Industrial Insight

Things changed… | July 20, 2011

http://www.streettalklive.com/research/145-the-breaking-point.html

The Breaking Point Posted by Lance Roberts on Tuesday, 19 July 2011 19:47

From the 1950’s through the late 1970’s interest rates were in a generally rising trend with the Federal Funds rate at 0.8% in 1954 and rising to its peak of 19.1% in 1981. When the economy went through its natural and inevitable slowdowns, or recessions, the Federal Reserve could lower interest rates which in turn would incentivize producers to borrow at cheaper rates, refinance activities, etc. which spurred production and ultimately hiring and consumption.

As the economy recovered and began to grow again the Fed would need to raise interest rates. This program seemed to work fairly well as interest rates went to a level higher than the last as the economy grew at an increasingly stronger level. This provided the Federal Reserve with plenty of room to maneuver during the next evolution of the business cycle.

However, beginning in 1980 that trend changed with what we call the “Breaking Point”. We are not entirely sure what created this breaking point specifically whether it was deficit spending by the Reagan Administration to break the back of inflation, deregulation, exportation of manufacturing and a shift to a serviced based economy, or a myriad of other possibilities or even a combination of all of them. Whatever the specific reason; the policies that have been followed since the “breaking point” have continued to work at odds with the “American Dream” to the benefit of Wall Street.

America was once a country built on the solid foundation of the hard work, satisfaction and pride in the building of stuff. We aren’t talking about “namby pamby” stuff – we are talking about real stuff. We used to produce everything from automobiles to steel to blue jeans; right here in America. We ran telephone lines, built roadways and bridges, drilled for oil and constructed buildings. It was the sweat of the brow and the strain on the back that built America into its former shining self. A country made up of opportunity and prosperity with a solid moral foundation and a strong military to back it up.

That was then. Beginning in 1980 our world changed as we discovered the world of financial engineering, easy money and the wealth creation ability of successful use of leverage. However, what we didn’t realize then, and are slowly coming to grips with today, is that financial engineering had a very negative side effect – it deteriorated our economic prosperity.

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I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.

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