and individual level, there will need to be constant preparation for possible economic collapse and calamity, especially during this period of vast uncertainties. In 2011 we experienced a year of major weather extremes and bizarre weather patterns. There were so many natural disasters compressed in such a short period of time. Jeff Masters of the Weather Underground website stated, “I've been a meteorologist for 30 years, and I've never seen a year like 2011 in terms of extreme weather events.” Both 2010 and 2011 were years of intense natural disasters around the world. In 2010, the devastating earthquakes in Haiti (which killed more than 200,000 people) and Chile (8.8-magnitude quake that killed more than 400 people) held the world community spellbound. In the summer of 2011 a severe widespread drought stretched across Kenya, Ethiopia, Somalia, Eritrea and Djibouti creating famine and hardship for millions of people. Food and water supplies were wiped out. Severe flooding in Thailand that began in July 2011 and continued until December, affected over 12 million people, and according to the World Bank, generated damages as high as $45 billion. In mid-December 2011, a devastating typhoon torn through the island of Mindanao in the Philippines bringing death to over 1200 people. Most of the dead were asleep when the raging floodwaters ripped their homes apart. News reports stated that in Economic X Factors 549 less than 12 hours, 8 inches of rain fell on the region causing flash floods and landslides. Over a half million people lost their homes. The U.S. experienced numerous tornadoes, a drought, flooding and a blizzard in 2011, causing more than $35 billion in damage. On April 27th, an unprecedented 300 tornadoes ripped through the South- east region destroying entire towns and killing 321 people. A level five tornado wiped out Joplin, Missouri on May 22, 2011, killing 158 people. A winter blizzard in the Midwest, Hurricane Irene on the East Coast and massive drought across the South wreaked havoc on the United States. THE RING OF FIRE Some independent thinkers and scientists believe that the Ring of Fire is waking up and becoming more active. The Pacific Ring of Fire is a 25,000 mile (40,000 km) horseshoe shape seismic belt or arc, home to 452 volcanoes and is an area where large numbers of earthquakes and volcanic eruptions occur each year. The belt expands from New Zealand, through the eastern edge of Asia, swings north across the Aleutian Islands of Alaska, and then moves south along the coast of North and South America. The earth crust is divided into giant rafts of rock called tectonic plates. The theory of plate tectonics indicates that the Ring of Fire is located at the borders of the Pacific Plate and other major tectonic plates. The crust and upper mantle of the earth (the lithosphere) is formed by various plates, and these plates interact, collide, and slide underneath one another. These massive movements release enormous power and energy, and generate major disturbances on the surface of our planet. This type of movement in the plates is known as subduction, and the nearby area that generates the volcanic and seismic activity is known as the subduction zone. About 90 percent of the world’s earthquakes occur in the Ring of Fire. And as we entered the second decade, the frequency and intensity of these quakes was on the rise. A number of factors could be coming together to create this phenomenon, however this is all 550 Global Economic Boom & Bust Cycles observation and scientific speculation. But the evidence is clear; we have entered an active period of seismic activity. WORLDWIDE DISASTERS: THE OPENING YEARS OF THE 21ST CENTURY The following is a list of some of worst natural disasters of the early 21st century; many are regarded as the worst catastrophes in modern history. Without warning, many regions in the world were severely devastated by crippling disasters. This is the broad nature of the Economic X Factor:

♦ The Indian Ocean 2004 Earthquake and Tsunami “The Wave that Shook the World” - December 26, 2004: Also known as the Sumatra-Andaman earthquake, this massive quake resulted in the death of over 230,000 people in fourteen countries, wiping out entire towns and villages along coastlines of these nations. With a 9.1- 9.3-magnitude, this quake was one of the deadliest natural disasters in recorded history. Scientists tell us that the force of this quake was more powerful than all of the earthquakes of the previous five years and that the energy released on the surface was comparable to 26 megatons of TNT or the equivalent of 1500 Hiroshima atom bombs. Scientists also tell us that this earthquake was so strong that it caused the earth to wobble about 2 ½ centimeters in its rotation and that it ruptured the greatest fault length of any recorded earthquake, spanning a distance of 900 miles. It had the longest duration of faulting ever observed, between 8.3 and 10 minutes. The epicenter of the main earthquake was approximately 100 miles in the Indian Ocean off the western coast of northern Sumatra, at a depth of just 19 miles below sea level. As a mega-thrust earthquake, this massive force would displace billions of tons of water setting in motion a dreaded tsunami traveling up to 500 miles per hour to the nearest coastlines. Nearly 100-foot waves - enormous walls of water - devastated countries with little or no warning of the coming catastrophe (there was no Tsunami Warning System in place, and these densely populated areas were totally unprepared for what hit them). In just 15 minutes Economic X Factors 551 after the earthquake, northern Sumatra was struck by the first tsunami wave. Thailand was hit one hour after the quake, and tsunami waves struck Sri Lanka and India one hour after landing in Thai- land. Banda Aceh, Indonesia suffered the heaviest casualties and destruction: 170,000 people lost their lives and many more were injured. One observer that toured the city after the destructive earthquake and tsunami stated that it was like the aftermath of an atomic bomb. Over 45,000 people would lose their lives in Sri Lanka and India. When it comes to natural disasters, flooding has proven to be the worst in terms of causing the most damage and death.

♦ Hurricane Katrina - August of 2005: Packing winds of up to 145 mph and labeled a Category 5 hurricane, Hurricane Katrina quickly became the deadliest and most destructive Atlantic hurricane of the 2005 hurricane season. Up to that point, it was the costliest natural disaster, with total property damage estimated at $81 billion. It destroyed one of America’s most famous cities, New Or- leans, Louisiana. At least 1,836 people died in the actual hurricane and in the subsequent floods. Residents by the hundreds of thousands were displaced. Images of Katrina still linger in the American memory of people stranded on rooftops waiting for rescue operations, of the Superdome shelter that became a place of despair as the crisis lingered for many days without effective rescue operations from FEMA and other public agencies, of people screaming for help after days of no response, of floating dead bodies and lost dreams. Like most natural disasters, many people loss everything when the levees were breached on August 29, 2005 and the city was flooded and remained that way for many days and weeks. The floodwaters paralyzed 80% of the city for many weeks. Hurricanes Katrina and Rita caused billions of dollars in damage in 2005. Six years after Katrina, residents of Louisiana had moved to more than 5,500 cities throughout the United States, most of who may never return to their home state. Many people went to Dallas, Houston, San Antonio and 552 Global Economic Boom & Bust Cycles

Atlanta. The disaster forced many to start new lives in new locations. Hurricanes Katrina, Rita and Wilma racked up $123 billion in damages.

♦ Haiti - January 12, 2010: In one of the worse natural disasters in recent history, a massive 7.0-magnitude earthquake struck Haiti and killed an estimated 300,000 people, destroyed 80 percent of the capital city of Port-au-Prince and displaced well over a million people. The economic blow to this nation was between $8 to $14 billion. Well over 630,000 people were forced to live in displacement camps and disease became a major health problem. It was the strongest earthquake that had hit Haiti in 200 years. The epicenter of the earthquake was about 10 miles southwest of Haiti’s capital city, Port-au- Prince, and was centered just 6.2 miles below Earth’s surface. Ac- cording to scientists, Haiti is located very close to the boundary where the Caribbean and North American tectonic plates meet; major fault lines linked to the plates’ movements run right through the country. In the destruction of most of the public buildings, a generation of doctors, nurses, professors, students, civil servants, and engineers were killed in this massive catastrophe. This island nation was dealt a severe blow, wiping out its infrastructure and creating a human tragedy of enormous proportion.

♦ Hurricane Irene - August of 2010: This massive hurricane swept through the East Coast wreaking havoc in nine states, causing $7 billion in damage. The hurricane flooded cotton and tobacco crops in North Carolina, suspended shellfish harvesting in Chesapeake Bay, swept away 35 bridges in Vermont, knocked out power in the region and kept commuters from their jobs in the greater New York metropolitan area.

♦ Peru - Earthquake and Seismic Activity (145 occurrences) in 2010: magnitudes 3.5 to 6.7. A very active region. Economic X Factors 553

♦ Queensland, Australia - January 2011: Massive flooding caused $7.3 billion in damage. A month later 180 mph Cyclone Yasi struck the coastal town of Cardwell in Australia.

♦ New Zealand - February 21, 2011: A massive earthquake hit New Zealand killing 181 people and left $20 billion in economic damage.

♦ Joplin, Missouri - May 22, 2011: A three-quarter-mile-wide tornado, one the biggest and deadliest tornadoes in U.S. history tore through Joplin and wreaked complete devastation on this town of 50,000 people. A six-mile swath of the city was mowed down by the powerful force of this deadly twister, packing 200 mph winds (an EF5 rated twister, the highest rated). More than 140 people were killed, 1500 missing, more than 900 were injured and hundreds were left homeless. Nearly a third of the city was leveled, with power and the sewage treatment systems severely damaged. In the wake of the deadly tornado, severe thunderstorms, bursts of hail and pounding rains kept Joplin in a state of terror. This was the single deadliest U.S. twister in more than six decades. The insured losses from Joplin totaled $6.7 billion.

♦ A massive 7.2-magnitude earthquake struck eastern Turkey, in the city of Ercis on October 24, 2011. The quake caused 970 buildings to collapse. More than 550 people were initially confirmed dead and over 1300 people were injured. The quake lasted for 20 seconds. More than 20 aftershocks shook the area. About 2,000 buildings were destroyed and authorities declared another 3,700 buildings unfit for habitation. On November 9th another 5.7-magnitude earthquake hit the region. In the period between these two earthquakes the region experienced 1400 aftershocks.

♦ Christchurch, New Zealand - December 23, 2011: Two days before Christmas, the city of Christchurch was hit by to powerful 5.8-magnitude tremors. Many people were out shopping when the 554 Global Economic Boom & Bust Cycles first quake struck at 1:58 pm, turning a festive occasion into fear and terror of total disaster. About 70 minutes later the second 5.8 quake came. The city had experienced a 6.3-magnitude quake in February 2011 that killed 181 people and destroyed a large percentage of the downtown area. New Zealand is another nation that sits on the Ring of Fire that experience upwards to 15,000 tremors a year. By October of 2011, a record-breaking 89 disasters were declared by President Obama. There were 81 declarations made in all of 2010, so there was a significant increase in 2011. According to the National Climatic Data Center, 2011 had more billion-dollar natural disasters than any year on record. America was hit hard by hurricanes, tornadoes, massive rivers overflowing and floods, unprecedented triple-digit heat and drought, wildfires and blizzards. It appears that 2010 was hard hit with natural disasters globally; however 2011 witness an unusual concentration of disasters in the U.S. According to Jeff Masters, a meteorologist who runs Weather Un- derground, “I’m not use to seeing all these extremes all at once in one year.” And according to Munich Re, a large multinational that insures insurance companies, the United States had 98 natural disasters during the first six months of 2011, and this was about double the average of the 1990s. Also, according to Munich Re, the global bill for natural disasters for the first six months of 2011 was $265 billion, with much of that total attributed to the massive earthquake, tsunami and nuclear meltdown in Japan. This was another indication that the occurrence of natural disasters were on the rise. Weather extremes, abnormal and freak weather patterns are the descriptive terms used to describe this era of natural disasters. In observing these unusual weather patterns, NASA Climate scientist Gavin Schmidt stated, “While the hurricanes and tornado outbreaks don't seem to have any clear climate change connection, the heat wave and drought do.” Global warming is playing a role in some of the extreme weather patterns, but it is not the sole reason for what we are now experiencing. Scientists are pointing to major “Solar Storms,” “Pole Shifting” and the weakening of the earth’s “Magnetic Shield” as other reasons Economic X Factors 555 for the increase in global natural disasters. Many observers now feel that we must now brace ourselves for these events to occur more often and perhaps with greater intensity. The scope and scale of these disasters have grown and big insurers, emergency managers, public officials, scientists and others have held summits on “how to better understand and manage extreme events.” In 2011, the richer areas of the globe experienced more of the devastation and impact of natural disasters. Thus, the cost of these events will continue to rise, possibly to astronomical levels. In the U.S., each presidential declaration makes the federal government responsible (much of it through the Federal Emergency Manage- ment Agency - FEMA) for at least 75 percent of the recovery costs of each disaster. More than 75 million Americans live near active earthquake faults. With a growing population, more buildings along coastlines and larger economies in developed regions, natural disasters will continue to become more costly. More property is in the way to get damaged. In an article entitled, “Drought, floods, food and climate,” economist Paul Krugman comments on the global warming crisis by reminding us that, “…what we’re getting now is a first taste of the disruption, economic and political, that we’ll face in a warming world. And given our failure to act on greenhouse gases, there will be much more, and much worse, to come.” Extreme weather patterns will continue to disrupt food production which will cause food prices to rise. Droughts, flooding and heat waves will wreak havoc on our world, generating shortages. JAPAN’S TRIPLE DISASTER: Earthquake, Tsunami and Nuclear Meltdown: 3/11 JAPAN - March 11, 2011 (3/11): A 9.0-magnitude super devastating (mega-thrust) earthquake struck Japan and initiated a triple disaster: earthquake, tsunami and nuclear power meltdown. Accord- ing to U.S. Geological Survey, this earthquake lifted a span of the ocean floor 50 feet over a span of 180 miles, setting in motion a massive tsunami that hit the shores of Japan shortly after the initial quake with over 10 billion tons of ocean water. The quake lasted an 556 Global Economic Boom & Bust Cycles unprecedented five (5) minutes! During the week following the quake, there were more than 500 aftershocks, with many of them the size of major earthquakes (one measuring 6.1-magnitude on the Rich- ter scale). Centered off the coast of Honshu at a depth of 17 miles below the earth’s surface, this quake generated a biblical-scale disaster with the tsunami attacking Japan’s northeastern coastal areas. This quake was so powerful it caused Japan’s coastline to subside by one meter. More than 19,000 people were killed, thousands were missing and millions of people were left living in shelters, with little food and water near-freezing temperatures. Japan’s government was completely overwhelmed by the triple impact of the disaster: a massive earthquake, tsunami and the Fukushima Daiichi nuclear power plant meltdown. For the world and Japan, this became known as 3/ 11. As the third largest economy in the world and one of the most developed nations on the planet, Japan’s moment of extreme catastrophe captured the attention of the collective consciousness of the entire world in a way that other disasters didn’t, shaping the economic policies, philosophies and technological and energy mandates in nations around the world. The images were profound and reached every corner of the world with astounding speed. As one reporter stated: “There is the sheer, surreal force of the images emerging from afflicted zones: cars perched on rooftops, ships sitting in rice paddies, helicopters in a David-and Goliath battle against radiation-spewing nuclear reactors.” In Germany, the reactions to the nuclear catastrophe lead to a pronouncement that the nation would be phasing out its nuclear energy sites over a period time. Other nations also began to re-think their nuclear policies. Many Japanese citizens began to strongly denounce the use of nuclear energy as a power source. Major magazine covers began to announce the uncertain future of nuclear energy: “Nuclear energy: The dream that failed” The Economist (March 2012) Economic X Factors 557

“Fukushima, March 12: 15:36: The End of the Nuclear Age” Der Spiegel magazine (March 2011) THE NUCLEAR CRISIS Considered as the worse nuclear crisis since the atomic bombing of Hiroshima and Nagasaki during World War II, the Fukushima Daiichi nuclear power plant became ground zero for 3/11. It was reported that a 46-foot tsunami wave broke through the protective wall of the complex that was located just meters away from the coastline. The defensive flood walls developed to protect the facility were 16 feet in height (5 meters), while the tsunami wave was greater than 20 feet (or 6 meters) in height. Backup generators were behind the walls, but they were not on high grounds. Explosions and fires broke out as the nuclear reactors overheated, spilling radiation into the Pacific Ocean, air and the surrounding land mass. Owned and operated by the Tokyo Electric Power Co. (TEPCO), the rapidly moving tsunami stormed the protective walls of the nuclear plant drowning the backup generators, knocking out cooling systems and causing the complex to leak radiation. Four major reactors were severely damaged in the catastrophe (three reactors went into the meltdown phase). The initial estimate was that it would take six to nine months to bring the crisis under control. Nearly 90,000 people had to be evacuated from the surrounding areas (within a 12-mile radius of the nuclear complex). In a sign that the radiation had seeped into the food chain, officials began to discover radiation contamination in spinach, milk and even tap water. Small amounts of cesium-137 (which is cancerous and has a half-life of 30 years) and iodine-131 were detected in milk. Three months after the disaster, scientists detected radioactive contamination from the plant 400 miles off Japan in the Pacific Ocean. They reported that the levels of concentration were not harmful to humans. Workers in the contaminated facility had to work in protected suits and masks, struggle against explosions, fires, aftershocks, leaks of contaminated water and equipment breakdowns; this would be an ongoing struggle for months to contain the complex nature of 558 Global Economic Boom & Bust Cycles the meltdown. In mid-December, Japan’s Prime Minister Yoshihiko Noda stated that “the Fukushima nuclear reactors have been brought to a state of cold shutdown.”10 Many nuclear scientists disputed that claim; however the government was attempting to move forward to the next stage, to bring to a closure a significant part of the crisis. In a New York Times report, a global team of experts led by Hitachi estimated that it would take three decades to return the site to a “green field” state (a condition safe for human habitation within legal limits of radiation). One of the main producers of nuclear reactors, Toshiba, stated that it would take approximately 10 years. How- ever, by December 2011, Japan was ready to execute a nuke cleanup operation of the areas evacuated during the crisis. The decontamina- tion process (to deal with the radiation fallout) contemplated consisted of: (1) scrubbing down thousands of buildings and the topsoil of the area of radioactive particles. (2) clean-cutting and scraping forested mountainous areas. The evacuated areas covers about 5,200 square miles, about 3 percent of the land mass of Japan, thus this land (as far as the Japanese are concern) cannot be abandoned. After the Chernobyl nuclear crisis in 1986, the Soviet Union relocated 300,000 people and abandoned the land affected by the crisis, and as of 2012, that land is still uninhabitable. In a crisis of this dimension, the threat of nuclear radiation is severe and can become fatal very quickly. For people near or around the affected areas, the government advice was to “Please do not go outside. Please stay indoors. Please close windows and make your homes airtight…Don’t turn on ventilators. Please hang your laundry indoors.” I agree with Eugene Robinson, writing in the Washington Post, that “Nuclear fission is an inherently and uniquely toxic technology.” In January 2012, almost a year after the nuclear meltdown, de- tection of radiation in Japan’s food supply illustrated the continued struggle of this nation to contain the deadly nuclear fallout. In the small town of Onami, located about 35 miles northwest of the Fukushima Daiichi nuclear plant, unsafe levels of radioactive cesium was detected in samples taken from rice farms. As one reporter observed: Economic X Factors 559

