Bubble Economics: Have We Learned Our Lesson Yet?

We must open by addressing the fact that we support all methods and creative fiscal devices promulgated to jump-start the world economy at this point. We speculate that the ultimate costs of naïve inaction far supersede the present value calculations of bailing out the banking industry, Detroit, and the homeowner. Tax cuts that keep dollars in the pockets of the American citizenry and corporate class have proven to be a more effective means of spurring the economy than merely bankrolling the Federal Government with curious levels of tax legislation.

Inflation will be contained at the moment. The labor market, which is the primary driver behind ramshackle inflation, is obviously weak amidst this recession. Labor has proven to be the last shoe to drop throughout this economic debacle and is currently deteriorating towards the point of hopelessness. December’s job report, released by the Bureau of Labor and Statistics, detailed another shocking loss of 524,000 jobs to parallel a U.S. unemployment rate of 7.2%.

The debt-riddled, exasperated consumer refuses to spend amidst this backdrop of miserable forecasts and wretched housing bust – credit crisis - bear market headlines. All major retailers have issued profit warnings – including the low price everyday Wal*Mart (WMT) juggernaut. Inflation is not the concern. Rather, the horrors of a maddening Japan-like deflationary era shall be combated as the primary current menace.

In spite of these daunting challenges, we remain confident that a strong economy will re-emerge part in parcel with the aggressive fiscal and monetary measures that have been legislated at Pennsylvania Avenue. Investors are being cajoled to take upon increasing levels of risk in retaliation for the Federal Reserve mandated rock-bottom interest rates that are now tormenting conservative savers. The battered equity markets also present delicious valuations that will effectively deliver a few brave souls towards re-entry. Eventually, the sheep-like, bi-polar sentiment that pervades the investment community will revert to mania and fuel yet another round of booming real estate, stocks, and commodities.

Then what?

Will lawmakers retreat from manipulating the internal circuitry of the machine with cheap money and bogus fiscal stimuli? Will a subdued Alan Greenspan ride again to undercut the authority of the Fed Chairman with dire warnings and threats that the proverbial spiked punch bowl be retired amidst another drunken debt-binge of speculation, mergers, and financial engineering? Will popular tax cuts be repealed so that this U.S. house-of-cards cut taxes / increase government spending Bernard Madoff-like Ponzi scheme can finally be put to bed?

No.

History will repeat itself. I am foreshadowing another speculative boom fueled by the dept-paper that undergirds our Western model of finance. The proposal is not a matter of ‘if.’ The declaration is a matter of ‘when’ and shall rely upon the intelligent location of whatever cockamamie, dot-com, South Florida condominium, commodity widget-tulip bulb will serve as the primary reserve bin for these supercharged, get-rich-quick dollars.

This time it will be different, right?

Investors want in.

Stock position: None.

Comments

[nova:]

It is a long way to go before the present government initiatives will fail.

Presently, too many people enjoy a parasitic way of life. This people will scream and do a lot to stop any progress but eventually they also will fail.

Credit driven economy are viable and successful at times of potential worldwide growth (new technologies, new markets, etc.,)

At the present time, worldwide growth is sharply contracting leading to
- severe world economies downturns and
- consequent economies and markets recoveries

However, the world will look very different 2-3 years from now.

Jan 13 12:33 PM

[Smarty_Pants:]

"The declaration is a matter of ‘when’ and shall rely upon the intelligent location of whatever cockamamie, dot-com, South Florida condominium, commodity widget-tulip bulb will serve as the primary reserve bin for these supercharged, get-rich-quick dollars."


In spite of the howls of protest this is sure to spawn, history's commodity widget-tulip bulb has always been gold.

It's simply one possibility among many.

Jan 13 01:07 PM

[austrian63:]

Kofi,

You are absolutely correct re: your prediction of another speculative boom followed by a bust. Interventionist policies, artificially low interest rates, etc. always spawn booms (malinvestments) followed by busts (liquidation). The housing and MBS "boom" was born out of cheap and easy debt. Funny how we are being told the cure is more of the cause.

What will make the post-crisis period different than past recoveries is the true insovency of the U.S.A. Once again we are breaking new ground. If you have a chance to re-finance or lock in long-term rates over the next six months I suggest everyone take advantage of the opportunity as eventually the cost of debt will exceed anything we could have ever imagined.

Jan 13 06:55 PM