Bubblenomics - the new science of predicting the crash


When will it happen? The sharpest minds in business and economics have been issuing dire warnings about the imminent collapse of the American economy for at least six years now. But why hasn't it collapsed yet?

One of the most insightful analysts of the bubblenomics tribe, Doug Noland of prudentbear.com , has warned against expecting the imminent catastrophe to take place right away. "It would be quite unusual for a Bubble Economy to falter with housing sales and prices at record levels, record mortgage Credit creation, robust federal and state spending, strong (inflation-induced) profits and income growth, a booming export sector, a generally robust global economy, low global interest rates and generally profligate Credit Availability and liquidity conditions," wrote Noland in his most recent "Credit Bubble Bulletin." Noland immediately adds in a less reassuring tone: "It would not, however, be unusual for such conditions to hasten financial crisis."

So then when is it going to happen? Because of course, at some point, it must happen. Every sensible person knows that. The institutional dysfunctionality of the American financial system would have sunk any other major industrial economy years ago. It is only the unique position of the American economy in the world, with the dollar, a worthless, paper currency, being used around the world in lieu of gold, that has enabled the wizards of finance on Wall Street to get away with it for so long. Countries used to try to horde up gold to strengthen themselves. That was what the mercantilist system was all about. Now they horde American dollars. For years, the American dollar was the most useful currency in the world. Oh, sure, it wasn't as stable as, say, the Swiss franc, but Switzerland isn't exactly the world's largest market. If you wanted to increase your exports (and what country, besides America, doesn't want to increase its exports?), you bought American dollars. This helped bring the price of dollars down, thus helping your country's exports. Americans, however, have been taking advantage of this system. The financial system, with the Federal Reserve's stealthy assistance, has been inflating like mad. For the most part, this inflation has either been exported abroad or channelled into various asset markets. Such inflation that has creeped into consumer or producer goods has been carefully thrown under the rug by various accounting tricks. How else can you explain the palpably bogus claim, issued by the Bureau of Labor Statistics, that inflation has only rise 3.3% in the last twelve months, despite a whopping 17% rise in energy costs? And how can we believe that housing costs only went up 2.7%, when the price of houses has increased so much more than that during the same period? Or that food only went up by 3.7%. I dont' know about you, but grocery prices where I'm at (Eureka, Ca) sure seem to have gone up more than that. No, it simply is not credible on the face of it.

It's obvious that the people in charge, from Greenspan on down, are very very worried. How long can they keep this farcical economy above water? It's amazing that they've kept it up for so long — quite an accomplishment, really, especially for those who are connoisseurs of the Après le deluge system of monetary policy. But how much longer can they go on? Can they make it to the election? That is perhaps their great hope. But after the election, hold on tight. All bets are off!

Posted: Wed - August 4, 2004 at 10:58 PM          

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