“An ensuing panic forced the Japanese government to intervene, with promises to test more than 25,000 rice farms in eastern Fukushima prefecture, where the plant is located. The uproar underscores how, almost a year after a huge earthquake and tsunami…Japan is still struggling to protect its food supply from radioactive contamination.”11 About 160,000 people were evacuated from homes near the plant, an area that may be uninhabitable for many years or even decades. The meltdown released a great deal of radiation into the environment. The abandoned communities (towns and villages where families had lived for centuries) are a testimony to the enormous losses suffered by the people: large rice fields, large businesses, well-built schools and ancient connections to the land. Tepco’s primary focus was to stabilize the reactors. The company was on course to lose ¥570 billion in the fiscal year ending in 2011. By December 2011, the fear of Nuclear power had captured the minds of many people in Japan: the anti-nuclear movement grew larger and stronger as a result of the crisis. As nuclear power operators suspended the operations of their nuclear energy plants for routine maintenance, very few were allowed to resume operations after 3/11. Throughout Japan concern for public safety prevented the majority of Japan’s 54 nuclear reactors from going back online. Only eight plants were in service as of December 2011.12 Kansai Electric (KEPCO), a utility that covers the cities of Osaka and Kyoto, had only one of its 11 reactors up and running during December 2011. By March 2012 The Economist reported that “52 of the country’s 54 nuclear reactors were off-line - their power replaced by old thermal plants working at full capacity.”13 TYPHOON ROKE In early September 2011, roughly six months after 3/11, Japan was hit with a massive killer typhoon, reportedly the worst in seven years. Initial news reports stated that 34 people were confirmed dead, 55 people were missing, and thousands were stranded as the typhoon washed away railways, bridges and roads. This was another clear indication that this nation is subject to a variety of natural disasters 560 Global Economic Boom & Bust Cycles that could disrupt and destroy the operation of nuclear power facilities. TSUNAMI As stated earlier, the mega-thrust earthquake displaced over 10 billion tons of ocean water and sent giant waves as high as 46 feet (or higher) traveling at 500 miles per hour to the northern coastline of Japan. The first waves of the tsunami hit Ofunato, Japan just 20 minutes after the massive earthquake. There was very little time for the people of that city to escape to safety. The tsunami and flood waters generated the greatest amount of damage, especially in the destruction of towns and villages, and the creation of the nuclear disaster. The massive destructive force of the tsunami simply tore through, ripped apart and carried away entire coastal towns and villages creating millions of tons of debris. One year after the disaster, the wreckage and debris of the tsunami littered the landscape: as reported by The Economist “an estimated 22.5m tones of debris scat- tered across Japan’s north-east coast - the equivalent of possibly 20 years of municipal waste…Only 6% of it has been permanently dis- posed of…Much of the farmland is contaminated with sea water; it will take several years for the salt to be washed out.”14 Approxi- mately 1.5 to 2 million tons of debris (dispersed over an area of 2000 miles by 1000 miles, roughly the size of California) was swept into the Pacific Ocean and began floating towards the North Ameri- can West Coast. On March 20, 2012, an empty Japanese fishing vessel (the 164 foot Ryou-Un Maru, which the Press labeled the Ghost Ship) was spotted drifting off of the coast of western Canada and represented part of the first wave of debris generated by the Japa- nese tsunami of 2011. ECONOMIC IMPACT The disaster caused at least $220 billion in damages in the destruction of towns, villages, infrastructure and assets. The crisis crippled several industries and left many international firms and investors unwilling to invest in Japan. Prior to the disaster, Japan already had been wrestling with a decade-long battle with deflation Economic X Factors 561 and enormous public debt. And with an aging population, this crisis simply exacerbated the core weaknesses of the nation. There was an immediate plunge in stock market values. As the third largest economy in the world and the fourth largest trading partner with the United States, Japan’s natural disaster crisis quickly spiraled into an economic quagmire: stock and commodity prices took an immediate hit as the crisis began to unfold. The prices of oil, natural gas, coffee, lumber and sugar fell on economic concerns that demand would suffer as Japan was knocked flat on its back. With Japanese manufacturing deeply tied to and integrated with the world’s two largest economies (America and China), there was deep concern of how long it would take for things to get back to normal. Economic dislocations were of major importance in this scenario. By Novem- ber 2011, signs of the economic slowdown were evident as the unemployment rate had increased and as the yen rose against the dollar amidst a global economic slowdown. Japan’s manufacturers laid off 210,000 workers in October. AN EARTHQUAKE-PRONE NATION WITH VAST NUCLEAR POWER Japan is located at the juncture of four tectonic plates, and as a result of this critical geological location, experiences about 20 percent of the largest earthquakes recorded each year. These are scientific facts that are well known in Japan and throughout the international community. One has to wonder why this nation would have 54 nuclear reactors operating in an actively seismic region. Given the potential risks of nuclear fission and radioactive fallout, what motivated the political and business establishment to saturate the geographically small land mass of Japan with nuclear power. It’s clear that energy independence was a key factor, especially since Japan has little or no natural resources. However, given Japan’s scientific and technological achievements over the past half century, I expected this nation to become the leading powerhouse in renewable energy technologies. Observations from The Economist help us 562 Global Economic Boom & Bust Cycles to understand what happened to create this trust and belief in nuclear energy power in Japan: “Indeed, much of society, excluding an anti-nuclear fringe, happily accepted the “safety myth” that enabled Japan to cram 54 nuclear reactors on one of the world’s most earthquake-prone archipelagos…But if people bought the myth, it was because successive LDP governments, ministries, big-business, lobbies, media barons and university professors sold it to them. Acci- dents such as Three Mile Island in Pennsylvania in 1979 and Chernobyl in 1986 caused barely a flicker of hesitation over the building of more nuclear plants in Japan.”15 In nuclear power, especially in the scientific process of nuclear fission, there is no such thing as a fail-safe system. Even in the newer designs and other enhancements that scientists and technocrats will state as assurances that another Fukushima Daiichi will not happen, this is not technology we should support as an energy vector in the 21st century and beyond. In addition, all of the nuclear power plants produce nuclear waste that has to be buried somewhere on our planet, nuclear waste disposal of radioactive byproducts. The consequences of failure are too great, and as a civilization we need to move in other directions. The nuclear crisis in Japan was the final wakeup call to the entire world. The use of nuclear fission technology is simply a bad idea and we do not want to see the worst case scenario. In writing for the Washington Post, Eugene Robinson presented a very concise analysis of the nuclear power issue shortly after 3/11. In his article entitled “Nuclear power now looks more like a bargain with the devil,” Robinson reminds us of some very important realities in dealing with nuclear fission produced energy: “The problem with nuclear fission is that the stakes are unimaginably high. We can engineer nuclear power plants so that the chance of a Chernobyl- style disaster is almost nil. But we can’t eliminate it completely - nor can we envision every other kind of potential disaster. And where fission reactors are concerned, the worst-case scenario is so dreadful as to be unthinkable…In the Chernobyl incident, a cloud of radioactive smoke and steam spread contamination across hundreds of square miles; even after 25 years, a 20-mile radius around the ruined plant remains off-limits and uninhabitable.”16 Economic X Factors 563

It appears that enlightenment on this issue will occur when the world is forced to experience something worse than Fukushima Daiichi. It is my hope that the German initiative to phase out its nuclear power plants will have a measurable impact on other nations around the world to abandon this potentially deadly technology. The risks associated with this technology are not worth the so- called benefits that are derived from the use of nuclear power. As I stated in the chapter on “Information Age Technologies,” nuclear fusion should be the only potential use of nuclear power in the future. Splitting the atom is a scientific unholy alliance with the devil (the opposite of good)! This longer analysis of Japan and 3/11 was designed to highlight the potential and real connection between natural disasters and their destructive power to destroy nuclear power facilities. World governments simply cannot predict nor fully protect their populations from the unexpected chaos and destruction of natural disasters. And no matter how well-designed and newly constructed (with the latest technologies) nuclear power plants are built; there simply are NO fail-safe systems that we can rely on given the unpredictable nature of natural disasters. This civilization has to factor in the explosive destructive power of natural disasters when considering the use and operation of such potentially harmful technology as nuclear fission. The risks of widespread radioactive fallout in a heavily populated region are just too great to keep such technology in operation. The first year-long struggle in Japan to contain the crisis was an eye- opener, and should have been an important wake-up call to the entire world civilization to “Abandon Nuclear Fission Technology.” NATURAL DISASTERS IN EARLY 2012 ♦ Indonesia - January 10, 2012: Centered 18 miles beneath the ocean floor, a powerful 7.3-magnitude earthquake struck Indonesia. There were no immediate reports of injuries or serious damage.

♦ Mexico - January 21, 2012: 6.2-magnitude earthquake. 564 Global Economic Boom & Bust Cycles

♦ Fiji Islands - January 24, 2012: 6.3 earthquake - no reports of damage or injuries.

♦ Japan - March 14, 2012: A 6.8-magnitude earthquake struck the southern coast of the island of Hokkaido and caused a small tsunami, however there were no major damage or injuries. About three hours later a 6.1-magnitude quake with an epicenter off the coast of Chiba (east of Tokyo) shook buildings in Tokyo. Again, there was no major damage or injuries. According to the Tokyo Uni- versity Earthquake Research Institute, since the massive disaster of 2011, there had been “a five-fold increase in the number of quakes in the Tokyo metropolitan area.” On March 11, 2012, the Japanese people paid special observance and remembrance of the massive earthquake and tsunami (3/11) that killed over 19,000 people. A moment of silence was observed at 2:46 p.m., the exact time when the 9.0-magnitude quake occurred on that fateful day in 2011.

♦ Mexico, Mexico City - March 21, 2012: A 7.4-magnitude earthquake with an epicenter 200 miles southeast of the capital, lasted over one minute but had minimal damage. The quake originated 12 miles underground and this presented no threat of a tsunami. There were no fatalities: Ring of Fire.

♦ Illinois and Kansas - February 29, 2012: Midwest twisters devastated two towns killing at least 10 people. One eye-witness stated that, “Every time the tornado hit a building, you could see it exploding.” Funnel clouds drop out of a darkened sky, ripping apart everything in its path; pulling trees out of the ground, tearing buildings apart, swooping mobile homes and cars up into the air.

♦ Indonesia - April 11, 2012: Two earthquakes struck Indonesia in a double punch to this nation still recovering from the 2004 mega- disaster 9.1-9.3-magnitude quake and tsunami that killed 170,000 people. The first quake measured 8.6-magnitude and was centered 20 miles (33 kilometers) beneath the ocean floor. The distance from Economic X Factors 565 the Aceh province (the location where the 2004 quake and tsunami killed 170,000 people) was about 269 miles (434 kilometers). The Pacific Tsunami Warning Center in Hawaii issued a tsunami watch for many nations in the region including South Africa, Singapore, Indonesia, India, Sri Lanka, Australia, Bangladesh, Malaysia and others. Only small tsunami waves hit the shores of Indonesia, however an 8.2-magnitude aftershock came shortly thereafter and sent people scrambling again for safety as another tsunami warning was issued. No major tsunami was generated from either of these quakes due to the type and nature of these earthquakes. These two quakes were considered strike-slip quakes, which according to scientists “cause a horizontal tearing movement that does not displace the seabed, causing vibrations in the sea instead.” The so-called mega-thrust earthquakes cause the seabed to rise vertically propelling large volumes of water to generate huge waves traveling at enormous speeds. Mega-thrust quakes are more powerful and much more destructive. Japan’s 9.0-magnitude mega-thrust quake in 2011 was four times more powerful than Indonesia’s first 8.6-magnitude strike-slip quake, and the 2004 9.1-9.3-magnitude Indian Ocean mega-thrust quake was five times more powerful. This was another quake situated in the Ring of Fire.

♦ Mexico - April 11, 2012: A strong 6.5-magnitude earthquake hit the western state of Michoacán in Mexico with an epicenter 238 miles (384 Kilometers) west-southwest of Mexico City. There was no major damage and no tsunami warning. It was the third earthquake to hit Mexico in less than a month. As one observer has stated, “the Ring of Fire has awakened,” and this will mean more frequent earthquakes and volcano activity throughout the ring.

♦ Pacific island nation of Vanuatu - April 15, 2012: A 6.5-magnitude earthquake struck this island nation 9:05 a.m. in the morning. The epicenter was 91 miles southeast of Port-Villa, Vanuatu at a depth of 5.4 miles below the surface. There were no reports of damage or injuries. This was another quake situated in the Ring of Fire. 566 Global Economic Boom & Bust Cycles

♦ Midwest-United States (Oklahoma, Kansas, Minnesota, Wis- consin, Nebraska, North Texas, and Iowa) - Weekend of April 14, 2012: News reports indicated that at least 122 tornadoes tore through the Midwest section of the United States. Five people died in Woodward, Oklahoma and there was heavy damage throughout the region (estimated cost was $283 million). More than two dozen people were injured.

♦ Chile - April 16, 2012: A strong 6.7-magnitude earthquake hit the South American country of Chile. At a depth of 23 miles (37 kilometers), the quake’s epicenter was 26 miles (42 kilometers) northeast of Valparaiso. The earthquake lasted for nearly one minute. There were no reports of major damage, however, the quake knocked out power and telephone service in various parts of Santiago. One 72- year old man died of a heart attack during event, but no other injuries were reported. Chile is another vulnerable region in the Pacific Ring of Fire and is the subject of many earthquake events. The country had just experienced a 7.1-magnitude earthquake on March 25, 2012, which was considered the strongest event since a massive quake struck the coastal country in 2010. In 2010, an 8.8-magnitude quake generated a tsunami that wiped out the city of Constitucion.

♦ Papua New Guinea - April 17, 2012: A 7.0-magnitude quake hit the northeast of Papua New Guinea at 5:13 pm but did not cause any major damage or injuries. The quake originated at a depth of 201 kilometers about 88 miles (141 kilometers) north of the city of Lae. A tsunami warning was not issued. This is another region of the Pacific Ring of Fire that is subject to frequently strong earthquakes.

♦ Mexico City, Mexico - April 18, 2012: The Popocatepetl volcano, located about 40 miles southeast of Mexico City, spewed glow- ing rock from its crater and shot a burst of ash into the sky. The mountainous peak stands 17,886 feet (5,450 meters) and is located within the system of the Pacific Ring of Fire. This was another early mild event indicating the awakening of the Ring of Fire. Economic X Factors 567

♦ Superstorm Sandy - October of 2012: The 2012 Atlantic hurricane season produced one of the most devastating storm systems in recent memory: Superstorm Sandy. Before making landfall in the United States on October 29th, Hurricane Sandy swept through the Caribbean generating tremendous damage. Jamaica, Haiti, Cuba, Dominican Republic, the Bahamas and Puerto Rico were all struck by the massive power of this storm system. In Haiti, 54 people died and over 200,000 people were made homeless by flood waters. Cuba suffered 11 deaths and nearly $2 billion in damages. Two people were reported dead in the Bahamas amid an estimated $300 million in damage. The nature of the storm changed as it traveled through the islands and throughout the eastern seaboard of the United States; Superstorm Sandy was reclassified from a hurricane to a non-tropical storm, to a post-tropical cyclone, until the media finally began to calling it a Superstorm. Sandy hit landfall in the U.S. on October 29th packing winds of up to 90 MPH and flood tides as high as 13 feet. Spanning nearly 1,000 miles from Florida to the border with Canada, Sandy left millions of people without power, shut down entire mass transit systems in city after city, tore through coastal towns with heavy winds, rain and flooding, caused the cancellation of thousands of flights worldwide, transformed some of Atlantic City’s streets into rivers, flooded Lower Manhattan, shut down Wall Street for two days and would ultimately have an impact on 24 states. In West Virginia, western Maryland and southern Virginia, the storm system generated severe snowstorms and two feet of snow in the mountainous areas. The states of New York, New Jersey and Penn- sylvania were severely damaged during this massive storm. The total death toll (as of November 3rd) was 113 people in nine states, with most of the deaths occurring in New York (48) New Jersey (24) and Pennsylvania (14). The Superstorm made its appearance in the U.S. eight days prior to the historic November presidential elections. Climate change and extreme natural disasters had not been part of the presidential debates; however, Superstorm Sandy delivered a resounding and forceful message to the candidates: that global warming and extreme weather patterns are real! It was an urgent reminder 568 Global Economic Boom & Bust Cycles of how unprepared we are in the face of colossal natural disasters and that our politics need to give strong consideration to the significance of climate change and other types of natural catastrophes. According to Eqecat, a catastrophic risk management consulting firm, estimated damages caused by Superstorm Sandy would be $30-$50 billion. These were preliminary numbers presented in early Novem- ber, only time will tell how much this disaster would really cost the nation. THE ARAB SPRING Other unknown and sudden unpredictable events and developments such as the “Arab Spring” that began in late December 2010 and early 2011 brought massive change to a region of the world that had been dominated by mostly long-standing autocratic rulers. Much of the economic and political catalysts that began the wave of protests and demonstrations throughout much of North Africa and the Middle East was captured and organized on the Internet. What began in Tunisia with the street vendor, Mohamed Bouazizi, who set himself on fire on December 17, 2010 to protest the economic hardship, rising prices, government corruption and cronyism, quickly grew into a multi-nation revolution against the old guard. Social media was an invaluable tool used to organize the civil resistance against the entrenched powers of each nation. Facebook, Twitter and YouTube helped to organize the strikes, demonstrations, marches and rallies that shook the foundations of the Arab world and uprooted decades of entrenched autocratic governments. After 10 months of struggle and revolution, four leaders had been overthrown: President Zine El Abidine Ben Ali of Tunisia, President Hosni Mubarak of Egypt, Muammar Gaddafi of Libya, and President Ali Abdullah Saleh of Yemen. The struggle continued in Syria and elsewhere, but the massive change had taken place and the spirit of the revolution had reached the masses throughout the Middle East and North Africa. Constitutional reforms were implemented in Morocco and Jordan in response to the protests and demonstrations. In Ku- Economic X Factors 569 wait, Oman and Lebanon, governmental changes were made to accommodate the new era. Indeed, a new era was born in this troubled region of the world in 2011. And as Secretary of State Hillary Rodham Clinton stated in an interview, “We’re facing an Arab awakening that nobody could have imagined and few predicted just a few years ago.” Moreover, in 2012, we have yet to see the end result of this massive development. There are many unknown factors brewing deep within the political and economic upheaval that produced the Arab awakening in 2011. Only time will tell what the end result will be after such a massive upheaval. We can expect Economic X Factors to play a role in future periods. SUMMARY/ANALYSIS The surprise attacks of 911 generated major disruptions and gave rise to a laundry list of uncertainties. However, like natural disasters, these types of events are totally unpredictable and uncertain in the depth of their devastation. For many people (including myself) the initial shock of 911 would last for nearly a month, particularly as media coverage kept the details and images fresh in our minds. This was clearly different for Americans! And given the continued threats of bio-terrorism (anthrax mailings, etc.) and other forms of potential terrorist assaults, the entire modern world moved into a whole new arena of 21st century high-tech warfare. We would now have to deal firmly with the other face of the Information Age Revolution: the potential use of many new high-tech weapons and the spread of lethal man-made biochemical diseases. But despite the harsh realities of the 21st century terrorist Economic X factor, we are now forced to live with these potential threats the same way we adjusted to the long 45-year Cold War of the 20th Century. And like the Economic X factor of natural disasters, one simply has to be aware that these events could happen anytime. This is clearly not a perfect world; however, I think mankind has made it worse than it should be. The global ripple effects that occurred on the day and day after of 911 were significant. In Japan, the Nikkei fell almost 7 percent; in 570 Global Economic Boom & Bust Cycles

Korea the stock market plunged 12 percent; and in most European and Latin American markets, similar declines were recorded. With most Asian economies depending on exports for most of their growth, global economic contraction simply made it a difficult period. America launched two wars, spent trillions of dollars and instituted a global manhunt for Osama Bin Laden and the Al Qaeda global network. After ten years and two presidents, on May 2, 2011, Osama Bin Laden was shot and killed by Navy SEAL commandos on a sprawling compound 35 miles from Islamabad, the capital of Pakistan. Under the direction of President Barack Obama, the body of Bin Laden was placed in a helicopter, flown to a ship and buried at sea. This brought to an end one of the most expensive, expansive and exhaustive manhunts in the history of modern civilization. How- ever, this would not remove the threat of the Economic X Factor of terrorist attacks. This remains an unpredictable reality similar to natural disasters. Of all the Economic X Factors, the most critical and vastly unpredictable reality is the sudden emergence of natural disasters. What were presented in this chapter are reasons for giving greater consideration to the economic implications of natural disasters. Our knowledge is limited concerning the occurrence of these events; however we must come to an understanding that we have entered a period of increased activity of a wide range of possible calamities. For instance, it appears that the Ring of Fire has awakened to the production of much larger events, stronger earthquakes and perhaps much stronger volcanic eruptions in the not too distant future. While scientists can point to global warming as a catalyst for extreme weather patterns, there is no clear connection or inference to be made in the case of earthquakes, volcanic eruptions and the dreaded tsunamis. There are a combination of factors coming together to produce this period of extreme weather and overall extreme natural disasters. And this is what this civilization needs to come to terms with: that in 2012 (whether we believe in Mayan prophecy or not) our world has entered a period of frequent and extreme natural disasters. Economic X Factors 571

