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Watching the Bubbles Will Prevent a 'Lost Decade'

By    |   Wednesday, 18 Aug 2010 09:08 AM

We’re starting to hear more talk about the United States entering a long-term slow economy that lasts for many years, much like Japan’s “Lost Decade” of the 1990s.

The talk is heating up because the assumed automatic recovery in the U.S. economy is slowing down and wasn’t all that strong to begin with.

The reason a lost decade can’t happen in the United States is that we have a very large multibubble economy.

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In such a multibubble economy, the bubbles either continue to grow or they pop. If one bubble starts to pop, it puts pressure on the others.

If the government chooses to inflate one of the bubbles — such as the government debt bubble (through massive deficit spending) or the dollar bubble (through massive printing of money), it can keep the other bubbles from popping for a while.

But once they start to pop, it is very hard for the bubbles to simply reach a happy median between growth and popping.

If we had only one or two bubbles — just real estate or stock markets — it would be easier to reach that happy median.

But with numerous bubbles (real estate, stock, private credit, consumer spending, government debt and dollar), it is nearly impossible to keep the pressure of one popping bubble from popping others.

Even the maintenance of the bubbles by the massive pumping up of the stock-market and real-estate bubbles by the government ultimately puts more pressure on the government bubbles, which means they will pop much faster than otherwise.

Again, this isn’t a recipe for a long-term, slow growth economy.

It’s a recipe for a bigger bubble pop.

It might be comforting to think that we could avoid a major popping of all of our bubbles and simply have a slow-growth decade, but its not economically feasible at this point. The bubbles are too big and too hard to keep in equilibrium.

It’s akin to thinking that the government debt is our children’s problem.

Comforting to us, but not at all realistic when you look at the realities of the economics of a massive government debt that is growing at a very rapid rate — and that borrowing is only possible if the money supply is also growing at a very massive rate. Again, not a recipe for slow growth, but a recipe for a massive bubble pop.

As I’ve mentioned in an earlier blog, the stock market is the key bubble in the short term. As that bubble pops, it will take the other bubbles down further.

The Fed will react by pumping up the other bubbles, but in the end that just makes those bubbles pop faster.

When the stock-market bubble pops, expect the other bubbles to come under more pressure and expect talk of a long-term slow economy to pop along with the stock market.

About the Author: Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, Aftershock, by Clicking Here Now.

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We re starting to hear more talk about the United States entering a long-term slow economy that lasts for many years, much like Japan s Lost Decade of the 1990s. The talk is heating up because the assumed automatic recovery in the U.S. economy is slowing down and wasn t...
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2010-08-18
Wednesday, 18 Aug 2010 09:08 AM
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