Bubble after bubble

I want those wonderful days to return! And PIIGS will fly…

I don’t speak much about the economy anymore. I think everything I said beforehand is more than evident now. I wish I could tell you what is to come, but neither can I, nor would anyone listen this time either.

It began even earlier, at the time of the so-called “Asian crisis”, when then Chairman of the Federal Reserve Alan Greenspan made the decision to use the power of the American economy to pull the world back from the brink of a very serious recession. The cost of this would be overheating the American economy, but the alternative might have been worse. If a Great Depression had set in at that time, when the developing world was still weak, the entire civilization as we know it would likely have suffered greatly.  Today, many of the emerging economies really are emerging, developing etc, and rely not at all on western aid.

The event people still remember, I think, is the “dotcom” bubble. At this time, credit was cheap, as a result of the earlier decision by the central bank. An air of optimism held sway.  The Internet was the new electricity, the new railway, the new thing that would change everything. The old restraints had been broken. Traditional economic laws no longer applied. Finally the trees could grow into the sky.

As we know, that was not quite what happened.  Generally, the Internet has made it easier for people to shop around, and pressed the margins down, so that businesses have to compete harder and earn less.  Of course, a few have profited, such as Amazon and Google, but their day is a continuing running to stay in place, for competitors constantly try to overtake them.

When the recession began in early 2001, half a year later than I had predicted, I believed that we would get the necessary correction to get the feet back on the ground and start growing from a realistic position, once the recession had run its course.  I realize now that this might not have happened anyway. But we will never know, because that fall a black swan flew in and changed everything, with the Fall of the Towers and the beginning of the “War on Terror”.

Perhaps Bush and his advisors really thought that the support naturally given to a president in wartime was a mandate also to his economic policies. Or perhaps they just decided that money did not really matter as long as they were fighting a war. And the “war on terror” was, by its  very nature, eternal. Short of mind-controlling the entire human population, terrorism simply cannot be entirely eliminated. Certainly not by military means.  The Bush administration had basically written itself a blank check, allowing them to disregard the economic consequences of their politics.

But government was not the only factor in the disaster. Perhaps it was not even the most important.  Unwilling to the let go of the fantasy money from an imaginary future, banks and their customers alike found a new bubble to blow. After the dotcom bubble came the housing bubble, far larger and more widespread.  Continued cheap credit allowed people to borrow more and more to pay more and more for the same houses. The longer this continued, the higher the values of the houses, and the larger mortgages could be taken out on them.  It was as if people really literally believed that the houses were growing, like plants. In reality, houses are more like bicycles, which can last long if maintained properly, but will eventually become useless. The time horizon is just so long that people don’t care – most houses will last for a lifetime or more.

Again we saw fantasy money, based on a fantasy future. In this future, houses would continue to be worth 10% or 20% more for each passing year, even though wages and salaries barely budged.  It is hard to imagine the stupidity necessary to go with this, but greed makes people as stupid as necessary.

When the dotcom bubble burst, a recession began but was quickly fended off by a new fantasy.  When the housing bubble burst, a new Great Depression began, but was again fended off. What we have now is a government bubble. The government has taken over the debt and guaranteed for the fantasy money from the two previous bubbles, and is even now adding its own. The Economist slaughtered the Obama administration’s forecast as laughable in its lack of realism. (Bear in mind that The Economist magazine had actually supported Obama in the election. We’re not talking about Forbes here, from whom I gleefully appropriated the term “government bubble”.) There is not, nor has there been, any credible plan for paying back the ever increasing loans. There is not even a credible plan for stabilizing the borrowing at the current high level. There is just the assumption that cheap money will last forever.

And PIIGS will fly.  (PIIGS is the abbreviation for the European countries that, beginning in 2010, have had trouble servicing their national debt.) In a way, Greece and Ireland can count themselves happy to have they government bubble burst this early, when the outcome will likely be no more than a long and painful recession. The alternative is far worse.

Think of it. We dodged a recession and got a depression. We dodge the depression and what?  What is the next step?

Hopefully not a return to the dark ages, or something like that. But the risk is there.  When a bank fails, there are usually other banks. Are there other governments?  Not unless you emigrate. What happens when a nation cannot pay its police and its military? We actually know that, because it has happened occasionally in developing countries. The guys with the weapons are not the ones who are going to go hungry. Not as long as they can get food by simply pointing their weapons at others.

Of course, those are goddam ni… Africans. It won’t happen in MY country. Right? Right? When there is no money to pay them, the police will continue to do their rounds, the firefighters are going to continue to fight fires, public schools will remain open and the roads will be maintained. We are good people.

Nobody wants to think the unthinkable. That is understandable. But then we have to do the unavoidable. To the same degree that we have spent more than we earned, as a society, so we will have to do the opposite. To spend less than we earn. We can debate whether to eat the rich or let the poor fall by the wayside, or just cut everything with a thousand small cuts. But we can’t continue to party on fantasy money.

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