As I stated earlier in the chapter, the nuclear energy crisis in Japan was a wakeup call to the entire world to abandon this technology, but many nations will not heed the call. The addiction to nuclear fission is almost similar to the addiction to oil, both of which should be phased out in the 21st century. Moreover, what is perfectly clear to me is that this world does not need any more nuclear power plants that could conceivably be the unexpected target of an unpredictable natural disaster. It is certain that we do not have control over how, when and where these disasters will strike next, but can make preventative decisions about what we build and place in the path of the destructive forces of nature. The emergence of Superstorm Sandy on the shores of the U.S. as Americans were preparing to go to the polls to vote for their next president, was a clear sign that we need leadership that understands the science and reality of global warming and extreme weather patterns. There must be enlightened leadership for this century of turmoil or we, as a species, will not survive. Our refusal to end the Age of Oil, Nuclear fission power and other failed policies will only accelerate our demise. These are no longer philosophical choices, they are hard scientific alternatives: we will either move with a total commitment to clean energy and scientific salvation or stay addicted to the death of oil and nuclear fission and live in ignorance. Finally, I take the position that the more people that are prepared for potential disasters or economic reversals (economic chaos), the better we will be able to survive as a community, nation or civilization. The massive destruction of natural disasters can change our realities very quickly and we must now be in constant preparation for these events. It is better to be prepared and nothing happens than to be unprepared in the face of calamity. 572 Global Economic Boom & Bust Cycles

NOTES 1) Nick Driver, “Blame recession on bin Laden,” San Francisco Examiner, Oc- tober 19, 2001, p. A-1. 2) Chronicle Wire Service, “Hugo Leaves Cities Battered In the Carolinas - 11 Dead,” San Francisco Chronicle, September 23, 1989, p. 1. 3) Sarif Imam - Jomeh, “Devastated Families Mourn Their Dead,” San Fran- cisco Chronicle, June 23, 1990, p. A7. 4) Chronicle Wire Service, “Midwest Tornadoes Kill 30 - Hundreds Hurt, Wide Damage,” San Francisco Chronicle, April 27, 1991, p. 1. 5) Los Angeles Times, “4 Million ‘at Risk’ In Wake of Cyclone,” San Francisco Chronicle, May 7, 1991, p. A7. 6) Chronicle Wire Service, “Japan Volcano Erupts - Death Toll at 12,” San Fran- cisco Chronicle, June 4, 1991, p. 1. 7) William Branigin, “Angry Mt. Pinatubo Evicts Aboriginal Tribe,” San Fran- cisco Chronicle, July 14, 1991, p.4. 8) Michael J. McCarthy, Robert Johnson, and Greg Steinmetz, “Andrew Spends Waning Fury in Louisiana,” Wall Street Journal, August 27, 1992, p. A2. 9) Yuji Okada, Jacob Adelman and Stuart Biggs, “Fukushima Dismantling to Start After Shutdown,” Bloomberg.net, December, 15, 2011. 10) Briefing Natural disasters, “Counting the cost of calamities,” The Econo- mist, January 14, 2012, p. 60. 11) Martin Fackler, “Radiation still a threat to Japan’s food supply,” The Sacra- mento Bee, January 22, 2012, p. A5. 12) Tokyo: Japan's energy crisis, “Nuclear winter,” The Economist, December 10, 2011, p. 47. 13) Koriyama, Rikuzentakata and Tokyo, Briefing Japan after the 3/11 disaster, “The death of trust,” The Economist, March 10, 2012, p.38. 14) IBID., p. 36. 15) IBID., p. 36. 16) Eugene Robinson, “Nuclear power now looks more like a bargain with the devil,” The Sacramento Bee, March 15, 2011, p. A13. EPILOGUE

“By diverting precious time, energy and talent toward fighting endless wars rather than funneling them for more constructive uses, the United States may unwittingly create its own downfall. Overextended military aggression abroad and unrestrained military buildup at the expense of other investments can ultimately backfire.” Ann Lee

he Grand Convergence theory presented in this book sug- Tgests that a number of tectonic events and economic forces will converge on this era to bring about massive change on our planet. This is the end of an era but not the end of the world. We are headed for a critical impasse in this present global scenario, one that will violently shake the economic and financial pillars of the world. The United States must begin to focus on rebuilding its infrastructure and repairing the severe financial damage to the American people and its domestic economy. This nation must also begin to reduce its foreign policy financial obligations to the rest of the world in order to strengthen its domestic economic and political security. America is at the crossroads and must not delay making the changes that are required to adjust to the new global realities. To remain overextended and bloated on the military front will simply make it much more difficult to recover from an extended bust cycle that includes massive de-leveraging by the decimated middle class in America, Eu- rope and other parts of the developed world. It is very hard for many people to fully understand the complexity of the epic drama unfolding before our eyes. And for many of us, it is even more difficult to accept the premise that the global economic system may be heading for a major collapse, one worse than the meltdown of 2008. However, the evidence presented in the pages of this book point overwhelmingly to the emergence of a transition period of massive change and evolution. Europe is imploding, America is struggling with an anemic recovery and gridlock politics in Washington, Japan is falling deeper into a deflationary pit and

573 China’s super growth era is decelerating. And there is no formal consensus from global leaders and people in power that the developed world is caught in the solid grip of a prolonged Balance Sheet Recession. We live in a world of 7 billion people and very few nations are accepting the scientific analysis of peak oil and other diminishing fossil fuel resources. Even in 2012, corporations continue to build combustion engine automobiles as if we still have an abundance of cheap oil. This book recommends that all earth- loving people should stop buying combustion engine automobiles. The sad reality is that most nations will continue the day to day struggle to acquire their daily fix of oil until it becomes too expensive to do so. It is time for the entire world to come to the conclusion that the Age of Oil is in decline, and that we must begin the transition period away from this depleting energy vector and devote our financial resources to the clean energy revolution. In addition, the world should stop the use of nuclear fission power. After the 2011 nuclear meltdown in Japan, there should be no question in anyone’s mind concerning how dangerous this technology is in the current era. Too many things can go wrong with this technological power source: natural disasters wreck- ing a facility; targeted terrorists attacks; and facility malfunc- tion and meltdowns that could release radioactive contaminants. Why take the risk and also be required to dispose of nuclear waste. In the information age, we can safely generate electricity without nuclear fission power. Unknown economic X-Factors will continue to play a critical role in future periods, having a major impact on a weak and vulnerable global economic system. Economic planning should take into consideration the uncertainty of these factors. National governments need to be more proactive and financially prepared to deal with these eventualities. Implementation of the full power of the Information Age Revolution must be adopted by those nations who understand

574 the super critical nature of our times. However, the most likely scenario is that trillions of dollars will only begin to move in this direction after a major crisis in the global economy. When it is clear that the old technologies of the industrial era are dinosaurs, then we will see a mad rush to implement the infrastructure for the new era. Finally, as individuals, communities and organizations, we must be prepared for the onset of a major collapse and downward cycle. Similar to preparing for natural disasters, now is the time to put aside the reserves and circle the wagons. No one knows how long the downward phase will last, however, we do know that it will not be shallow and brief. The global economic system is in deep trouble and is embedded with countless trillions of dollars of derivatives and credit bubbles of enormous proportion. This is what will explode in our faces on some unsuspecting day in the future. It is better to be prepared and nothing happens than to be unprepared and all hell breaks loose. Make some preparations to survive this thing!

575 ABOUT THE AUTHOR

Khafra K Om-Ra-Seti has worked as a professional stockbroker and institutional trader for the Charles Schwab Corporation; for six years he was a lead instructor for the BA Completion Program at New College of California; and is currently an active investor in real estate and the stock market. As a writer and publisher for nearly two decades and a self-proclaimed futurist, Khafra has become more energetically focused in the development of Information Age technologies and the clean energy revolution that are destined to completely transform our way of life in the 21st Century. He is also very concerned that the entire world is moving too slow to declare the end of the AGE OF OIL. His keen interest in computer technology and related futuristic issues evolves from his work with mainframe computers that began in the latter 1970s and early 1980s. He ob- tained his education at San Francisco State University, earning BA and MBA degrees in finance. In this current book, Khafra expands on his interdisciplinary knowledge and economic ideas to bring about a Grand Convergence theory of the collapse and revision of the global economy. He also presents some of his visionary ideas concerning the economic recovery in the 21st Century and beyond.

576 ALSO BY KHAFRA K OM-RA-SETI

World Economic Collapse: The Last Decade and the Global Depression (1994) Co-author: Black Futurists in the Information Age: Vision of a 21st Century Technological Renaissance (1997) Capoeira, The Novel: A Tale of Martial Arts Mastery, Mysticism and Love (2002) Bubble Markets and Boom & Bust Cycles: Paradigm Revolutions in the Information Age (2002) Global Economic Meltdown - Long-Wave Economic Cycles: Myth or Reality (2012)

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577 GLOSSARY

This section includes economic, financial, and other relevant terms used in this book. Some of these terms are unconventional and are given definitions which explain their meaning and usage within a given context. Other terms are in common usage and are broadly defined.

ADAM SMITH (1723-90): As founder and originator of the classical school of thought in economics, Adam Smith paved the way for the modern evolution of capitalism that overcame the “mercantalist” societies of the 15th and 16th centuries of early Europe. In his book The Wealth of Nations, published in 1776, Smith presented the first systematic analysis of economic data, and the underlining philosophies guiding the economic behaviors of human societies. His analysis advocated a limited role for government, free market systems, and the significance of individual self-interest. The notions of “Laissez Faire” (let them do) and the "Invisible Hand" are popular concepts associated with his writings. To Smith and other classical thinkers that would follow, the free enterprise system was a self- adjusting, competitive environment tending towards full employment with minimal government intervention. Smith's analysis provided little or no understanding of depressions, capitalistic greed, or an adequate picture of the business cycle. AGE OF LIGHT: Refers to the coming speed of light rate of data transmission and manipulation in computer assisted telecommunications. It will be a new age commencing sometime after the year 2000, in which we will witness an expanded intellectual universe. It will enable unpredictable scientific breakthroughs and elevated levels of consciousness. ARTIFICIAL INTELLIGENCE (AI): Refers to the ability of a computer to perform intelligent thinking and make intelligent decisions. It involves the combination of complex and simple software

578 Glossary 579 elements to bring about a simulated form of applied logic. AI is the ability of a device to perform various functions similar to human intelligence, variously called reasoning, planning, learning, problem solving and pattern recognition. ARBITRAGE: An investment strategy that seeks to take advantage of price differences in two or more markets with respect to the purchase or sale of securities, commodities or currencies. The object for the arbitrageur is to profit from the existing or prevalent price differentials. BIOMASS: A rapidly evolving field of energy development that focuses on converting rotting organic matter, such as plant life, animal waste, commercial and residential garbage and other forms of organisms (present in particular habitats), into various forms of energy. In a sense, it is a system of recycling of living matter that may normally be discarded, never fully utilized. In a process known as “anaerobic digestion,” where free air is non-existent, microorgan- isms of biomass are converted into methane and other gases. BI-POLAR: Refers to two diametrically opposed views, political systems, economic philosophies, etc. . The bi-polar era as mentioned in this text, refers to the dominant spheres of influence of the United States and the Soviet Union - the two chief hegemonies of the post World War II period - which strongly influenced and controlled international politics, economies and military competitions throughout the period 1943 through 1991. That era is rapidly fading, with the collapse of the Soviet “Command economic system.” Commu- nism versus capitalism was one of the central themes of the bi-polar era, with the two large continental empires dominating the international arena. BOOMING 80S: The 1980s was an exhilarating period of Reaganomics and Republican Administrations; a period of massive U.S. budget deficits, the rise of the Pacific Rim, and the emergence of a relatively large number of billionaires. It was also a period of rampant speculation, hyperinflation, merger mania, and the rise of billionaire drug empires worldwide. This is the period referred to in this text as the “Booming 80s,” which like the “Roaring 20s,” will 580 Glossary be long remembered as a decade of the nadir of the “Capitalist Dream.” time. BOOMING 90S: The period from 1995 to the year 2000 witnessed the birth of the Dot-Com era and the Internet revolution. This technological revolution generated a great deal of speculation in U.S. stock markets which lead to one of the greatest boom and bust periods of the 20th century. BRETTON WOODS: The twenty years that elapsed between the two Great World Wars (1919-1939) were marked by a boom/bust cycle that shook the foundation of the entire world. It was this period that led to the development of the Bretton Woods agreements, which was the first successful attempt by a large group of nations to control their economic relations. After the First World War, repara- tions and war debts had been a serious and continuous problem between the quarreling European nations. Hyperinflation knocked Germany to its knees in 1923, and in the aftermath of the stock market crash of 1929, the entire world was confronted with a major economic depression. All over the world, millions of people lost their jobs, their savings and their standard of living. Confronted by these difficult realities, governments resorted to various methods of economic warfare. In order to prevent a repeat of the aftermath of the First World War and subsequent events, the victorious Western Allies decided to put in place global economic and monetary systems that would address the pressing problems of the post-WW II era. Representatives from 44 nations gathered at Bretton Woods, New Hampshire in 1944-45 and established the blueprint and working models of the International Monetary Fund (IMF) and the Interna- tional Bank for Reconstruction and Development (IBRD, the World Bank). In conjunction with other international programs, such as the Marshall Plan, these organizations would henceforth be at the center of major short-term currency stabilization problems, and long- term economic developmental projects for nations requiring substantial aid over long periods of time. CAPITAL FLIGHT: This term refers to massive outflows of a nation’s domestic capital that proves to be counter-productive to the Glossary 581 overall economy. Such factors as an unstable political situation, hyperinflation, overvalued exchange rates, higher interest rates and greater economic and investment opportunities abroad, have contributed to this phenomenon over the ages. During the 1980s and early 1990s, capital flight has been most prevalent in Latin Ameri- can countries. CASHLESS SOCIETY: As the digital revolution in the 1990s continues to evolve, the use of paper currencies as a means of economic and financial exchange will possibly be replaced by more sophisticated credit/debit cards, and other forms of “digi-cash and cyber money.” According to author Joel Kurtzman, we may be moved from a “gold to a megabyte standard,” monetary systems based on micro- chips, computer memory and high speed transmission systems. Whether we use free-floating exchange rates or a gold standard, the underlying power of the system will be dependant on massive computer systems. Sometime in the 21st century we will probably witness the conversion to a complete cashless society dominated by mega-global banking and financial systems. COLD WAR: The post-World War II world of 1945 resulted in a superpower struggle between the Soviet Union and the United States. On economic and political fronts, it was the struggle (on a global basis) of democracy and capitalism versus communism and its command economic plan. A former Allied power during World War II, the Soviet Union began to pursue expansionist policies, globally, that were at variance with America’s economic and political philosophies. By mid-1990, the Cold War was abandoned, particularly by the Soviet Union whose economy was rapidly falling into a depression. COMMAND SYSTEM: An economic system wherein the state owns and controls the primary means of production and capital. The state decides what the essential priorities of the economy will be and puts in place a plan to carry out those objectives. For instance, in the Soviet Union, the overwhelming emphasis placed on its economy during the period 1945 to 1991, was the development of the military industrial complex. Faced with an imminent collapse of their 582 Glossary economy and hyperinflation, the Soviets were forced to revise their overall economy and seek admission into the global economic order of market economies and free enterprise systems. COMPUTER GENERATED IMAGES (CGI): The revolution in digital technology has enabled computers to create “true-to-life” pictorial or pictographic images, such as the dinosaurs witnessed in the film Jurassic Park. CGI will continue to evolve as new hardware and software systems are created to build complete “realities” in computer environments. In short, what we witnessed in Jurassic Park is just the beginning of an enormous revolution in the film industry and other forms of multimedia development. CURRENCY SWAPS: These are special agreements allowing countries (A and B) to conduct trade between each other without having to swap for dollars in the process. The active use of currency swaps by various nations throughout the world deemphasize the use of the dollar as the reserve currency of the world. DEFLATION: In general terms, deflation refers to an overall decline in the prices of goods and services. For most long-wave cycle theorists, the ultimate climax of the boom/bust cycle of the 1980s and 90s, will be a deflationary blowout. DEPRESSION: In an economic depression, such as the one that occurred in the 1930s, an economy experiences severe business contraction, rising unemployment, deflation, reduction in consumer purchasing power, public insecurity and a buildup of inventories. For the majority of people, basic necessities dominate their economic planning, which wipes out many consumer demands and services that cater to nonessential needs. DEVALUATION: It is the result of a nation’s currency being lowered with respect to other national currencies and/or gold. Devalua- tions are sometimes engineered or planned, as in the case of the U.S. leaving the gold standard in 1971. DEREGULATION: Deregulation occurs when a government moves to significantly reduce certain regulatory restrictions on an industry. Periods of deregulation, as in the Booming 80s, can sometimes lead to excessive abuse and economic disaster. Deregulation of the S & L Glossary 583 and Banking industries in the U.S. during the 1980s, is an example of this type of problem. DERIVATIVES: SEE Over-the-Counter Derivatives. DINOSAUR SYNDROME: As used in this publication, this term refers to the imminent extinction of various systems, technologies, organizational designs and infrastructures during the evolutionary phase of the Information Age Revolution. As old system designs complete their historic cycles, new information age technologies will move in as replacements for the new era. DISINFLATION: This process is essentially the slowing down of the pace of inflation. Prices are increasing at a slower rate. DISCOUNT RATE: Essentially a foundation rate, the Discount rate is what the Federal Reserve charges its member banks for loans. The collateral used for such loans are government securities and/or qualified commercial paper. Commercial banking rates are generally established at levels above this foundation rate. ECONOMETRICS: A form of computer analysis that describes in mathematical terms, economic relationships between various factors. Relational models will examine economic forces such as interest rates, housing starts, labor, inflation, the money supply and other economic entities. By examining these factors, econometrics strives to present an accurate mathematical understanding of the relationship between these factors. ECONOMIC MULTIPLIER EFFECT: This economic event occurs as success on one level ripples throughout an entire economic region or local economy. This allows successful businesses to generate huge profits, pay better salaries and bonuses, which allows employees to purchase more goods and services in the local economy. Local firms will supply products and services for other firms in the region, furthering the recycling of dollars and raising the standard of living for the entire region. The same effects can operate vice versa. EURODOLLAR: Refers to U.S. dollars held in banks outside of its borders. The principal place of deposit are European banks. 584 Glossary

EXCHANGE RATE: The rate of exchange of one currency for another. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): This is the federal agency that insures deposits (within prescribed limits) that are held in member banks and savings and loan institutions. The agency was established in 1933, in the wake of the collapse of the American banking system. Hundreds of thousands of depositors lost their entire savings due to the enormous number of bank failures. The FDIC was put in place to restore confidence and safety in the system. FEDERAL DEFICIT: When the U.S. Government spends more money in a fiscal year than it brings in, a federal deficit or monetary shortfall is created. Budget deficits have been a consistent reality for over a decade and are likely to continue to escalate for most of the 1990s. FEDERAL FUNDS RATE: This is the rate that banks charge other banks to borrow funds on an overnight basis in order to meet Fed- eral Reserve requirements. It is a market sensitive rate and is followed closely by analysts who are charting the direction of interest rate changes. FEDERAL RESERVE SYSTEM: The “Fed,” as it is commonly known, came into being as a result of the Federal Reserve Act of 1913. It is an independent organization that coordinates and manages the banking activities in America; it is the nation’s central bank. Through 12 regional Reserve Banks, the system establishes a controlling influence over the economic life of the nation and is responsible for regulating the flow of credit and money. FISCAL POLICY: Administered by the federal government, fiscal policy seeks to provide even performance and stability to the business cycle by changing taxes and federal government spending with a targeted goal of expanding the economy during a recession, and conversely, contracting economic demand during inflationary periods. Taxing authority and government expenditures are significant factors that determine the direction of economic activities during boom and bust cycles. Glossary 585

