Fiscal Cliff? What About The Bubbles?

here has been much ado about the “Fiscal Cliff” and rightly so.  Everyone is talking about the impending doom associated with the fiscal cliff but few are talking about the gorilla in the room – our bubble economy.  This article introduces what perhaps is an even greater looming danger – the continued deflation of the bubbles upon which our economy is based.

In 2006, David Wiedemer, et. al.published America’s Bubble Economy in which they warned of the impending economic crisis resulting from the bursting of the bubbles upon which our economy has thrived in the past.  This article introduces the 6 bubbles supporting the US economy.

1.  The Real Estate Bubble – Real estate became a bubble when the growth in the price of houses exceed the growth in the economy.  The problem is really a collapse of the housing price growth.  Once it began to fall, it flooded the mortgage industry with a huge number of upside down loans with an associated increase in loan defaults.  This was the first bubble to pop in 2008.

2.  The Stock Market Bubble –  After decades of growth, who expected the stock market to crash?  The stock market became a bubble when the growth of stock prices  far exceed the growth in company value and the growth in GDP.  Stocks became overvalued and investors eventually caught on.  When the real estate bubble popped, and banks began to fail, investor confidence began to fall and the stock market begin to fall as well.  The stock market bubble began is slide in 2008-2009.

3.  The Private Debt Bubble – As the real estate bubble and stock market collapsed, private debt was eventually affected as well.  Bad loans began to go bad.  Credit cards begin to tighten up and business loans funds began to become harder to get.  When the economy dips again, good loans will go bad and more banks will fail.

4.  The Discretionary Spending Bubble – Discretionary means that it’s “optional”.  Much of what Americans purchase is optional and has been supported by easy money, low interest rates and low inflation.  As the economy tumbled in 2008-2009, consumers began to put purchases on hold.  Consumer optimism took a dive.  Credit card delinquency increased and home equity loans dried up.

5.  The Dollar Bubble – Milton Friedman, the Nobel prize winning economist, stated that inflation is a monetary problem.  In other words, excessive printing of money causes inflation.  Who hasn’t seen seen pictures of German’s hauling money in a wheelbarrow to buy a loaf of bread.  The Federal Reserve has been operating the money printing presses virtually non-stop and purchased bonds in QE1 and QE2 (Quantitative Easing) which massively increased the money supply.  Anyone familiar with the “law” of supply and demand is aware that the more of something there is the lower the value of that commodity.  It works with money as well and it’s called inflation.

6.  The Government Debt Bubble –The ultimate bubble is the massive debt that our government placed on tax payers.  The debt is so large (over $14 Trillion) that it is virtually impossible for us to pay it off.  At some point nations currently purchasing our debt will realize that it’s a loosing proposition and decline further purchases.  This will have significant impact on a nation addicted to the good life.  The impact of the collapse of the government debt bubble will dire.  No longer will Congress be able to kick the debt can down the road.  They will have to bring spending under control.

The problem with bubbles is that once the burst, they can’t be re-inflated.  Our entire economy rests on the 6 bubbles described above.  The question is not whether the bubbles will pop, it is a question of when.  The wise person will prepare to an eventual economic downturn.  Future articles will explore the bubbles in greater depth and address steps that may be taken to avoid being a casualty of an economy that collapses.

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