Posted on 02/25/2008 5:39:35 PM PST by palmer
A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences...
Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.
...
There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.
There is one industry that fits the bill: alternative energy, ...
(Excerpt) Read more at harpers.org ...
That said, with all the negative connotations that he implies (excess equity is bad, etc), there is good that comes from this type of malinvestment. Unlike houses which are bloated and useless for growing the economy, the equity bubbles like the one he is proposing result in real economic growth and innovation. The alt energy bubble should be no different, although it's going to be difficult to avoid the minefield of carbon rationing. But I would also note that the malinvestment in highly inefficient energy projects and carbon trading schemes will also trickle down into really useful technological investments which with luck we will be a leader in.
the next bubble
Yep, lots of garbage in this article too (e.g. a very poor explanation of ABS). But this guy and his friends get to choose the next bubble with a lot of help from the politicians.
So is this thread.
You have to look at the causes of things.
There is simply too much capital floating around for the available investment opportunities.
Why is this? Modern technology has made advanced nations rich beyond belief. The civilized world has been transformed from an economy of scarcity to an economy of abundance. We are able to make more goods than we can use.
Other societies are not as fortunate, but they are coming along. What will happen when the process is complete?
The only “big crash” will be in the West. The effort will only slow Asia’s economy down a little. The dollar will fall even faster, and oil will continue to go up.
Sorry to disagree but the credit bubble economy creates input shortages. Many raw materials like copper have tripled creating the abundance you speak of in disposable consumer items. Retail inflation was still tame at 4%, but wholesale inflation was 6%. The end result of the credit bubble is recession or destruction of the currency (in our case some sort of devaluation and replacement).
Bubbles were once very rare—one every hundred years or so
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The economic boom and bust cycle—some may even call it the business cycle — has been present for hundreds of years and likely since the dawn of whenever people started doing business.
During the depression not everyone got broke.. some got out just before.. THEN bought up America for pennies on the dollar..
True, the business cycle is eternal and driven by emotion and imperfect information. However the credit cycle vastly overstimulates the business cycle. The fact that we have some 2 million or so “extra” houses is well beyond what an ordinary business cycle would produce.
When the US economy falls the whole world screams.
Why? Because Asian jobs will evaporate since folks in the US won’t be buying products made overseas, need call centers in India to answer product questions, travel abroad spending US Dollars or wanting their tax dollars sent to Countries that cry down with the USA.
JMHO
Depression won’t come for a while, first a new bubble, then perhaps another, and then hyperinflation, then perhaps depression, but those last two are unpredictable and very unlikely in the current political climate.
So, government tax policy caused the dot-com crash.
American demand only consumes a small part of China’s exports, and Chinese domestic consumer demand has risen. China will be building over a million kilometers of new roads soon and won’t likely slow its economy down much to suit plans of a few people here. ...not to mention India and others.
Good read. I think this was first posted about a month ago. Big hint is the 4.5% fed funds rate.
Still a good read. There is a lot to digest there, and a lot of it very true and very compelling. Who knows what the next bubble will be, but he addresses many good points.
Thanks for posting.
Did you ever read the novel “ State of Fear” by M Crichton.
This article is a prime example of the lib media’s non stop fear mongering to sell books , magazines, and TV time.
Bank runs and tent cities coming to a neighborhood near you.
I don’t buy his premise at all. Bubbles yes, but not this premise.
Funny you should metion...
I went shopping yesterday. As I went down the isles of Home Depot, everything was made in China. I mean EVERYTHING.
Later, I went to Bed, Bath & Beyond. Guess what. Same deal. I flipped over all kinds of goods and EVERYTHING was made in China. Stunning. It wasn’t just the obvious junk or cheap goods. I mean, $200 kitchen knife sets that were made 100% in China.
And Asia is going to continue without a hiccup while we go into recession? There is NO WAY Asia will not feel great pain if the US consumer stops consuming. NO WAY.
Decoupling is a myth that got disproved on black Monday when the FED smashed interest rates by 75bp.
No I haven’t read the book, but I am aware of the premise and agree entirely. The whole global warming charade is nothing but alarmist pseudoscience wrapped in a fig leaf of actual science and fact (a portion of CO2 is man-made, but I believe the warming is mostly natural). But despite my best efforts (and many better ones posted here), the alarmists are winning and will grab both government funding and legal and regulatory benefits that will enable the next bubble.