FUNDAMENTAL ANALYSIS: Under this form of analysis, financial and economic statistics are examined as a means for determining the viability of an investment opportunity. A company’s balance sheet and income statement would be examined in addition to industry data and the quality and abilities of the management team. A number of both quantitative and qualitative factors are brought together to form a final opinion of a company’s future prospects. G-20: Established in December 1999, Finance Ministers and Cen- tral Bank Governors from industrial and emerging-market countries from all regions of the world (20 nations representing 90 percent of global gross national product) meet to coordinate and discuss important issues related to global economic stability. The organization helps to promote and support economic development and growth throughout the world. The G-20 is composed of the following countries: Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, the United States, United Kingdom, Turkey, Republic of Korea, South Africa, Saudi Arabia, Russia, Mexico and Japan. G-7: Is an international group made up of 7 major industrialized countries in the world. This group assembled for the first time in 1982 with a focus on global economic and financial events. The interrelationship of these 7 economic powers and their impact and influence on the global economy represented a key operational forum from which to orchestrate economic stability throughout the world. This group consist of the following countries: Canada, Ger- many, France, Italy, Japan, the United States and Great Britain. Since the meltdown of 2008, the G-20 has become a much relevant organization for maintaining global economic stability. GLASS-STEAGALL ACT: The Glass-Steagall Act of 1933 established the division between Commercial Banks and Investment Banks, setting up a Firewall between these entities. In the wake of the 1929 stock market crash and the subsequent collapse of the banking industry by 1933, New Deal politics enacted legislation that would prevent a repeat of the Roaring 20s speculative frenzy. Glass-Steagall was one of the main banking laws that came out of the 1930s De- 586 Glossary pression Era. The act separated investment and commercial banking activities. It was discovered that during the boom of the 1920s, banks took on too much risk with depositors' money which involved stock market activities and investments. GLOBAL ECONOMY: Refers to the globalization of the free movement of goods and services. The world is considered as one big marketplace, with free market institutions operating on every shore. With the collapse of many communist regimes worldwide, the free market concept appears to be winning the battle to expand throughout what was previously the Soviet Union. GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT): An agreement put in place and signed in 1947 by 22 nations. The basic mission of this organization is the reduction of worldwide tariffs and the fostering and promotion of free trade throughout the world. In over forty years of existence, GATT has managed to maintain a semblance of balance and fair play in the international trade arena. However, like so many programs began 40 to 60 years ago, it has been strained to a point where reform is mandatory. In the 1990s, GATT will need to meet the challenge of the ever-growing complexity of international trade problems. The Uruguay Round of GATT talks in 1990 highlighted the issues of intellectual property rights (copyrights and trademarks), agriculture and financial services. With the advent of regional trading blocs in the 1990s, the issues of quotas, subsidies and hi-tech property rights may grow more intense, which could lead to trade wars. GRAND CONVERGENCE THEORY: As defined in this publication, this theory is the confluence of a diversity of economic forces that brings about a manifestation of creative destruction and global economic revision. This interdisciplinary approach seeks to arrive at the truth embedded in a number of factors that combine in epic proportion at a given moment in time. In our current era very powerful economic forces will collide to bring about massive change in our modern civilization. We will witness the rise and fall of nations, technologies, and economic systems and models that are part of the creative destructive nature of capitalism. Glossary 587

GROSS NATIONAL PRODUCT (GNP): The total value of goods and services produced by the U.S. economy within a fiscal year. GOLD STANDARD: A standard monetary system whereby a nation's currency is assigned a given weight in gold. The currency is officially backed by gold, which is considered a “hard currency.” HARD CURRENCY: In the absence of a gold standard, hard currencies are those that are issued by governmental systems and economies that are stable, enjoy high standards of living, and are perceived in the international community as valuable. At present, the U.S. dollar is the world's foremost hard currency. This championship status will be seriously challenged during the second decade of the 21st century. HYPERINFLATION: A rapid increase in the prices of goods and services within a given economy. Prices accelerate daily, sometimes hourly, in a runaway situation. A given currency in this situation is rapidly devalued as more and more dollars, yen or rubles buy fewer goods and services. It is a panic environment which was best illustrated (during the 1980s) by the chaotic conditions of Latin Ameri- can economies. INFLATION: Basic rise in the price of goods and services. During an upward trend in a business cycle, there is a steady increase in inflationary pressure, particularly as the money supply increases relative to the available stock of goods and services. INVERTED YIELD CURVE: A rare economic event in the capitalist system when short-term interest rates on investments such as U.S. Treasury Bills and Money Market funds are higher than long- term rates. During normal periods, investors are expecting to receive higher rates on long-term investments due to the longer holding periods. According to some analysts, an inverted yield curve is an advance warning of an impending recession. INSTITUTIONAL INVESTORS: These are generally large, well financed organizations that buy and sell large blocks of securities. This category of investor includes insurance companies, mutual funds, pension funds, banks, religious and educational endowment funds and other types of well financed institutional investment groups. 588 Glossary

INDUSTRIAL REVOLUTION: This period marks the beginning of the machine age, a major turning point in the history of man that witnessed rapid advancements in the rate at which things could be done. Centered in Europe (with Britain as the central driving force), it brought the 18th and 19th centuries new concepts like the assembly line system, steam engines, rapid advancements in communication systems, rapid firing guns and much more. Productivity increases in the newly industrialized nations generated the need for more raw materials, machines, factories and labor. The colonization movement was sped up, as the more powerful nations scrambled for natural resources, land, and wealth. INFORMATION AGE: According to Harvard sociologist Daniel Bell, it is the “post-industrial society,” the next evolutionary step from the industrial age. It is the brain-intensive age of knowledge and hi-technology, characterized by the creation, production and distribution of information (John Naisbitt, Megatrends, 1982). This new era includes the development of the thinking machine, knowledge intensive industries and the synergistic use of information and electronic systems to generate new creations. JANUARY EFFECT: The rise in prices of many small capitalization stocks during the month of January each year. According to Barron’s Finance & Investment Handbook, “The January Effect is attributed to year-end selling to create tax losses, recognize capital gains, effect portfolio window dressing, or raise holiday cash; since such selling depresses the stocks but has nothing to do with their fundamental worth, bargain hunters quickly buy in, causing the Janu- ary rally” (John Downes and Jordan Elliot Goodman, Barron’s Fi- nance & Investment Handbook, third edition, 1990). MACROECONOMICS: An examination of a nation’s economy as a whole. Such major economic forces as unemployment, interest rates, money supply, price levels, inflation and a nation's productive output of goods and services are brought together to formulate an overall analysis of the economy. MERCANTILISM: Established economic policies of a nation that protects home industries through high tariffs, monopolistic foreign Glossary 589 trade practices, and the promotion of greater wealth for the nation by increasing measurably the level of exports over imports. MONETARY POLICY: Essentially a set of procedures and tools the Federal Reserve Board has at its disposal to control the U.S. money supply. The Fed tools most commonly used are the discount rate, open market operations and the lowering or raising member bank reserve requirements. MIXED ECONOMY: An economic system that is composed of both the socialist and capitalistic models. Mainland China is probably the best example of a major world superpower utilizing both systems to its advantage. This economic design will most likely be the wave of the future for the majority of nations. During this era, communism as an economic system has failed and undiluted capitalism is likely to meet the same fate if an unprecedented level of wealth and power is concentrated in the hands of a few people worldwide. Free enterprise and socialism, as humanistic developments are not likely to go down with capitalism and communism. The new era will call on the best economic factors of both of these major systems and fashion a new economic plan for an entire new world order. The mixed economy is the evolving model for the newly developed future system. MORAL HAZARD: As presented in this book and according to economic theory, moral hazard is a situation whereby a party has a tendency to take risks but is aware that any negative fallout from the risks will not be assumed by the risk taker. One party takes on the enormous risks while another party or entity bears the burden of any negative consequences. The prime example in this book is the behavior of big banks during the meltdown of 2008. Many of these large institutions took on enormous risks, lost billions of dollars but were ultimately bailed out by the U.S. federal government and the Federal Reserve System (FED). Banks engaged in excessive risk- taking with borrowed funds with or without the assumption that the FED would be there when and if a bailout was required: big brother will be there no matter what. Rewarding bad behavior is the essence of moral hazard. 590 Glossary

MPEG: Is the Motion Pictures Expert Group agreed upon consensus for digitized compression standards for the transmission and storage of video signals. MPEG-1 through MPEG-4 are four ascending standards developed to facilitate slow to high transmission speeds for various forms of media, such as CD-ROMs, broadcast television and HDTV. MULTIDIMENSIONAL CORPORATION: This term refers to the emergence of a new corporate entity that fully adapts itself to the multimedia wave of the Digital Age. These new corporate entities will ultimately operate simultaneously on many platforms and in many business environments, providing (in some instances) a complete line of products and services to a highly varied global consumer base. MULTI-POLAR WORLD ORDER: The bi-polar era that was dominated by the Soviet Union and the United States following WW II through 1991, will give way to a new type of world order by the mid 1990s. This new multi-polar world order witnessed the rise of several economic power blocks. The most prominent of the newly structured political and economic systems was the European Eco- nomic Community, the rise of China, India and Brazil, an Islamic/ Middle Eastern centered economic community, and a Southern Afri- can economic trading community. As these new power centers came into being, major adjustments on the worldwide political and economic landscape has followed. The multi-polar atmosphere as we rapidly move forward in the 21st century. NATIONALIZATION: Government takeover of a private enterprise as a matter of state policy (as in communist societies) or in the interest of national self-preservation (i.e., to save jobs, prevent ex- ploitation of the nation’s natural resources, or to save a collapsing industry). During the opening years of the 1990s, many countries in South America and elsewhere are abandoning nationalization policies and opening up fully to free enterprise. NOTATIONAL VALUE: Notational Value of “over the counter” derivatives represents the underlying market value or amount of derivative contracts. It reflects the value of the trades in the system; Glossary 591 however, it is not an accurate value of the amount of money at risk among the participants. That number is determined by the actual performance of the assets underlying the contracts: stocks, bonds, currencies, commodities, stock indices, etc. The credit worthiness of the trading counterparties is also considered in the valuation process. OVER THE COUNTER DERIVATIVES: The value of a derivative contract or security is based upon or derived from the value of specific underlying assets. Examples of underlying assets are: currencies, commodities, interest rates, bonds, stocks and market in- dexes. Generally used as instruments to hedge risks or to speculate in the markets, these contracts often represent high leverage financial transactions. Examples of derivatives are option contracts, futures contracts, forward contracts, swaps and various types of instruments related to the mortgage industry. In general, derivatives are traded through an organized exchange in the market; whereas over the counter derivatives are contracts that are negotiated between two parties. PETRODOLLARS: Refers to the large quantity of U.S. dollars paid to oil producers during the 1970s. Most of this money was deposited in Western banks, which in turn made billion dollar sovereign loans to many Third World countries during this period. The petrodollar glut of the 1970s is largely responsible for the enormous Third World debt load of the 1980s and 90s. PRIME RATE: This is the interest rate banks charge their most credit worthy customers; its the best rate available in a given period. Other rates are built upon the prime rate, based upon economic principles of risk and return. PARADIGM SHIFT: Represents a period in history when broad interrelated changes are made in the way societies function, conduct transactions and organize the production and distribution of products and services. Its effects alter existing frameworks and require significant infrastructure developments to accommodate new system designs and technologies. Prime examples of paradigm shifts in 592 Glossary global affairs are the Industrial Revolution and the emergence of the Information Age Revolution. PHASE I EDICT: This term refers to the historic Federal Court Consent Decree in January 1982, that gave AT&T a two year period to prepare for the complete breakup of its operations. D-Day came on January 1, 1984, which established the era of the Regional Bell Operating Companies (sometimes called the seven Baby Bells) as well as AT&T reorganization in the long distance arena. PHASE II EDICT: This term refers to the continued deregulation of the telecommunication industry in the 1990s (in the U.S.), which culminated in the implementation of the Telecommunication Com- petition and Deregulation Act of 1996. President Clinton signed the new legislation on February 8, 1996, marking the end of an era. PRICE EARNINGS RATIO: A finance calculation that provides an investor with an estimate of how much they are paying for a company's earning power. The ratio is calculated by dividing a stock's price by its earnings per share. PROGRAM TRADING: Computer driven, buy and sell programs utilized by mainly large institutional investors, to take advantage of arbitrage and similar profit opportunities on various markets. Pro- gram traders are a major force on large, automated exchanges, and are generally cited as responsible for major up and down moves in the markets. QUANTITATIVE EASING (QE): A form of monetary policy employed by a central bank to stimulate and increase the supply of money in an economy in a super low interest rate environment. The general notion is that the central bank is printing money, however, the reality is that money is created by electronically adding numbers to an account. Once the money has been created, since the meltdown of 2008 the Fed implemented to main strategies: (1) it has deployed billions of dollars to purchase Treasury bonds in order to lower the overall rates in the U.S. economy; and (2) the Fed has deployed funds to purchase mortgage bonds to lower home mortgage rates. The overall result has been the prevention of complete collapse in the U.S. economic system. Glossary 593

REPOS (REPURCHASE AGREEMENTS): These instruments are contracts (typically overnight loans) for the sale and repurchase of financial assets. Upon the termination of the stated period, the seller repurchases the asset for the same price in which it was sold plus an agreed upon interest payment for the use of the funds. In essence, Repos are short-term interest-bearing loans against collateral. RECESSION: In a typical recession an economic system will experience a business cycle contraction and basic slowdown in economic activity. Economists will declare a recession after specific macroeconomic indicators (such as GDP, employment, business profits, household income, etc) decline for two consecutive quarters. In recessions, the unemployment rate will rise, bankruptcies will accelerate, inventories will rise and businesses and households are cutting back on expenditures. A prolong period of recession and contraction will lead to an economic depression, which is a much more severe event. RING OF FIRE: The Pacific Ring of Fire is a 25,000 mile (40,000 km) horseshoe shape seismic belt or arc, home to 452 volcanoes and is an area where large numbers of earthquakes and volcanic eruptions occur each year. The belt expands from New Zealand, through the eastern edge of Asia, swings north across the Aleutian Islands of Alaska, and then moves south along the coast of North and South America. The earth crust is divided into giant rafts of rock called tectonic plates. The theory of plate tectonics indicates that the Ring of Fire is located at the borders of the Pacific Plate and other major tectonic plates. SECURITY AND EXCHANGE COMMISSION (SEC): This federal commission came into being in 1934 as a federal agency designed to protect the investing public against any wrong practices by the securities markets. Security registration and full disclosure by a company issuing investment certificates such as stocks or bonds, became part of a new set of regulations that would close the chapter on the abuses and corruptions of the Roaring 20s. The de-regulated 1920s led to the New Deal regulations of the 1930s. 594 Glossary

SELLING SHORT: A technique used by an investor to make a profit in a declining market. An investor sells a security or commodity futures contract that he or she does not own. In the case of securities, the seller will borrow the securities through the broker, make the sale, and cover this position at a later date at a lower purchase price. The basic idea is to sell at a high price and buy the stock back at a lower price, covering the borrowed position. If the price of the stock declined in the interim, a profit is made; if the price increased, the short seller incurs a loss. SHADOW BANKING SECTOR: Another area of the economic system that facilitates lending which includes brokerages, hedge funds, money market funds and structured investment vehicles. SOVEREIGN WEALTH FUND (SWF): These investment vehicles are large state-owned investment funds that are focused primarily on global investment opportunities. The assets that make up the bulk of these funds are as follows; precious metals, bonds, stocks, property and various other types of financial assets. SPECULATIVE FRENZY: A wild, uncontrollable period of speculation in stock prices, land, precious metals, etc. It is a time when prices are driven to unreasonable heights due to the frenzied activities of large numbers of investors hoping to make substantial profits in a fast moving market. The end result is a “bubble bursting,” generating heavy losses for those unfortunate investors who got in at the tail end of the action or who simply did not bail out in time. STAGFLATION: The combination of a steady increase in prices or inflation, and continued slow economic growth and unemployment. TROUBLED ASSET RELIEF PROGRAM (TARP): Imple- mented during the enormous turbulence of the meltdown in 2008, TARP was brought into existence to help avert a complete collapse in the U.S. economic system. With the passage of H.R. 1424 enact- ing the Emergency Economic Stabilization Act of 2008, TARP gave the U.S. Treasury $700 billion to buy up mortgage backed securities (and other instruments) from banks throughout the land in order to generate liquidity and un-freeze money markets. Glossary 595

TRADE DEFICIT: Refers to economic statistics indicating that a nation is importing more than it is exporting. A trade surplus is the exact opposite. TRICKLE-DOWN ECONOMICS: An economic plan wherein the wealthy receive tax breaks, investment tax credits, and other special incentives in order to encourage greater investment activity in the economy. According to the theory, the economic benefits and profits should “trickle down” to the other levels of society. This was one of the main theories behind Reaganomics. BIBLIOGRAPHY

Aganbegyan, Abel; Inside Perestroika: The Future of the Soviet Economy, New York: Harper & Row, 1989. Beasley, W.G.; The Rise of Modern Japan, (New York: St Martin's Press, 1990), pp. 224-226. Bonnifield, Matthew Paul; The Dust Bowl, (Albuquerque: University of New Mexico Press, 1979). Browne, Harry; The Economic Time Bomb, New York: St. Martin's Press, 1989. Bruner, Robert F. and Carr, Sean D.; The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, New Jersey, John Wiley & Sons, Inc., 2007. Brynjolfsson, Erik; McAfee, Andrew; Race Against The Machine: How the Digi- tal Revolution is Accelerating Innovation, Driving Productivity, and Irrevers- ibly Transforming Employment and the Economy, (Kindle Location 16). Digital Frontier Press. Kindle Edition (2011-10-17). Burstein, Daniel; YEN!, New York: Fawcett Columbine, 1988. Cardiff, Gray Emerson; A Millionaire's Guide to Panic-Proof Investing ing the Stock Market; Danville, Sound Advice Press, 1996 Casey, Douglas R.; Crisis Investing, New York: Stratford Press, 1980. Davidson, James B. and Lord William Rees-Mogg; The Great Reckoning, New York: Summit Books, 1991. Dicken, Peter; Global Shift: The Internationalization of Economic Activity, (The Guilford Press, New York, 1992). Diop, Cheikh Anta; Black Africa, Westport Connecticut: Lawrence Hill & Com- pany, 1978. Dodd, Paul Manning; Hirohito: The War Years, New York: Mead & Company, Inc., 1986. Erdman, Paul; What's Next, New York: Doubleday, 1988. Erdman, Paul; Paul Erdman's Money Book, New York: Random House, 1984. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, Janu- ary 2011. Galbraith, John Kenneth; Economics In Perspective, Boston: Houghton Mifflin Company, 1987. Garraty, John A.; The Great Depression, New York: Bruce Jovanovich Publish- ers, 1986. Goyette, Charles; The Dollar Meltdown, New York: Penguin Group, 2009. Grunwald, Michael, The NEW NEW DEAL, New York: Simon & Schuster, 2012.

