Were the seeds of the crisis sown in mid-2001?

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Last Friday, FT Alphaville wrote up a Kevin Gaynor (from Nomura) comment that pinpointed mid-2001 as the starting point for the recent crisis.

As Gaynor states:

"Looking back it now seems that a fundamental shift happened in mid 2001 to the commodity and currency world, a shift which has been ongoing since and that has affected the global supply side inflation picture around dramatically.

This shift has not been analyzed before as far as I'm aware, but in fact, it appears to have dominated asset returns over the period. The US Dollar measured against its broad index shifted from being in a quasi permanent appreciation since the breakup of Bretton Woods, into a depreciating phase which is still going on today.

The CRB index, which had been in a broad cycle since the 1960s, shifted into a turbo charged increase phase. Not surprisingly, the basic materials and oil and gas components of the global equity index shifted into a major bull phase at the same time and have together been the two best performing sectors over the period."

But if he's right, the question is why did dollar and commodity markets experienced a structural shift in mid-2001?

Commenting on the FT Alphaville post, my answer was that the Bush tax cuts and the September 11 attacks resulted in a massive fiscal earthquake:

"Two fundamental global economic pivot points in mid-2001 were the US passing the first Bush tax cuts and the September 11 attacks.

It's why the US fiscal position shifted from the 2001 projection of $889 billion annual surplus in 2011 to a $1,480 billion deficit forecast this year by the CBO for 2011. A $2.3 trillion swing in the deficit for 2011.

The impact on net indebtedness? Instead of a surplus of $2.3 trillion, it has a net debt of $10.4 trillion - a $12.7 trillion swing in a decade."

The rest of the FT Alphaville post and the comments are worth reading because they flag up the rather stark implications for global rebalancing.

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