His global warming premise is BS (see my previous post), but the next bubble will come, it has to come from somewhere, and the global warmers are politically powerful.
The next “bubble” might just be the last: hyperinflation.
You should read it . Funny and sharp.
Black Monday was a long time ago and a different international economy. There are quite a few more vehicles running on petroleum products in Asia today, and Asians are drinking up more of the freight fuel. Areas like Africa and South America will increasingly buy from them and give them control of more ocean routes, though. Some Vietnam-era commanders have told me over the years that we should disregard any perceived threat from China, because the Chinese “aren’t very smart” and the like.
IMO, they’re not the monkeys that our leaders want to believe them to be, and we should start paying attention. Implementing a “recession” in the USA after handing nearly all of our engineering technology to Asia is not a good answer.
(T. Boone) Pickens: U.S. Faces Disaster over Oil Wealth Exodus
Let me put it this way. Put the rest of our middle class down, and that will drive oil prices down a little. ...quite a bit of SUV pleasure driving going on there. Lay most of our middle class off from their jobs.
I’m daring our business leaders to do that and to see how much the dollar and oil prices are affected. Will it be worth the political costs and likely international wars?
“American demand only consumes a small part of China’s exports, “
The American consumer is 20% of the world economy.
If you add together all the consumption of Brazil, India, China and Russia they make up one sixth of the American consumer. Those are still largely export economies reliant on the US consumer. If we go into recession they will slow dramatically. Decoupling hasn’t happened.
Commodities.
BANGKOK, Thailand (AP) -- Asia would be able to weather any recession in the United States, analysts say, because rising trade and investment within the region make it less dependent on the U.S. economy than in the past.
While a severe downturn in the United States would drag on Asian growth by eroding demand for exports, a rapidly growing middle class is fueling orders for automobiles, electronics and housing -- much of which will be supplied from Asia itself.
Voracious demand for oil, iron ore and other commodities to build roads, sewage systems, and office buildings -- especially in the booming economies of China and India -- will also help sustain the region through any U.S. slowdown.
"The U.S. economy is not that important anymore," Hans Timmer, a World Bank economist, said in Singapore earlier this month.
Excluding Japan, 43 percent of Asia's exports go to other nations in the region, Lehman Brothers calculates -- up from 37 percent in 1995.
"China and India represent a bigger presence on the world stage than just a half dozen years ago," said David Cohen, director of Asian forecasting at Action Economics in Singapore. China, in particular, has "more it can bring to buffer whatever happens in the U.S."
A drop of 1 percentage point in U.S. economic growth would shave 1.3 percentage points from China's growth rate due to lower exports, Citigroup says.
Since China is growing so fast, that isn't likely to make much of a dent. China's economy will still expand 11 percent this year, slightly slower than in 2007, Citigroup projects. Lehman Brothers forecasts 2008 growth will drop to 9.8 percent.
But Rajeev Malik, an economist with JPMorgan Chase in Singapore, cautioned that growth in China and India could not make up all the slack of a U.S. downturn.
"Demand in industrial countries is still pretty important for the rest of Asia," Malik said. "While China and to some extent India offer some offsetting demand, there will still be some downshifting in activity if the U.S. goes into recession."
Japan, the world's second-largest economy, may suffer the most from a U.S. contraction. Ryutaro Kono, chief economist at BNP Paribas in Tokyo, predicts that the nation's economic growth will drop this year to about half of the 2 percent it has marked in recent years.
"The damage from the overseas economic problems hasn't really surfaced yet," Kono said. "But it will be coming."
Asian stock markets -- many of which had stellar runs last year -- have tumbled in recent weeks amid worries that a slowdown in the U.S. will hurt corporate profits.
Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent Monday, its biggest percentage drop since the Sept. 11, 2001, terror attacks. Japan's benchmark Nikkei 225 index slid 3.9 percent to its lowest close in more than two years, and China's Shanghai Composite index plunged 5.1 percent.
Lower demand for Chinese exports could even have a silver lining for China by restraining inflation, which has soared to the highest level in more than a decade.
Associated Press writers Joe McDonald in Beijing, Yuri Kageyama in Tokyo and Gillian Wong in Singapore contributed to this report.
Asia Seen Weathering Any US Recession...
The final edition of his trilogy which also includes “NASDAQ 6000: the NEW economy” and “why housing never goes down and why their is no housing bubble.”
He’s going to be 0-for-3.
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