596 Ishihara, Shintaro; The Japan That Can Say No, New York: Simon & Schuster (English Translation), 1989. Jackson, John G.; Ages of Gold and Silver, Texas: American Atheist Press, 1990. Jenkins, Richard A.; Supercomputers of Today and Tomorrow: The Parallel Pro- cessing Revolution, Blue Ridge Summit, PA.: Tab Books Inc., 1986. Johnson, Simon and Kwak, James; 13 Bankers: The Wall Takeover and the Next Financial Meltdown, Vintage Books (A Division of Random House, Inc.), New York, January 2011. Kennedy, Paul; The Rise and Fall of The Great Powers, New York: Vintage Books, 1989 Ed. Kindleberger, Charles P.; The World In Depression 1929-1939, Berkeley: Uni- versity of California Press, 1986. Kindleberger, Charles P.; Manias, Panics, and Crashes, New York: Basic Books Inc. Publishers, 1978. Kindleberger, Charles P.; Marshall Plan Days, Boston: Allen & Unwire, 1987. Kondratieff, Nikolai; The Long Wave Cycle, New York: Richardson & Snyder, 1984. Koo, Richard; The Holy Grail of Macro Economics: Lessons From Japan's Great Recession, (John Wiley & Sons (Asia) Plc. Ltd., 2009). Kotkin, Joel and Kishimoto, Yoriko; The Third Century, New York: Ivy Books, 1988. Leeb, Stephen and Leeb, Donna; The Oil Factor, Time Warner Book Group, 2005. Malabre, Alfred Jr.; Beyond Our Means, New York: Vintage Books, 1988. Malkin, Lawrence; The National Debt, New York: Mentor, 1987. Musashi, Miyamoto; A Book Of Five Rings, New York: The Overlook Press, 1974. Naisbitt, John; Megatrends, New York: Warner Books, Inc., 1982. Negroponte, Nicholas; being digital, New York: Vintage Books, 1995. North, Gary Dr.; 12 Deadly Nega-trends, Fort Worth Texas: American Bureau of Economic Research, Revised Ed., 1989. Omrazeti, Khafra K; World Economic Collapse: The Last Decade and the Glo- bal Depression,; KMT Publications, San Francisco, 1994. Peebles, Melvin Van; Bold Money, New York: Warner Books, 1986. Prestowitz, Clyde; Three Billion New Capitalists: The Great Shift of Wealth and Power to the East, Basic Books, 2005. Rifkin, Jeremy ; The END of WORK: The Decline of the Global Labor Force and the Dawn of the Post-Market Era, G.P. Putnam's Sons, 1995. Rosenau, David and Shuman, James B.; The Kondratieff Wave, New York: World Publishing, 1972. Shelton, Judy; The Coming Soviet Crash, New York: The Free Press, 1989. 597 Sertima, Van Ivan; Golden Age of the Moor, (editor: Transaction Publications, New Brunswick, 1993). Smith, Adam; The Roaring '80s, New York: Summit Books, 1988. Sobel, Robert; The Great Bull Market, New York: W.W. Norton & Company Inc., 1968. Sutton, Anthony C.; Western Technology and Soviet Economic Development 1930 to 1945, Stanford, California: Hoover Institution Press, 1971. Toffler, Alvin; POWERSHIFT, (New York: Bantam Books, 1990).

598 INDEX

smaller Pentagon budget and 226 A 911 and 524 America at the Crossroads 26 AAA credit rating of U.S. downgraded 44, aluminum in West Virginia 35 48, 54 American Debt Crisis 20 Aboriginal groups 95 American Dream 31, 98 Achuthan, Lakshman 32, 65 American economy and Europe 114 additive manufacturing, 3-Dimensional American homeowner 39, 75 printing and 418, 420, 422 American consumer market 63 Adobe Systems 203, 288 austerity programs 36 Afghanistan 26, 29, 517, 525 bail out American homeowner 73 Afghanistan and natural resources 516 bail out the American people 31 Africa 269, 508, 518, 546 entrepreneurship and independence 71 middle class developing in 483, 485 global stock, currency, bond markets 50 New African Policy in 484 Gross Domestic Product (GDP) 38 political liberation in 483 health care, homes, higher education 70 African Moors in Spain and Portugal 401, increased productivity 67 404 labor unions in America 69 AID’s epidemic 200, 484 low-rate mortgages across the board 73 Airbus 422 middle class and 68 Al Qaeda 525, 570 middle managers, unskilled labor 69 Alabama 36, 502 national default 44 Birmingham 36 new job plan for America 63 Jefferson County 36 no new revenues 50 Aladdin 530 paper in New England 35 Alameda 293 poverty 27 Alaska North Slope 495 rich and wealthy corporations 46 Aleutian Islands of Alaska 549 safety-net programs 52 Alexander, Adam 325 several rounds of tax cuts 29 Algeria 493 steel in the Midwest 35 Aliber, Robert Z. 470 tax increases on the wealthy 53 Allentown, Pennsylvania 93 Textile mills in the Carolinas 35 Allianz SE 158 the American dream 66 Ally Financial 74, 78 Treasury Debt 48 alternative energy resources 23 trillion dollar deficits 49 Amazon.com 18, 287, 288, 297, 304, unemployment, 48 309, 444 United States 107 America (SEE also United States) 15, 106, wealthiest 1 percent of Americans 32 258, 260, 263, 265, 275, 299, 357, America Online (AOL) 300 394 460, 469, 471, 479, 485 American Auto Industry 257 deficit spending and 493 American capitalistic system 534 global terrorism and 525 American cities and states going broke 27 mega-superpower and 230 American Dream 98 American economic system 496 600 INDEX

American International Group (AIG) 335, Asia 178, 236, 274, 275, 294, 305, 315, 345, 360, 393 349, 362, 394, 452, 460, 519, 549 American Recovery Act of 2009 13, 368 middle class in 315 American steel industry 198 Asian market turmoil in 1997 315, 334 American unions 416 Asian region 478 American worker 413 Asian societies 246 job loss and technology and 417 Asian Tigers 312, 454 manufacturing jobs and 419 Ask Jeeves 19, 329 rapid obsolescence and 413 AT&T 361, 408 technology or low-cost talent and 413 Athens, Greece 95 Americans for Tax Reform 50 Atlanta Braves 300 AMR Corp. 526 Atlanta Hawks 300 Amsterdam 206 Atomic Age 236, 414 Anchorage, Alaska 425 Auckland 95 angel investors 534 Austin, Texas 295 Angola 484 Australia 94, 250, 565 anti-nuclear protesters 95 Austria 112, 121 AOL 19, 287, 288, 309 automation 240 AOL Instant Messenger 300 automation and jobs 423 Appelbaum, Binyamin 352 Autor, David H. 416 Apple 19, 444 Avatar 445 Arab oil embargo of 1973 494 Axa SA 158 Arab Spring 91, 175 Arab world and 568 B Economic X Factors and 569 Facebook, Twitter and YouTube and 568 B2B portals 309 Kuwait, Oman and Lebanon and 568 Babson, Roger 183 Mohamed Bouazizi and 568 baby boomers 71, 72, 87, 302 Morocco and Jordan and 568 Bahamas 198 Muammar Gaddafi of Libya and 568 Bahrain 517 President Ali A. Saleh of Yemen 568 baht 313, 315 President H. Mubarak of Egypt and 568 Bail Out the American People 79, 80, 84, President Z. Ben Ali of Tunisia and 568 100 social media and 568 bailouts 388, 392, 394 Syria and 568 American and European banks and 389 the Internet and 568 government bailout 375 Arabs 404 international bailouts 388 Argentina 512, 533 bank bailouts 361 default on its long-term debt and 334, 533 Baker, James 209 President Fernando de la Rua 533 Baker, Josephine 179 recession and 533 Balance Sheet Recession 191, 192, 281 Arizona 83 Bally's Las Vegas 530 Arkansas 199, 495 Baltic republics 458 Arlington, VA 523 Banda Aceh, Indonesia 551 Arthur, W. Brian 414 Bangladesh 565 Artificial Intelligence (AI) 67, 240, 242, bank, Central of Cyprus 122 401, 413, 423, 426 Bank Holding Company Act 42 INDEX 601

Bank of America 39, 41, 74, 77, 78, 83, Belgium 112, 164 153, 346, 359, 360, 362, 384, 391, Bell Laboratories 406 393, 394, 396, 434 Bellagio 530 Bank of Canada 528 Bellevue 254 Bank of England 149, 169, 360, 528 Benchmark Capital 308 Bank of International Settlements 61 Bennett, William 85 Bank of Japan 261, 266, 270, 281 Berkshire Hathaway 357 Bank of New England 223 Berlin 95 Bank of Tokyo 264 Berlin Wall 496 bankers and banking system 13, 199, 359 Berlusconi, Silvio 137, 141 bankruptcies 223, 314 36, 70, 79, 171, Bernanke, Ben 24, 31, 38, 45, 51, 52, 64, 198, 217, 218, 317, 323, 359, 73, 79, 99, 100, 146, 351, 359, 379, 362, 532, 535 388, 394 municipal bankruptcy filings 36 depression-era FED Chairman 31 bankruptcy and student loans 87, 88 Bhatia, Sabeer 298 banks 19, 43, 64, 73, 75, 77, 80, 81, 90, Bi-polar era 26, 197, 230 96, 124, 190, 202, 205, 219, 221, 379 Biden, Beau 77 American banking institutions 37 Biden, Joe 77, 144 Bank holding companies 41, 42 Big Five nations 235 banking industry and 74 Biggs, Barton M. 264 banking industry by 1933 40 binary system 404 banking system collapse 31 Bing, Dave 35 banks and debt forgiveness 31 bio-engineering 240 banks and excess reserves 62 biofuel economy 511 banks bailed out 38 biofuels 245 banks in America 61 biogas 485 commercial banks/nvestment banks 40 biotechnology 298, 441, 447 consolidation of the banking industry 39 genetically engineered cells and 441 enormous systemic risk and 391 bipolar era 227 megabanks 379, 387, 390, 387, 389, Bissonnette, Zac 86 395, 396 How to Be Richer, Smarter and Better banks and student loans 86 Looking Than Your Parents by 86 Barcelona, Spain 427 Black Futurists in the Information Age 11 Barclays PLC 359, 363, 385 Blackrock 83 Bares, John 425 Blackstone 161 Baroin, Francois 139, 140 Blanchard, Oliver 159 Barrios, Carlos 9 Blodget, Henry 297 Barroso, Jose Manuel 168 Bloom Energy 434 Basel III 158 Bloomberg 39, 89, 90, 134, 136, 383, Bass family 530 384, 385 Batra, Ravi 269 Fed and Bloomberg affair 383 The Great Depression of 1990 and 269 Ireland real estate bubble and 130 BATS 429 Bloomberg Television 84 Bay Area 310, 324, 326, 327 blue collar jobs 413 Bear Stearns 41, 335, 352, 357, 360, BNP Paribas SA 385 362, 393 Boehner, John 45 Federal Reserve-backed bailout and 353 Boeing 422, 456 Bear Sterns 10, 51 Bolivia 516 Behravesh, Nariman 350 bond markets 144, 428, 527 602 INDEX

Bonnifield, Paul Matthew 185 central bank and 115 boom and bust cycles 10, 12, 16, 18, 21, 25, Hong Kong and 315 32, 43, 62, 173, 179, 191, 287, 291, 311, Broadcast.com 298, 328 316, 323, 329, 331, 334, 335, 375, Brown, Gordon 141, 169 393, 448, 534 Brown, Willie 225 boom and bust cycle of (1995-2000) 275, Browner, Matt Hamlin 97 283, 291, 320, 329 Brussels 106, 108, 120, 123 Booming 1980s 107, 196, 199, 215, 218, Brussels, Belgium 153 227, 229, 260, 262, 266, 268, 270, United States of Europe and 153 302, 308, 334 Brussels summit 144 billionaires in 201 Bryan, Shelby 329 Brazil moratorium on debt 207 Brynjolfsson, Erik 400, 416 Bush Administration 211, 214, 220, 221 Brynjolfsson, Erik and McAfee, Andrew cheap oil prices in 202 Race Against The Machine by 416 Consumer credit in 200 Bubble Markets and Boom & Bust Cycles Japan and Treasury bond markets 207 32, 535, 546 Japan in 205, 212 budget deficits 207 junk bonds in 215 Buffett Tax 53 merger mania in 205, 214 Buffett, Warren 11, 52, 286, 319, 346, 362 mergers and acquisitions 202, 212 Bulgaria 112 Michael Milken and 216 bull and bear markets 21 Program Trading in 205 bull market 38 rise of the billionaires 200 Burach, Bernard 183 S&L crisis and 219 Burry, Michael J. 350 technology/economic slowdown in 202 Bush era 12 Tokyo financial capital of the world 202 Bush, George H. W. 211, 226, 227, 228 Wall Street in 202 Bush, George W 29, 211, 538, Booming 80s and the Crash of '87 21 Bush Administration 37 Born, Brooksley 349, 375, 380, 381 Bush Tax cuts 45, 54, 368 Clinton Administration and 380 Business Cycle Dating Committee 531 derivative contracts and 380 Business to Business (B2B) 323 Long-Term Capital (LTCM) and 382 Business Week magazine 267 OTC derivatives and 380, 381 bust cycle 16, 379, 532, 534 Boskin, Michael J. 222 Boston 93, 94 C Bouazizi, Mohamed 175 Bowsher, Charles A. 222 CAD-CAM systems 199, 242 brand names 288 California 74, 75, 76, 78, 79, 83, 96, branding and brand names 328 197, 224, 249, 254, 325, 411, 531, Brazil 114, 160, 163, 207, 486, 502, 511, 536, 560 512, 518, 533 Silicon Valley and 292 Breeden, Richard 218 California Office Emergency Services 538 Bretton Woods agreement 104, 159, 196, Cameron, David 151 314, 333, 494 Campbell, Colin 499 BRICS 114, 160, 162, 486 Campeau Corp. 217 BRICS nations 23 Canada 145, 467, 501, 560 Britain (See also United Kingdom) 111, Canadian tar sands 518 112, 185, 187, 235, 260, 265, 418, Candlestick Park 537 498, 500, 518, 525 Capital Economics 153 INDEX 603 capital flight 313, 315 Anyang city 471 Capital Group Inc. 329 astronaut Zhai Zhi-gang and 479 capitalism 409, 452, 457, 469 atomic bomb and 476 capitalistic economic system 535 Australia and 467 capitalistic societies 455 economic development in Africa 484 Capone, Al 179 Beidou Navigation Satellite System 480 car manufacturing 35 Beijiang Power/Desalination Plant 478 carbon fiber 418, 421, 441 Beijing 162, 453, 463, 470, 487 Cardiff, Gray Emerson 178 Beijing, Hangzhou 455 Cardoza, Dennis 82 boom period in 469 Caribbean 541, 552 Brazil and 467 Carpenter, Candice 329 California and trade with 461 Carter Administration 219 Chairman Mao Tse Tung 454, 455 Carthage 233 Chile and 467 Caterpillar 462 China's Banking Regulatory Comm. 469 Cavallo, Alfred 506 Chinese entrepreneurship in 459 CBS 299 Chongqing metropolitan area 464 CDOs 347 civilization state and 452 tranches of CDOs and 341 coal producing power plants and 487 CDS 121, 122 coastal economic zones 456 CDS contracts 174 commercial property development 469 Census Bureau 27 communist party and 454, 458 Center of Budget and Policy Priorities 33, communist/mixed economy in 461 37 Confucianism, Daoism, Ying/Yang 452 Central America 163 construction industry in 468 central bankers and economists 64, 349 continent of Africa and 482, 483 central banks 146, 171, 384 cultural revolution and 454 U.S., British and Swiss central banks 139 culture of consumerism and 488 Chairman of the SEC 381 Deng visit Guangzhou, Shenzhen, and Challenger, Gray & Christmas 327 Zhuhai and 459 Chambers, John 50, 327 Deng Xiaoping and 454 Chapter 11 Bankruptcy 217, 218, 223, 224, Deng Xiaoping visit to America 456 360 desalination industry and 478 Chapter 9 bankruptcy law 102 economic and technology develop. 456 Charles Schwab Inc. 319 education in China 465, 480 Chase Manhattan 318 Emperor Qin Shi Huang 453 Chase, Steve 300 establish industrial parks in Africa 485 Cheney, Dick 226 expertise, technology in Africa 484 Chengdu 463 export markets of 462 Chernow, Ron 178 Ford and 462 Chicago 93 foreign reserves of 462 China 22, 49, 67, 69, 95, 134, 160, 161, General Chiang Kai-shek 454 236, 250, 265, 282, 283, 290, 311, General Motors in 462 315, 335, 391, 419, 422, 432, 452, government-controlled banks 468 454, 455, 486, 496, 508, 516, Great Wall of China and 453 517, 561 green energy revolution in 477 12th five-year plan of 477 growth rate in 462, 473 America and 455 Guangzhou 464 ancient history and 452 Han Dynasty 453 604 INDEX

Hong Kong and 457, 460 wind power in 478 internal domestic consumption 474 World Trade Organization (WTO) 460 Jin Da Di Energy Engineering and world’s second largest importer of oil 462 Technology Co. Lt 479 China Index Academy 473 Liu Yang first woman astronaut 480 China Internet Network Information Center long-term mortgage plans and 475 (CNNIC) 477 Macau and 457, 460 China’s leaders 482 manufacturing hub of the world 464 Choe, Stan 429 market economy and 454 Christchurch, New Zealand 95 market reform movement 458 Christensen, Lars 90 meltdown of 2008 and 465 Christoulas, Dimitris 126, 175 natural resources and 518 Chrysler 179, 222 Nike in 464 Chrysler Corp 223 nuclear power reactors and 487 Cisco 19, 203, 321, 325 one child policy and 456 Cisco Systems 299, 307, 327 Pearl River delta 463 Citigroup 39, 41, 42, 74, 78, 153, 346, People’s Bank of China (PBOC) of 146 384, 391, 394, 526 People’s Liberation Army 480 Citicorp and Travelers 41 President Jimmy Carter and 455 Clancey, Tom 524 President Richard M. Nixon and 455 Clark Air Base 544 primary and secondary education 481 Clark, Jim 298 rare earth minerals in 463 clean energy 12 real estate bubble in 475 Cleveland, Ohio 64 real estate bubble mentality in 466 climate change 371 real estate markets in 466 Clinton Administration 276, 289, 374 Republic of China - ROC 454 Clinton, Bill 228, 379 rural poverty in 464 Clinton Administration 42 science and technology and 476 Clinton, Hillary Rodham 569 scientific superpower 476 Cloud technology 444 second largest economy in the world 462 CMGI 307, 324 Seven Kingdoms and 453 CNN 300 sewage-geothermal process and 479 Coakley, Martha 77 Shanghai 455, 463, 471 coal liquefication 245 Shenzhou 7 spacecraft 479 cobalt 515 Shenzhou 9 spacecraft 480 Coca-Cola 456 Sino-British Joint Declaration 457 Cohn, Lawrence 374 Sino-U.S. normalized relations 456 Cold War 26, 197, 226, 227, 230, 269, solar energy 478 483, 569 space program and Yang Li-wei 479 cold war after 911 524 space program in 478 Collateralized Debt Obligation (CDO) 338, space science and 479 340 special gov. programs and education 481 college students 92 stimulus package and 465 Colombia 269 the Lehman Collpase and 114 Colorado 185 Tiananmen Square and 457, 459 Colorado Springs 35 Tiangong 1 space lab 480 Columbia Pictures 255 Tianjin 479 combustion engine automobiles 411, 430, trade surplus and reserves 484 432, 462, 487 ultra-cheap labor costs and 419 Comdisco 534 INDEX 605

