Numerous economic cheerleaders would have us believe that recovery has begun, that we have turned the corner. Wait a minute, not so fast. Is this an upturn of a typical economic cycle? Previously I introduced the work of David and Robert Wiedemer, Cindy Spitzer and Eric Janszen, America’s Bubble Economy. This book, written in 2006, warned of the impending collapse of one or more of the six identified bubbles in the following two to five years. 2008 through 2010 witnessed the collapse of the Real Estate Bubble, the Stock Market Bubble, the Private Debt Bubble and the Discretionary Spending Bubble. The Fed, assisted by China and Japan have taken dramatic steps in an effort to re-inflate the bubbles. So have we dodged a bullet?
In their sequel, Aftershock, the authors of America’s Bubble Economy are confident that despite their best efforts, re-inflating the bubbles is next to impossible. While the Fed, China and Japan might be able to slow the deflation or even enable slight improvements, the underlying economic problems in our nation will preclude a return to the glory days. So, what’s next? Where does trouble lie?
The final two significant bubbles that we face are the Dollar Bubble and the Government Debt Bubble. Unless the government make a dramatic change in course, collapse of these two bubbles is inevitable. Lets take a look at these final two economic bubbles.
The Dollar Bubble – The fed has instituted several rounds of quantitative easing (QE-1) and (QE-2) in an attempt to keep the dollar strong. The QE rounds have required massive printing of dollars to ensure prop up the value of the dollar. The indiscriminate printing of dollars which are not supported by fundamental economic drivers will eventually be unsustainable. The consequence is eventually we will experience significant inflation and the consequence of inflation is further deflation of the bubbles that we trying to shore up and a rise in interest rates. This will put even further downward pressure on the earlier bubbles resulting in a renewal of their decline.
The Government Debt Bubble – In addition to the monumental printing of dollars, the government has embarked on a path of massive borrowing. In just six short years, the national debt has almost doubled from $8.5 trillion to almost $17 trillion. The idea that we will pay off that magnitude of debt when we can’t even pay the interest due on that debt is unrealistic. Equally unrealistic is the belief that other nations such as China and Japan will continue to want to purchase our debt. Once foreign investors realize that the party is over they will begin to unload our debt and the final bubble will begin its descent.
Despite the stock market cheerleaders assurance that the recovery has begun, the reality is that the current practices of the Fed and the Government – massive printing of dollars and massive borrowing – will result in the popping of these two bubbles and a continuation in the deflation of the previous four bubble. Yes, the economy is in trouble.