Commerce One 297, 321 206, 210, 212, 231, 248, 260, commercial banks 344, 348 270, 334, 428 commercial mortgages 338 five year bull market and 204 Commission Junction 302 October 19, 1987 and 204 commodities 39, 461 Crash of ‘98 276, 316, 319, 377 Commodity Futures Modernization Act of credit 16 (2000) 375 credit boom 336 Commodity Futures Trading Commission Credit Default Swaps (CDS) 121, 157, 338, (CFTC) 375, 380 347, 360, 390, 394, 344 communism 95, 236, 311, 409, 452 credit markets 346, 353, 394, 395 central planning and 454, 458 Credit Suisse Group AG 385 collapse in 1989 and 226 credit system 10 Community, National Reinvestment Corp. 81 crony capitalism 313, 316 Compaq 325 Cuban, Mark 299, 429 Competitive Media Reporting 310 Cube, The 421 Comptroller of Currency 61 Cummings, Elijah 80 Computer Generated Images (CGI) 445 currencies 206, 266, 313, 315, 333, 334, Computer Industry Almanac 289 428, 461, 493 computer program trading 51 collapse of the gold standard 333 computer software 476 devaluation of 333 computer technology 441 free floating exchange rate systems 333 computers 240, 402, 411 free floating exchange rates 494 Confucianism 481 new era of paper money creation 334 Congo 485 currency wars 16 Congress 13, 29, 37, 40, 43, 52, 53, 61, Cyprus 112 70, 72, 88, 100, 189, 214, Czech Republic 112, 150 219, 226, 349, 350, 354, 361, 368, 381, 389, 507 D GAO Audit Report and 388 halls of Congress and 48 Dagong Global Credit Rating 49 Congressional Budget Office 28 Danske Bank A/S in Copenhagen, 90 Congressional Committee 352 de-leveraging 32, 62, 73, 174 consumer market 73, 100 debt ceiling 43 Continental Airlines Inc. 218, 526 budget cuts and tax increases 47 Coolidge, Calvin 180 debt explosion CoreLogic 82 early 1990s and 228 Corrigan, Gerald 218 debt forgiveness 81 Corzine, Jon 165 decentralized electrical power grids 510 Cosmo World Corp. 254 Deepwater Horizon rig 502 Council of Economic Advisors (CEA) 14 Defense Secretary 226 Countrywide Financial 336, 362 defense spending 224 Cowan, Dow 325 deflation 38, 116, 268, 313, 468, 560 Cranston, Alan 538 Delaware 75 Crash of 1929 18, 42, 183, 188 Dell 231, 301 Crash of 1990 18, 269, 271, 273, 275 Dell, Michael 287 Crash of 2000 10, 289, 336 DeMarco, Edward 78, 79, 80 Dot-Com Collapse of 2000 18 Democratic Administrations 40, 508 Crash of 2008 61, 390 Democratic Party 96, 228 Crash of ‘87 10, 18, 60, 111, 203, 606 INDEX

Democrats 42, 46, 53, 72, 79, 80, 88, 92, Domjan, Raphael 441 95, 147, 211, 368, 371 Donahoe, Patrick 70 Denmark 151 Donovan, Shaun 80 Department of the Interior 540 Dot Com and Internet Era 43, 173, 275, 289, depression (economic) 11, 55, 82, 84, 99, 290, 298, 300, 301, 308, 309, 322, 101, 272, 283 323, 324, 328, 330, 443 depression of the 1930s 187 Super Bowl advertising slots and 309 Der Spiegel magazine 557 Dot Com auctions 325 deregulations 43, 201, 219, 289, 303, 318, Dot Com Bubble 10, 336, 531 318, 334, 352, 360, 373, 380 Dot Com bubble collapse 19, 324, 325, 327 30-year period of deregulation 40, 334 334, 335 regulations in the capitalistic system 43 Dow Jones Industrial Average (Dow) 47, unrestricted free markets and 352 50, 51, 55, 60, 209, 210, 289, derivatives 39, 41, 61, 318, 346, 349, 304, 305, 306, 313, 316, 360, 527, 538 353, 357, 375, 392, 394 Dr. Doom. See Nouriel Roubini complex derivatives 335 drachma 124 Financial Weapons of Mass Dest. and 395 Draghi, Mario 143, 154, 156 global derivatives market 165, 391, 174 Dresdner Bank AG 385 notational value of derivatives 61 Drexel and the junk bond market 231 OTC derivatives 396 Drexel Burnham Lambert Inc. 216, 217 Derivatives Industry 61 Dublin, Ireland 108 Desert Storm 496 Dukakis, Michael 211 Detroit, Michigan 35, 93 Dupont 179, 182 Deutsche Bank AG 385 Durant, Will 181 Deutschmark 105 Dust Bowl of the 1930s 198 devaluation 316 Dynasty 200 Dexia SA 385 2008 meltdown and 164 E DiamlerChrysler 433 Dicken, Peter 409 e-commerce 444 digital 3-D technology 445 e-discovery software 423, 427 digital revolution 288, 300, 405, 411, East Asian 312 413, 417 Eastern Airlines 179, 218 greater productivity and 418, 419 Eastern Europe 226, 230, 235, 262 Dimon, Jamie 390 fall of 269 Dinosaur Syndrome 411, 446 eastern Europe 419 Diop, Cheikh Anta 410 Eastern European communism 105, 458 Black Africa by 410 eBay Inc. 287, 302, 309, 321, 308, 434 DirectEdge 429 ECB 128, 138 discount rate 194, 377 ECC 461 District of Columbia 33 Eccles, Mortimer 187 Dodd-Frank Wall Street Reform and Con- Eckert, J. Presper 402 sumer Protect 382, 386, 392 ecommerce 288, 303, 310 Doerr, John 434 Economic Monetary U. (EMU 1999) 111 Doha, Qatar 460 Economic Cycle Research I. (ECRI) 32, 65 dollar 111, 147, 173, 196, 207, 212, economic recovery 190 239, 260, 263, 333, 316, 493 economic system 409 devaluation of the dollar 251, 257 Economic X Factor 524, 531, 548, 550, 570 reserve currency of the world 106 natural disasters and 535 INDEX 607

EconoMonitor.com 473 394, 404, 418, 433, 461, 469, Ecuador 493 485, 497, 498, 500, 516, 519, 570 Edano, Yukio 463 economic troubles in Europe 48 education 482 European crisis 61 EEC 110, 258 massive fallout from 2008 meltdown 145 EFSF 139, 162 unified Europe 109 Egypt 91 European Banking Authority 158 Eichengreen, Barry 170 European banks 90, 104, 114, 361 election year 2012 84 European Central Bank 112 Electric and Hybrid Vehicles 432 European Central Bank (ECB) 114 Electrogen 432 common monetary policy and 154 Ellington, Duke 179 European central banks 362 Emergency Banking Act 171 member nations of the original EEC 107 emerging markets 69 European Court of Justice 149 Empire State Building 259 European Debt Crisis Employee Benefit Research Institute 209 China and 161 energy conservation 504 Quantitative Easing (QE) and 156 Energy Information Admin. (EIA) 511 European debt Crisis England 401 Federal Reserve System and 146 Enron 330 European Fin. Stability Facility (EFSF) 139 Enron Corp. 535 European Recovery Program, or ERP 102 Erdman, Paul 333 European Sov. Debt Crisis 21, 114, 395 Paul Erdman’s Money Book by 333 Europe’s Exch. Rate Mechanism (ERM) 110 Erixon, Fredrik 175 expert systems 67, 69, 427 ERM Spain devalued its currency in 111 F Sweden in the 111 Estonia 112, 458 Facebook 91, 415 ethanol 430 Fannie Mae 51, 73, 77, 78, 79, 81, 83, ethanol fuel and Brazil 511 100, 131, 335, 340, 355, 356, 393 Ethiopia 483 FBI mortgage fraud 337 etoys Inc. 329 FCIC 333, 342, 346, 350, 352, 355 etoys.com 308 Financial Crisis Inquiry Report 343 European Community (EU) 21, 104-109, FDIC 13, 31, 101, 219, 221, 317, 396 110-124, 117-143, 144-166, 168-176, F.D.I.C. banking function 42 315, 473, 486 FDR 16, 190, 373 euro 108, 330 Fed 37, 55, 62, 73, 330, 337, 353, birth of the euro 111 385, 393 monetary conversion was completed 112 Fed Chairman 351 euro decline 104 Fed-Ex 434 euro zone 105 Federal Emergency Manage. Agency 541 Denmark out of 112 federal funds rate 376, 528, 529, 535 fiscal austerity and 112 federal government 86 Sweden out of 112 Federal Home L. Mort. Corp. (Freddie Mac) unemployment in the 172 51, 73, 77, 78, 79, 81, 83, 100, 131, Eurodollar 494 335, 340, 354, 355, 356, 393 EuroMold fair 420 Federal Housing Administration (FHA) 354 Europe 28, 55, 104, 178, 191, 233, 258, Federal Housing Finance Agency (FHFA) 334, 349, 357, 385, 387, 391, 79, 356 608 INDEX

Federal Open Market Committee (FOMC) fossil-fuel technologies. 433 51, 65, 351, 375, 529 Fountaingrove Country Club 254 Federal Reserve 51, 52, 55, 64, 72, 80, Four Asian Tigers 294 187, 317, 318, 331, 349, 356, 359, 375 Frame Technology 298 Federal Reserve Bank 377, 388 France 108, 112, 116, 123, 128, 129, Federal Reserve Bank of New York 138, 143, 144, 145, 146, 152, 153, 86, 350, 359 155, 157, 159, 162, 168, 172, 176, 235, Federal Reserve Board 219, 350, 528 396, 518 Federal Reserve Chairman 64, 99, 104, 377 austerity measures and 140 Federal Reserve System 19, 31, 40, 100, Cannes G-20 summit in 163 143, 149, 171, 173, 191, 202, 375, S & P downgrade and 139 378, 382, 386, 389, 395, 396 Socialist Party and 141 established in 1913 375 Frank, Barney 392 Fed effect and 378 Frankfurt 206 Roaring 20s and the 181 Fraud Enforcement and Recovery Act 341 Federal Reserve’s “Beige Book” 224 free enterprise system 287, 289, 311, Federal Stafford loan program 87 334, 448, 461 Feldstein, Martin 80 free market capitalism 378 Ferguson, Charles 393 Freedom of Information Act 383 Inside Job by 393 FreeMarkets Inc 297 fiber optics 298, 435, 463 FSLIC 220, 221 Financial Crisis Inquiry Commission (FCIC) fuel cell technology 245, 430, 448, 488 339, 341, 344 fuel cell automobiles and 430 Financial Crisis Inquiry Report and 341, home and other commercial facilities 433 347, 373, 386 the Bloom Box and 434 Financial Institutions Reform, Recovery and fuel cell technology and hydrogen econ. 510 Enhance 220 Fujitsu 244 Financial Services Modernization Act of Fuld, Dick 357 1999. (See Gramm-Leach Bliley Act) Fusion Technology Institute at the Univ. 410 financial weapons of mass destruction Futsu Golf Club Company 254 (WMD. (See derivatives) Finland 112, 116, 117, 121, 151 G fiscal policy 52, 64, 314, 396 Fisher, Allison 513, 515 G-20 115, 163, 486 Fisher, Irving 182 GAO audit 382 Fitch 48, 49, 54, 128, 139, 343, 391 garden variety recession 192, 417 Fitzgerald, F. Scott 178 Gates, Bill 287 The Great Gatsby and 178 Gault, Nigel 65 flash crash of (May 2010) 60, 429 Geithner, Timothy 51, 79, 81, 84, 351, Florida 83, 198, 502, 544 359, 381, 394 FOMC 378, 535 European debt crisis and 144 food stamps 27, 63 Genentech 204 Forbes Magazine 67, 83, 201 General Accounting Office 222 Ford Motor Co 223, 430 General Electric 182, 186, 299, 361, foreclosure crisis 75, 76, 77, 79, 81, 82, 433, 462 83, 85, 94, 97, 336, 340, 356, 385 General Motors (GM) 182, 335, 425, 430 debt forgiveness 74 General Purpose Technologies (GPTs) 414 Foreign Affairs 467, 471 genetic engineering 422 Fortune magazine 300 Geocities Inc. 328 INDEX 609

German central bank (Bundesbank) 142 Government Accountability Office report Germany 13, 15, 94, 95, 105, 110-117, (GAO report) 39 121, 123, 128, 138-144, 128, 146, Government National Mortgage Association 147, 149, 150, 154, 155, 163, 169, (Ginnie Mae) 354 172, 185, 187, 191, 236, Government-spon. enterprises (GSEs) 354 385, 441, 467, 478, 556 securitization and 354 exports to China and 142 Governor Wilson 225 monetizing debt aversion and 143 Goyette, Charles 484, 499 reunification with East Germany 105 Gramm-Leach Bliley Act 42, 374 rise of Hitler in 1933 and 142 Grand Convergence 9, 20, 21, 573 Weimar Republic and 142 Great Depression of the (1930s) 13, 16, 18, West Germany 105 19, 22, 24, 31, 37, 52, 64, 84, 91, Ghana 140, 483 99, 191, 185, 192, 202, 225, 229, 283, Gilani, Shah 392 335, 336, 354, 361, 465 Gillette 179 1933 Banking Act gave us the FDIC 189 Glass-Steagall Act of (1933) 40-43, 96, 101, bank failures in 189 102, 190, 372, 374, 383, 392 deflationary years 186 global banking system 136 Dust Bowl and 185 Global Crossing Inc. 535 economic contraction in 1938 and 187 global economic collapse 119 Federal Savings and Loan Insurance global economic system 335, 449, 524 Corporation (FSLIC) and 190 global economy 10, 64 fiscal tightening of 1937 in 279 global energy revolution 438, 439 Social Security Act in 1935 190 Global Insight 350 Great Depression of the 21st Century 10, 13 global investor 311 second decade of the 21st century 19, global labor force 172, 416 22, 24, 25, 31, 42, 98 global warming 11, 12, 555 Great Recession of (2007-2009) 14, 31, 64, globalization 35, 69, 70, 129, 198, 311, 66, 72, 81, 98, 394 312, 409, 428, 504 Great Society programs 196 global economic disaster 37 Greece 19, 55, 73, 112, 113, 116, 117, globalization of wage competition 27 117, 118, 119, 120, 121, 123, 124, new global job market realities 28 125, 126, 127, 128, 130, 132, 136, 139, the global empire 28 141, 142, 144, 147, 152, 156, 157, 160, economic and financial activities and 428 166, 169, 175, 176, 385 new global economic system 71 ADEDY and GSEE and 117 Gogh, Vincent Van 256 Athens 124 Golay, Michael 514 bankruptcy and 119 gold 515 Credit Default Swap (CDS) affair and 157 gold standard 239, 494 economic depression in 126 gold standard and 1971 197 fiscal policy and 125 Golden Age of capitalism 306 Greek economy 47 Goldman Sachs 39, 41, 153, 318, 346, harsh austerity measures and 125 352, 362, 384, 391, 526 recession and 117 Goodyear 179 green house gases 430 Google 415, 427, 434 green revolution 12 Gorbachev, Mikhail 200, 226, 227, 262, green technology 16, 371, 521 541 green technology revolution 487, 546 Gore, Al 289 Greene, David 503 Government Account Office (GAO) 386 greenhouse effect and clean energy 507, 555 610 INDEX

Greenspan, Alan 40, 41, 167, 209, 211, Home Owner’s Loan Corporation (HOLC) 214, 218, 286, 318, 319, 320, 349, 190, 191 350, 352, 377, 378, 381 Homestead Air Force Base 544 Gross, Bill 168 Honda 274 Pimco’s Total Return Fund by 168 Hong Kong 95, 294, 312, 315 Gross Domestic Product (GDP-U.S.) 63, Hong Kong exchange 209 376 Honshu 556 Group of Five Accord of (1985) 257 Hoover, Herbert 99, 180, 184, 185 Group of Seven Accord of (1987) 257, 264 Hotmail 298 Grunwald, Michael 13, 14, 368 House Banking Committee 221 Gulf of Mexico 502 House of Representatives 45, 79, 362 Gulf War 495 Housing and Urban Development 80 high-tech war and 496 housing bubble 344, 357 President Bush and 496 housing crisis 32, 52 Houston 199, 495 H HP 325 HSBC 346 Haiti 136 Huang, Arthur 422 Hancock, David 445 Hubbert, M. King 498 Harding, Warren 180 HUD 83 Harlem Renaissance 179 human genome 441 HARP 82 Hungary 112, 150 Harris, Kamala 76, 77, 80 Hurlock, Paul 432 Harrison, George 183 Hurricane Hugo 541 Harvard University 68, 383 Hurricane Sandy 23 Hawaii 544, 565 Hussein, Saddam 227, 495, 517 Hayward fault line 540 hybrid vehicles 488 health care 482 hydrogen 245, 410, 430, 431, 434 Healtheon 298 hydrogen age 433, 487 hedge funds 19, 158, 317, 342, 345 HydroGen1 430 Heisei Bubble Collapse of (1990) 229 hyper-inflation 142, 191 helium-3 (HE-3) 410 Hypo Real Estate Holding AG 385 Helsinki 95 Hewlett Packard 307 I high-frequency traders 60, 429 high-tech warfare 569 IAS Machine 402 high-tech weapons and drones 437 IBM 224, 325, 406, 408 Highland Park, Michigan 36 Iceland 89, 90, 335 Hilo, Hawaii 93 banking system collapse in 362 Hiroshima atom bomb 550 Icelandic Financial Services Association 90 HIS Global Insight 65 ICG Communications Inc. 329 Hitachi 244, 406, 558 ICGE 307, 323 Hitler, Adolf 189 IDC Research 290 Hitler and the Third Reich 115, 235 Idealab 308 Hockfield, Susan 419 Iksil, Bruno 390 Hollande, Francois 140, 141, 174 International Monetary Fund (IMF) 47, 106, Hollywood 445 117, 118, 119, 124, 128, 135, 150, 157, Hom, Paul M. 406 159, 160, 162, 163, 164, 170, 233, 279, 313, 314, 349, 383, 486, 533 INDEX 611

bailout operations and austerity programs interest rates in 1970s 517 of 159 Internal Revenue Service (IRS) 53 IMF World Economic Outlook report for Internat. Atomic Energy Agency (IAEA) 518 2012 475 international currency speculators 313, 315 incubator companies 307 International Energy Agency (IEA) 519 Independents 72 international financiers 533 India 69, 114, 160, 294, 299, 404, 413, International, Gallup 140 419, 432, 465, 486, 496, 508, 512, International Space Station 425 516, 518, 551, 565 Internat. Swaps Deriva. Asso. (ISDA) 122 European Debt Crisis and 163 Internat.Telecom Union (ITU) 443 Indonesia 265, 313, 493, 500, 565 internationalization of labor costs 199 Industrial Age 9, 12, 15, 239 Internet 15, 32, 69, 70, 91, 92, 93, 172, Industrial Light and Magic 445 275, 286, 287, 288, 290, 291, 296, Industrial Revolution 191, 401, 414, 424 300, 301, 302, 303, 304, 311, 322, industrial revolution 235, 410, 492 322, 324, 330, 415, 417, 419, 425 Inflation 89 Internet Revolu. 290, 291, 298, 418, 443 inflation 85, 104, 142, 197, 211, 266, branding and 308, 309 303, 305, 312, 316, 352, 376, 497 broadband and 443 double digit inflation 333 Investment Bankers 307, 320, 337, 348, 534 monetary inflation 38 investment banks 84, 346, 379 inflation in 1970s 517 Investor’s Intelligence 306 Information Age Revolution 11, 14, 22, IPOs 303, 304, 307, 309, 477 100, 196, 203, 229, 231, 286, 291, Iran 493, 497, 499, 500, 507, 512, 294, 296, 300, 310, 330, 331, 371, 517, 518 373, 414, 447, 461, 476, 496, 510, 569 Israel and Iran 497 Information Age revolution 400 nuclear weapons development program Information Age technologies 22, 69, 415 and 497 Information Services Inc. (IDD) 212 Iran-Contra affair 207 Information Superhighway 288, 437 Iranian revolution and oil 494 Infoseek 298 Iraq 26, 29, 227, 230, 493, 495, 499, Initial Public Offerings (IPOs) 297 517, 518, 527 Inoki, Antonio 256 Iraq invasion of Kuwait 264 Inside Job 37 Iraq War 45 insurance companies 205, 216, 354, 545, Ireland 112, 127, 151, 396 554 National Asset Management Agency insurance industry 360 (NAMA) and 131 Integrated Health Services 534 real estate boom in 130 Integrated Resources 217 IronPlanet 323 Intel 231, 307, 325 Irvine, CA 431 Intel Corp 203 Islamabad, Pakistan 570 Intel Corporation 403 Israel 431, 518 Interest rates 219 Isutani', Minoru 254 interest rates 38, 65, 81, 266, 303, 305, Italy 108, 110, 111, 112, 113, 122, 127, 312, 315, 317, 330, 331, 361, 395 128, 129, 135, 136, 137, 138, 141, 144, interest rate policy 376 146, 152, 155, 156, 157, 165, 269, 396 prime interest rates 376 derivatives market and 138 rate hike cycles and 377 iVillage Inc. 329 rate-cutting cycles and 377 reduction of long-term interest rates 532 612 INDEX

fiscal tightening in 1997 279 J German islands in the Pacific and 235 Jackson Hole conference in Wyoming 64, global shift for the 21st century and 242 349 Hashimoto Administration in 279 Jackson, Jesse 211 Heisei Bubble Collapse (1990) 229, 334 Jamaica 432 Heisei Bubble years in 252, 277 January effect 378 Heisei Era in 261 Japan 173, 187, 203, 287, 294, 312, 314, Hiroshima and Nagasaki and 236, 557 330, 334, 433, 438, 452, 453,454, 460, Information Age Revolution and 233 462, 463, 467, 468, 471, 486, 496, 513, Information Network Systems in 244 517, 545 Iwato Boom period and 238 3/11 and 562 Japan was at the crossroads 268 9.0 massive earthquake, tsunami and Japanese bubble economy 21, 191 nuclear disaster 282 Kanto Earthquake and 540 AEROPOLIS 2001 and 259 land mass is the size of California 249 asset inflation in 261 land speculation frenzy in 249 atomic bombing of Hiroshima and LDP governments and 562 Nagasaki 557 Liberal Dem. Party (LDP) in 267, 268 bank bailout program in 276 Long-Term Credit Bank of Japan 249 banking crisis in 271, 272, 273, 276 Lost Decade 62 bankruptcies in 275 massive plunge in asset prices in 278 Booming 80s and 249 Meiji Restoration and 234 central bank and 115 Meltdown of 2008 and 277, 282 collapse of its stock markets and real MITI and world energy conservation 239 estate market 267 MITI World Vision report and 238 commercial applications of scientific Mitsu Bank 249 knowledge and 241 monetary policies in balance sheet comm. real estate collapse in 271, 277 recessions 279 Crash of 1990 259, 262 Moonlight Project in 245 Crown Prince Yoshito and 235 National Space Devel. Agency of 245 de-coupling theory and 263 new investments in China and 274 deep recession in 277 Nikkei of 38,957 on (December 29, 1989) deflationary forces in 271, 272, 274 in 277 deregulation and loosening tax laws 253 North America and 274 deregulation of industries markets in 275 nuclear crisis and 282 dynamic export markets of 249 nuclear meltdown in Japan 554 earthquake in 1923 250 nuclear reactors in 517 economic powerhouse and 247 Platinum jewelry soared in 255 economic stimulus package in 267 Plaza Accord in 1985 and 251, 255 Economist Richard Koo and 278 precious metals and 255 Emperor Hirohito and 234, 235, 261 Prime Minister Ikeda 238 Emperor Meiji and 234, 235 Prime Minister Junichiro Koizumi 277 Emperor Taisho and 235 Prime Minister Miyazawa 268 export markets and 258 Prime Minister Obuchi and 280 falling property values 266 quantitative easing in 281 Fifth Generation of Computers and 242 real estate bubble in 313 Fifth Generation Project 476 recession in 267 Finance Minister Kiichi Miyazawa 276 rise in discount rate in 261 first major recession in 239 Roaring 90s in America and 303 INDEX 613

robotics and 240, 242 Jing, Men 160 semiconductors and 240, 244 job creation 15 Showa Era in 261 Johnson Administration 354 stock market frenzy in 251 Johnson, H. Ross 213 Sunshine Project in 245 Johnson, Simon 390, 392 super-long bubble economy and 229 Johnson Space center in Houston 456 super-long bull market 264, 267 Joint Venture: Silicon Valley or JVSV 291 superconductivity and 245 Joseph, Fred 218 Taiyo Kobe Bank 249 JP Morgan 41, 318 the art world and 256 JP Morgan Chase 39, 41, 74, 77, 78, 318, the educational system in 246 346, 353, 362, 384, 390, 391, 392, 395 The Izanagi Boom and 238 Judge Napolitano 389 the mercantilist society and 236 Jumriany, Jalil 516 the MUSES-A satellite and 245 Junk Bond collapse of the 1980s 43 the Nikkei in 261, 262, 263 junk bonds 217, 220, 308, 317, 334, the “Only Store” in 274 385, 533 the Pacific Rim and 254 Jurassic Park 445 the Peace Constitution and 236 JVSV 293, 295 the Zaibatsu in 235 An Economy at Risk and 292 third largest economy and 282, 556 Blueprint For A 21st century Community tight monetary policies in 266 and 292, 294 Tokyo 260, 266 Tokyo center of world commerce 250 K Tokyo Bay and 443 Tokyo in the 1980s 249 Kana Communications 329 Tokyo real estate market in 238, 250 Kansai Electric (KEPCO) 559 Tokyo Stock Exchange 248, 259, 260 Kansas 185 Tokyo: financial capital of the world 251 Katz, Larry, 68 Toyota Motor Company 243 Kazakhstan 463, 518 trade surplus and 251, 258, 260 Kazatoprom 463 unemployment rate in 561 Kennedy, Joseph 181, 183 Victor Company of Japan (JVC) 243 Kentucky 75 war with Russia and 235 Kerry, John 54 World War II and 236 Keynes 187 world’s number one creditor nation 253 Keynes, John Maynard 186, 187 Yokohama and 540 The General Theory of Employment, Zaitech system of currency hedging 258 Interest and Money 186 zero interest rates in 281 Keynesian economic policies 188, 189 Japan Development Bank 257 Kindleberger, Charles P. 186, 188 Japan Economic Institute 254 King, Rodney 225 Japan is at the crossroads! 284 Kirsch, Steve 298 Japan Oil, Gas and Metals Nat. Corp 463 Kleiner, Perkins, Caufield and Byers (KPCB) Japanese real estate investors in Hawaii 253 434 Japan’s Great Recession 281, 283 Kohl, Helmut 108 Japan’s long bear market 283 Kohlberg Kravis Roberts & Co. 213 Japan’s lost decade 278 Kondratieff, Nikolai Dimitriyerick 183 JDS Uniphase 325 Long Economic Cycles by 183 Jenkins, Richard 426 Jiabao, Wen 485 614 INDEX

Koo, Richard 192, 233, 278, 280, 283 Libya 493, 517 The Holy Grail of Macroeconomics: Lifestyles of the Rich and Famous 200 Lessons From Japan’s Great Recession by Lincoln, Abraham 95 278 Liquidity Trap 62 Korea 235, 452 lira 111 Korean Development Bank (KDB) 358 lithium 432, 515 krona 89, 111 Lithuania 112, 458 Krugman, Paul 63, 168, 555 Little Rock, Arkansas 93 Kulcinski, Gerald 410 Livermore, Jesse 181, 183 Kurzweil, Ray 443 Lloyd, Seth 437 The Age of Spiritual Machines by 443 loan modifications 73, 78, 81, 85, 386 Kuwait 227, 264, 493, 495, 499, 527 loan products 337 Kwak, James 390 Lockhart III, James B. 356 Kwantung Peninsula 235 Lockheed 222 Lofgren, Zoe 79 L London 178, 191, 206, 390 Long-Term Cap. Manage. (LTCM) 317, 318 L., Byron Dorgan 42 long-wave cycle 9 Labor unions 94 Loral Corporation 408 Laden, Osama Bin 525, 531, 570 Los Angeles 93, 94, 97, 224, 254, 289 President Barack Obama and 570 Louisiana 198, 199, 495, 502, 544 Lagarde, Christine 159, 161, 162, 170 Lucas, George 444 Managing Director of IMF 170 Lucasfilm Ltd. 444 Laherrere, Jean 499 Luxembourg 112 Las Vegas 93, 306 Las Vegas Review-Journal 82 M Laser beam technology 434 Latin America 178, 533, 570 Maastricht Treaty 147 Latvia 112, 458 MacArthur, Douglas 236 law of supply and demand 333 Madrid and Barcelona, Spain 95 Lawrence Livermore Nat. Laboratory 411 Magnetar 393 Lee, Ann 472, 481, 482 Malaysia 315, 565 What the U.S. Can Learn from China 472 Manchester, New Hampshire 94 Leeb, Donna 499 Manchuria 235 Leeb, Stephen 491, 499 Mandela, Nelson 200 Lehman Brothers 10, 41, 51, 113, 119, manias and panics 18, 188 144, 152, 168, 318, 335, 345, 352, Manila in the Philippines 95 357, 359, 393 Mantega, Guido 163 Banking regulators in the UK and 359 margin calls 321, 322 bankruptcy and 360 Mark Hopkins 254 Korean banks and 358 Marketwatch.com 297 Warren Buffet and 357 Mars 425 Lengoasa, Jeremiah 546 Marshall, George 102 Lenin, Vladimir IIyich 458 Marshall Plan 159 leverage buyout acquisitions (LBOs) 197, Mason City, Iowa 93 213, 214, 215, 308, 334, 342 Massachusetts 75 the 1980s and 534 Massachusetts Institute of Technology (MIT) Levitt, Arthur 381 416, 419, 514 Lexington, Mass. 350 massive infrastructure developments 510 INDEX 615

Masters, Jeff 548, 554 MGM Mirage 530 Mateo, Borja 134 Micheaux, Oscar 179 The Truth About the Spanish Real Estate microcomputer revolution of (1980s) 200, Market by 134 203, 287, 288, 445 Matsushita Electric Industrial Co 255 microcomputers 408 Mauchly, John W. 402 microprocessor 403 Mayan prophecy 9, 570 Microsoft 19, 203, 231, 288, 298, 299, MCA Inc. 255 301, 307, 325, 331 McAfee, Andrew 400, 416 Middle Class (U.S.) 93, 98, 370, 372, 414, McAllen, Texas 93 474 McCarthy, Leo 538 Middle East 91, 218, 227, 265, 494, McCarthy, Sir Callum 359 496, 497, 498, 499, 503, 508, McDonald’s 274 519, 568 MCI Worldcom Inc. 301 Middle Eastern Affairs 492 Medicaid and Medicare 27, 29, 31, 44 Milken, Michael 216, 217, 218 Meehan, Michael 181 Ministry of Inter. Trade and Industry 265 Meiji Restoration 247 Minneapolis, Minnesota 93 Meltdown of 2008 10, 12, 15, 19, 22, 37, Minnesota 75 38, 42, 61, 90, 91, 104, 156, 191, Mississippi 502 318, 335, 334, 379, 382, 386, 391, Mississippi River 197 392, 393, 473 Mitchell, Charles 181 credit markets and 361 Mitsubishi Corporation 245 credit ratings and 352 Mitsubishi Estate Co. 255 euro zone and 113 Mitterrand, Francois 108 Fed Chairman Ben Bernanke and 361 Miyako 254 GM and Chrysler bailout and 362 Mobile, Alabama 93 high leverage ratios and 356 Mobile World Congress 427 higher interest rates and 337 Mojave Desert airline graveyard (1992) 218 leverage and 357, 373 Mondale, Walter 275 oil shock recession of 2007-2008 and 497 monetary policies 314 52, 64, 192, 209, The Dow Jones during 362 375, 396 The Fed "Shock and Awe" of 361 Money Morning Capital Waves 392 Treasury Secretary Henry Paulson 361 money supply 376 Memphis, Tennessee 93 Montgomery Ward 179, 186, 534 merger and acquisitions 221, 307, 321 Monti, Mario 137 merger mania 200, 303 Moody's 48, 49, 54, 128, 343, 344, 360 Mergers & Acquisitions magazine 202 532 mergers and acquisitions 461 Moon, The 425 Meridian 254 Moore, Gordon 406 Merkel, Angela 120, 123, 140, 143, 148, Moore’s Law 407 154, 175 Moors, Kent 438 Merkley, Jeff 392 moral hazard 379, 389, 395 Merrill Lynch & Company 41, 224, 318, Morgan, J.P. 216 335, 341, 352, 360, 362, 393, 224 Morgan Stanley & Co. 41, 161, 264, 318, Mesa, Arizona 430 352, 362, 384, 526 Metzenbaum, Howard 217 Morgenthau, Henry Jr 187 Mexico 69, 265, 314, 495, 499, 514, 519 Mori, Taikichiro 238 Meyer, Stanley 432 Morris, Charles R. 349 MF Global 164, 393 The Trillion Dollar Meltdown by 349 616 INDEX mortgage debt crisis 85, 173 Economic X Factors and 545 Mortgage Electronic Registration Systems extreme weather conditions and 546 (MERS) 75, 77 federal disaster aid and 544 Mortgage Origi. & Security. Abuses 76 Federal Emergency Management Agency mortgage originators 348 (FEMA) 551, 555 mortgage-backed securities 51, 77, 339, Fukushima Daiichi nuclear power plant 337, 342, 352, 353, 355, 361, 363, meltdown 556 386, 395 global warming and 546 investment and commercial banks 341 Haiti earthquake of (2010) and 548 junk bond status and 340 Hurricane Irene 549 leverage and 346 Hurricanes Katrina, Rita and Wilma 552 rising interest rates and 342 insurance companies and 544, 548 securitizing loans and 348 international climate scientists and 546 subprime CDO and 342 Japan and 3/11 563 tranche system and 338, 339, 340 Japan with vast nuclear energy power 562 Wall Street and 341 Japan: Earthquake, Tsunami and Nuclear Motorola Inc. 203, 408 Meltdown: (3/11) 555 MoveOn.org 80 Japan’s mega-thrust earthquake 560 Mozambique 483 Japan’s nuke cleanup operation 558 multi-polar world order 23, 27, 487 Joplin, Missouri on (May 22, 2011) 549 Munich Re 547, 554 mega-thrust earthquakes and 565 Mussa-Ivaldi, Sandro 442 most costly year and 547 Mussolini, Benito 235 Pacific Ring of Fire 566 mutual funds 216, 221, 304, 305 Pacific Tsunami Warning Center and 565 My CFO 298 preparation for potential disasters 571 President Obama in 2011 declaration 554 N Ryou-Un Maru 560 strike-slip quakes and 565 Nakano, Koji 269 Sumatra-Andaman quake (2004) 550 Honest Poverty by 269 Thailand flooding 548 nanotechnology 442 tsunami and flood waters 560 NASA 425, 554 Turkey - October 2011: earthquake 553 Nasdaq 289, 304, 321, 323, 325, 329, typhoon Roke and 559 330 weather extremes weather patterns 548 Nasdaq Composite Index 527 natural gas 430, 433, 434, 478, 501, 520 National Bureau of Economic Research 34 hydraulic fracturing and 512 National City Bank 182 natural gas automobiles 488 National Climatic Data Center 554 natural gas industry national debt 227 Obama administration and the 512 National Ignition Facility (NIF) 411 natural gas resources and America 511 NATO 105 Nazarbayev, Nursultan 463 Natrual Disasters 23, 371, 537, 570 NBC 328 Kenya, Ethiopia, Somalia, Eritrea and NEC 406 Djibouti: Dr 548 Netflix 415 Chernobyl nuclear crisis in 1986 558 Netherlands 112, 121, 151, 421 Chile and 548 Netscape 287, 288, 298, 300 earthquakes, volcanic eruptions and Neumann, Von 402 tsunamis 570 Nevada 75, 83 earth’s Magnetic Shield 554 New Deal 14, 187, 190, 368, 372, 373 INDEX 617

New Deal in 1933 52 nuclear fission power New Deal politics 40 gas-fueled power plants instead of 514 New Deal Energy revolution 173 nuclear fusion 410, 448, 510, 563 New Deal of 1933-1934 101 nuclear fusion research 515 New Deal of 1935-1938 101 nuclear power 12, 438, 476, 478 New Deal of the 21st Century 13, 368 Chernobyl in 1986 and 562 New Deal policies 228 Fukushima Dai-ichi meltdown and 513 New Economy 290, 299, 330, 444 Fukushima Daiichi nuclear plant 558 New Energy Revolution 23 Germany and 563 New Internet Economy 18, 19 Germany’s stance on 513 New Mexico 185 nuclear energy crisis and 571 New Orleans, Louisiana 551 nuclear fission and 562 new technologies 69 nuclear fission reactors in the United New York 75, 91, 93, 96, 173, 178, 181, States 513 191, 202, 205, 206, 207, 222, 232, nuclear radiation and 558 310, 523, 530 nuclear waste and 562 New York’s Central Park 35 Obama administration and new nuclear New York Federal Reserve Bank 183, 218 reactors 514 New York Supreme Court in Brooklyn 77 Three Mile Island in Penn. (1979) 562 New York Stock Exchange (NYSE) 91, Nuclear Regulatory Commission (NRC) 513 205, 223, 248, 429 New York Times 352, 558 O New York University 54 New Zealand 549 Oak Ridge National Laboratory 503 Nigeria 140, 485, 493, 517 Oakland A’s 537 Nikkei 264, 265, 267, 270, 271, 276, 320, Oakland, California 93, 94, 538 569 Obama Administration 13, 29, 37, 51, NIKKO 254 390, 431 Nippon Electric 244 Obama, Barack H. 12, 371, 373, 382 Nippon Telegraph & Tele. Co. 259, 264 Obama-Era 12, 15, 29, 44, 50, 52, 53, Nissan Leaf 418, 432 63, 68, 71, 75, 79, 80, 82, 84, 86, Nixon, Richard M. 104, 492, 494 88, 92, 94, 96, 100, 101, 141, gold standard and 333 191, 368, 372 gold standard in 1971 104 2012 State of the Union address 76, 506 Noda, Yoshihiko 558 depression-era president 30 Nomura Research Institute 278 European debt crisis 145 Nomura Securities 259 European debt crisis and 144 Nonpartisan Tax Foundation 28 President Obama 45 Noonan, Michael 131 President Obama’s birthday 48 Norquist, Grover 50 Occupy Wall Street (OWS) 53, 91, 92, 96 North Africa 91, 568 Occupy Wall Street Journal 96 North America 233, 275, 552 occupyourhomes.org 97 North Carolina 552 off-shoring 70 North Dakota 42, 520 Ofunato, Japan 560 North Korea 236, 527 Ohbayashi Corp. 245, 260 North Sea 495 Ohga, Norio 275 Northwestern University Rehab. Inst. 442 Oil 9, 11, 12, 23, 230, 286, 333, 395, 396, NovaThermal Energy LLC 479 434, 441 oil crisis of 1970s 618 INDEX

Iran-Iraq war of 1979 and 517 transition period 505, 506 stock markets and 517 unconventional sources of oil 501 Yom Kippur War of 1973 and 517 oil junkie syndrome 508 oil crisis of 2007-2008 junkie that constantly needs a fix 509 meltdown of 2008 and 517 oil shocks of 1973 and 1979 265 oil crisis of early 1990s oil/energy market 333 invasion of Kuwait in 1990 and 517 Oklahoma 185, 199, 495 oil industry 411, 432 online trading 303, 304, 306, 311 Age of Oil 12, 100, 369, 477, 487 Organization of Petroleum Exporting Alaska’s North Slope 498 Countries (OPEC) 199, 239, 493, 494, Athabasca River of Canada 501 508, 519 BP Oil Spill 501 oil shock of 1973 and 239 Canadian tar sands 503 second oil crisis and 239 cheap oil and 419 Operation Twist 73 Chevron oil spill and Brazil 502 optical disk technology 240 China and the oil connection 518 Options Clearing Corporation (OCC) 61 collapse of oil prices in 1986 495 Oracle 203, 231, 288 combustion engine automobiles 506 Orange County 380 deepwater drilling and 503 Organization for Economic Cooperation and depleting global reserves 519 Development 130, 168, 279 easy cheap oil is on decline 498 Orlando, Florida 99 easy to find conventional oil 492 Orphanides, Athanasios 122 end of cheap oil 504 OTC Bulletin Board 301 end of the age of oil 520 OTC derivatives 318, 338, 344, 372, 375, European crisis and 517 383 first two major oil shocks 505 outsourcing 70, 464 geologists and economists 505 Owens Corning 534 global peak oil 503 OWS 95 Golden Age of Oil 493 North Sea oil fields 498 P Oil addiction and 492 Oil as the bloodstream of the world P.B., Linda Katehi 93 economy 491 Pacific Gas and Electric (PG&E) 534 oil futures market and 507 Pacific Ocean 557, 560 oil spills and 501 Pacific Rim nations 536 OPEC’s reserves are overstated 499 Pakistan 26, 512 peak oil and 487, 498, 5504, 21 Pan Am Corp. 223 President Obama and BP oil spill 502 Panic of 1907 191 prices fell in the 1980s 199 Papademos, Lucas 104, 123 rising cost of production/supply 503 Papandreou, George 120, 124, 141 Russia’s oil production 500 Paris, France 95, 179, 530 solar and wind projects vs 507 Patrick, Kathy 83 speculators in the futures markets 504 Patriotic Millionaires for Fiscal Strength 52 Strait of Hormuz and 517 Paulson & Co. 346 Strategic Petroleum (SPR) and U.S. 510 Paulson, Henry 350, 359, 363 supply and demand and 520 Paulson, John 168, 393 supply and demand system 510 President of Paulson & Co. Inc. 168 supply side of 519 Peace Dividend 226 technological shift away from oil 504 Pearl Harbor 235, 523, 527 INDEX 619

Pebble Beach golf resort 254 Quantitative Easing 37, 55 Peking University (Beida) 482 QE1 37 Pennsylvania 512 QE2 37, 61 pension plans 305 quantitative easing (QE2) 49 Pentagon 523, 527 Quantum Computers 437 People’s Republic of China 456 Quantum Technologies Inc. 431 Perot, Ross 228 Quarterman, Lloyd 400 Perry, Matthew C. 234 Persian Gulf 543 R Petopia.com 309 Petraeus, David H. 516 R.H. Macy & Co 224 Petroleum Intelligence Weekly 499 Race Against the Machine 427 Pew Fiscal Analysis Initiative 29 radical innovation 409 Pew report of 2010 478 Radiocarbon laboratory at the Fundamental Philadelphia South Wastewater T. Plan 479 Institute 410 Pickens, T. Boone 511 Rajan, Raghuram G. 349 PIIGS 127, 130, 144, 169, 172, 385 Rajoy, Mariano 104, 135 Pimco 83 Rating Agencies 338 Pink Sheet companies 301 RCA 179, 186 Pittsburgh, PA 425 Reagan, Ronald 40, 80, 207, 219, 334, Poland 112, 142, 151 378 Port Arthur 235 Reaganomics 197, 200, 201, 211, 228, 334 Port of Oakland 93 real estate markets in U.S. 199, 495 Portland, Oregon 93 1990 market and 221 Portman 254 commercial and 224 Portugal 112, 116, 127, 129, 165, 166, depressed real estate markets (1991) 224 175, 404, 457 recessions 10, 29, 32, 55, 65, 209, 211, Postal Service 70 218, 330, 350, 544 pound sterling 105, 260 balance sheet recession 278, 279 Powell, Colin 434 double-dip recession 48 precious metals 527 new recession 65 Preska, Loretta 384 severe recession 37 Priceline.com Inc. 19, 329 garden variety 99 Princeton, New Jersey 506 1981-82 recession 201, 334 principal reduction 81 1990s recession and 377 private-equity firms 158 911 and 531 productivity gains 413 early 1990s and 222 program trading 303, 428 global recession 266, 331 stock markets and 428 global recession and 911 525 program trading platforms 60 normal business cycle recession 278 Providence, R.I. 94 oil price spikes and 518 Public Citizen 513 recession of 1980-82 197 recession of the early 1990s 227 Q worldwide recession 496 Reconstruction Finance Corporation 354 Qatar 493 recovery 9, 11 Quake of ‘89 540 Recovery Act of (2009) 13, 14, 15 Japan and 540 free floating exchange rate system 335 quantitative analysts 348 reformers 370 620 INDEX

Regling, Klaus 162 Roaring 90s 22, 289, 307, 311 Rehn, Olli 140 Clinton Administration and 374 Reid, Harry 88 Robinson, Eugene 44, 558, 562 Reid, T. R. 106 robo-signing 74, 75 The United States of Europe: The Rise of a Robonaut 2 or R2 425 Superpower by 106 robotic workers 15 Reinhart, Carmen M. 19, 65 robotics 32, 67, 69, 172, 199, 240, 243, Renaissance Cruises 530 260, 401, 413, 416, 417, 420, 423, Renoir 256 447, 480 Republican administrations 40, 227, 508 cost of labor and 419 Republican Admin. in the 1920s 180 Dante II and 424 Republican Party 96, 211, 227, 228 drones and 437 Republicans 13, 42, 44, 46, 50, 53, 71, Shakey and 424 88, 95, 147, 201, 211, 334 Robotics Inst. of Carnegie Mellon Univ. 425 fiscally conservative Repub. majority 45 Rockerfellar Center 255 Republican House Speaker 45 Roesler, Philipp 154 Reserve bank of Australia 95 Rogoff, Kenneth S. 19, 65, 383 reserve currency 196 Romania 112 Resolution Trust Cor. (RTC) 221, 224, 340 Rome, Italy 95 Ricardo, David 186 Romney, Mitt 82 Richards, James 474 Roosevelt Administration 101 Currency Wars: The Making Of The Next Roosevelt, Franklin Delano (FDR) 13, 52, Global Crisis by 474 99, 101, 170, 187, 189 Richter scale 540, 545, 556 Rose, Charlie 393 Riegle-Neal Interstate Banking Law 41 Roubini, Nouriel, 54 Rifkin, Jeremy 415 Royal Bank of Scotland Plc 385 The END of WORK by 415 Rubin, Robert 349, 381 Riley, Joseph P. 541 rubles 316 Ring of Fire 564, 565, 570 rupiah 315 ringit 315 Ruppert, Michael 518 Rio de Janeiro 502 Russia 114, 160, 235, 311, 318, 467, 486, RJR Nabisco 213 Crash of 1998 and 316, 334, 533 Roaring 20s 199, 300, 445 European Debt Crisis and 163 Consumerism and 180 Russian oil export quota 519 deep recession in 1920-21 and 178 Gorbachev and perestroika 455 discount rate raised in (1928) 183 Russian Soyuz capsule 479 easy money policies by the Fed 194 Russian debt crisis 276, 316, 377, 319 electricity, internal-combust. engine 179 Rutte, Mark 129, 141 financial trusts in 182 Ryan, Beck & Co. 374 inflation of the 1920s 186 investment pools in 182 S Jazz Age and the 178 major tax cuts in 181 Sacramento, California 82, 93, 95 New York Stock Exchange and 188 Safe Money Report 55 October 29, (1929) and 183 Safeguard 307 prohibition of alcohol and 179 Safeguard Scientific 324 Radio Corp. of America (RCA) and 182 Saito, Ryoei 256 Wall Street in 181 Sallie Mae 87 Roaring 20s and the Great Depression 21 Sallie-Mae 86 INDEX 621

San Andreas fault line 540 Senate Finance Committee 214 San Francisco 237, 249, 254, 308, 310, Senate Majority Leader 88 411, 537 September 11, (2001) 336 1906 earthquake and 537 Shaka Zulu 405 San Francisco Bay Area 445, 531 shakeout period 323 Quake of 1989 and 536 Shannon Court 254 San Francisco Chronicle 326 Shearson Lehman Hutton 213 San Francisco Examiner 531 Sheraton Palace 254 San Francisco Giants 537 Sherman, Brad 51 San Francisco State University 531 Shumlin, Peter 491, 513 San Jose, California 295, 310 Si, Lian 464 San Mateo, California 293 Siemens 462 Sand Hill Road 296, 307 Sikorski, Radoslaw 142 Sanders, Bernie 51, 386, 389, 507 silicon 405 Santa Clara 293 Silicon Graphics 298 Santa Cruz 293, 538 Silicon Valley 291, 293, 295, 296, 298, Santa Fe, New Mexico 93 307, 406, 434, 445, 536 Sarkozy, Nicolas 120, 139, 140, 150, 172 incubator programs and 296 Merkozy era and 140 industry clusters in 292 Saudi Arabia 265, 493, 496, 499, 508, virtual corporation and 295 516, 518, 525 Singapore 294, 295, 312, 565 Savings and Loan crisis of the (1980s) Slovakia 112, 121, 151 S &Ls 43, 199, 202, 205, 216, 219, Slovenia 112, 121 220, 221, 227, 231, 263, 272, 276, 313, smart phones and mobile advertising 444 354, 495 Smart Serv Online Inc 301 Savings and Loan Industry 334 Smith, Adam 186 Say, J.B. 186 Smoot-Hawley Tariff Act of (1930) 185 Schlesinger, Jacob M. 240 Sobel, Robert 183, 272 Schmidt, Eric 427 The Great Bull Market, Wall Street in the Schmidt, Gavin 554 1920 and 183 Schneiderman, Eric 75, 76, 77 social media 92 Schumpeter, Joseph 286 social security 13, 27, 29, 31, 44, 87, 88 Schwenninger, Sherle 68 Social Security Act 101 science fiction is becoming reality 437, 442 Societe Generale SA 385, 396 science fiction of the 20th Century 412 Socrates, Jose 129, 141 Scotland 94 Softbank Corp. 275, 307 Seattle 94 software 417 Seattle Washington 93, 94 software systems 426 SEC Chairman 218 Solar and wind energy 510 SEC reforms 101 solar energy 245, 410, 441, 477, 485, 512 second economy 414 solar power 439 Secretary of State 569 Son, Masayoshi 275 Secretary of Treasury 31 Sony 255, 275 Securities and Exchange Commission 375 Sony Inc. 275 securitization 75 Soros, George 111, 168, 196 Seidman, William 221 South Africa 114, 160, 486, 565 semiconductor technology 406, 476 collapse of apartheid in 269 semiconductors 240, 292 South America 163, 233, 549 Senate Banking Committee 222 South Carolina 541 622 INDEX

South Korea 94, 294, 312, 313, 527, 570 sub-Saharan Africa 161 sovereign debt 49, 73, 113, 143, 164 Subbarao, Duvvuri 160 sovereign wealth funds 19, 84 Sudan 485, 517 Soviet communism 102 Sumitomo Corp 463 Soviet Union 28, 33, 171, 183, 197, Summers, Larry 349, 381 226, 227, 230, 263, 455, 458, 483, Sun Microsystems 325 496, 525, 558 Sunderland 418 Bolshevik Party and 458 super committee 52, 53, 54 collapse of 269 Super Congress. (See Super Committee) economic depression and 458 super rally of (1998-99) 319 military industrial complex and 459 supercomputers 60, 429, 438 perestroika in 262 superconductivity 240, 438, 510 space science 476 levitated trains and 438 space shuttle Discovery 425 supply and demand 186, 432, 494, 510 Spain 19, 112, 116, 122, 127, 132, 165, Sweden 112, 150 166, 172, 175, 265, 404, 471 Sydney, Australia 95 austerity measures and 133 Synthetic CDOs 338, 347 Ciudad Real Central Airport and 134 conservative Popular Party in 135 T deep recession and 133 meltdown of 2008 and 133 Tahrir Square 91 mortgage-backed securities in 133 Taipei stock exchange 95 real estate bubble in 133 Taipei, Taiwan 95 S & P and 135 Taiwan 294, 312, 454, 456 Sprint 301 Takakushi, Nobuaki 257 Sri Lanka 551, 565 Taliban 525 Sridhar, K.R. 434 Troubled Asset Relief Pro. (TARP) 37, 155 St. Louis, Mo 93 Tax Policy Center 53 Standard & Poor’s (S&P) 48, 50, 54, 116, taxes 225 128, 146, 153, 339, 343, 360, 378, Taylor, John 81 391, 533 Tea Party 44, 53, 96 Spain and 132 Tech bubble collapse of 2000 473 Standard & Poor’s 500 index 299, 362, 378, technical analysis 429 529 technological innovations 67 Stanford Research Institute 424 Teich, Albert H. 400 Staples 434 telecommunication 240, 288, 291, 301 Star Trek 442 terrorism 23 Star Wars 442, 444 terrorist Economic X factor 569 state attorney generals 74 Texas 185, 199, 495, 502 STEM education 71 Thailand 313, 551 stock markets 44, 50, 66, 303, 305, 319, The Age of Materialism 201 362, 377, 561 The Economist 136, 137, 168, 417, 483, wars, high inflation, econ. uncertain 527 546, 547, 556, 559, 560, 561 stock market crash 146, 214, 259 The Matrix 442 stock market rally 38 The New New Deal 13 Storchak, Sergei 163 The New New Deal: The Hidden Story of Stroeher, Immo 441 Change in the Obama Era 13, 368 student loan crisis 31, 85, 86, 97, 338 The New York Times 52, 68 sub-prime CDOs 338, 347, 393 The Panic of 1907 18 INDEX 623 the Philippines 548 U.N. weather agency 546 The Week 116 U.S. Bureau of Economic Analysis 34 Theglobe.com 297 U.S. Court of Appeals in Manhattan 331, TheStreet.com 297 384 third industrial revolution 419, 422 U.S. Department of Energy 433 Third World nations 28, 456, 484 U.S. Freedom of Infor. Act (FOIA) 383 This Time is Different 65 U.S. Geological Survey 555 Time Magazine 225, 264, 300, 374, 523 U.S. Government Debt 29 Time Warner Inc 299, 300 U.S. Optoelectronics Industry Development Toffler, Alvin 410 Assn. (OIDA) 436 Toffler, Heidi 410 U.S. Secretary of Education 85 Toffler, Alvin and Heidi U.S. Senate 81 Powershift by 410 U.S. Supreme Court 384 Tokyo, Japan 95, 173, 202, 204, 206, 229 U.S. tax codes 215 Tokyo and earthquakes 540 U.S. Treasury 55, 173, 356 Tokyo Electric Power Co. (TEPCO) 557 U.S. Treasury Bills 317 Tokyo Stock Exchange 262, 264 UAL Corp. (UAL) 217, 526 Tokyo stock market collapse 204 UBS 116, 167 Tokyo University Earthquake Research UBS AG 385 Institute 564 UC Davis 93 Too Big To Fail 37, 38, 106, 164, 355, 356 UCLA 289 Toshiba 244, 406, 558 Uganda 546 Toure, Hamadoun 443 UK Financial Services Authority 360 Toyota 274, 433, 488 Ukraine 458 trade wars 16 unemployment 52, 65, 66, 71, 97, 305, traders and investors 51 312, 314, 482, 530 TradingProduce.com 323 structural unemployment crisis 66 transistor technology 403 the unemployed in 1991 225 Travelers 42 unemployment benefits 63 Treasury 355, 356, 393 unemployment insurance 31, 101 Treasury and Bond holdings 55, 181 UniCredit 396 Treasury Department 221, 350, 359, United Arab Emirates 265, 493 363, 532 United Kingdom (U.K.) 105, 457 Treasury Secretary 51, 84, 350, 359, 381 United Nation 265 Treasury securities 44, 348 United Nations 233, 236, 455, 495, 541, Tricadia 346, 393 547 trickle-down economics 228 United States 173, 187, 189, 227, 240, troika 118 282, 288, 290, 292, 348, 387, Truman, Harry 188 438, 470, 479, 483, 486, 489, Tulip mania 18 518, 524, 561 Tunisia 175, 568 25% of the world’s oil production 492 Turanor Planetsolar 441 budget deficits 258 TWA 179 central bank and 115 Twitter 91, 415 federal budget deficits 251 Green Energy Revolution and 478 U mega-superpower and 196 safe haven and 174 U.K. (see also United Kingdom) 94, 105, the EU crisis and 145 141, 150, 151, 169 United States Ecological Survey 540 624 INDEX

United States Geolog. Survey (USGS) 500 Webvan Group 329 University of Chicago 470 Weide, Karsten 444 University of Dakar 410 Weidmann, Jens 143 University of Inter. Business in Beijing 464 Weimar Republic (1923) 18 University North Carolina at Chapel Hill 88 Weinberg, Carl 169 Uzbekistan 458 High Frequency Economics and 169 Weiss Ratings 49 V Weiss Research, Inc 55 welfare 27 Vencill, Daniel 531 Wellington 95 Venezuela 493, 518 Wells Fargo 39, 41, 74, 77, 78, 362, 384 Ventro 323 West German Stock Market 259 venture capitalists (VCs) 303, 307, 320, West Germany 209 327, 330, 434, 534 Western Civilization 227 VentureOne Corp. 308 Western Europe 235, 240, 275 Viacom 299 white collar jobs 413 Vienna 95 White House 46, 50, 52, 61, 63, 71, 73, Vietnam 140 97, 100, 211, 228 Vietnam War 196, 493 Willkie Farr & Gallagher LLP 383 Volcker, Paul 104, 334 Wilson, Pete 545 vulture funds 83, 84 wind farms 512 wind power 439 W won 313, 315 Works Progress Administration 101 Wachovia 41, 346, 362 World Bank 45, 106, 159, 233, 314, Wal Mart 434 474, 548 Wall Street 25, 37, 43, 76, 91, 97, 204, World Championship Wrestling 300 206, 208, 216, 218, 263, 334, 337, World Economic Collapse 535, 546 342, 344, 345, 346, 348, 351, 352, World Economic Forum 169 353, 357, 360, 380, 388, 390, World II 26 394, 396, 429, 524, 526 World Meteorological Organ. (WMO) 547 Wall Street investment bank CEOs 40 World Trade Center 523, 526, 527 Wall Street Journal 85, 240, 250, 262, World Trade Organization 67 273, 329, 378, 381, 389, 530 World War I 26, 178, 191, 235 Wall Street Vultures 534 World War II 32, 68, 98, 102, 105, 159, Wall Street: Money Never Sleeps 37, 411 187, 189, 227, 233, 234, 235, 239, Walt Disney Co. 530 250, 268, 283, 314, 381, 395, 439, Warner Bros. 179, 300 453, 455, 476, 525, 557 Jazz Singer and era of talkies 179 post-World War II era 374 Warsaw Pact 226 Worldcom 331 Washington D.C. (Capitol Hill) 39, 44, 47, Wyoming 512 48, 50, 88, 92, 96, 214, 226, 350, 373, 380, 390, 392, 394, 507, 512, X 521, 523, 526, 538 Washington Mutual 362 X Factors 504 Washington politicians 37 Xiaoping, Deng 452, 458, 459 Washington Post 44, 558, 562 Xinhua News Agency 49 wealthy individuals 84 Weather Underground 548, 554 INDEX 625

Y2K 305, 319, 446, 447, 524 Yahoo 19 Yahoo! 275, 287, 288, 298, 299, 301, 304, 309, 321, 429 Yamano, Masato 245 Yaobang, Hu 457 Yeltsin, Boris 316 yen 108, 263, 264, 303 Z

Zambia 485 Zapatero, Jose Luis Rodriguez 141 Zia, Khaleda 543 Zichal, Heather 513 Zimbabwe 136 Zimbabwe hyperinflation in 2005 18 Zoellick, Robert 45, 160 Zuccotti Park in Manhattan 91 Zurich Financial Services AG 158