Bubble Economics – Don’t Panic
I am shocked at what is happening to our country right now. It is like an incredibly bad dream. I put together the following two charts (see below). The first chart is the history of the Dow Jones Industrial Average for the last 18 years. I drew a line (just a guess) of the normal sustainable rate of growth of the American economy. Independent on where you draw the line, it is easy to see 2 bubbles in the last 18 years. The first one is commonly referred to as the internet bubble or the dot com bust. And the second is the mess that we are experiencing. When looking at the magnitudes of the bubbles, they are similar in size. It is true that the DJ is not a surrogate for the market as a whole, but certainly if there is excess liquidity driving the mortgage market, then the DJ would at least have a residual bubble from the liquidity.
Which brings me to the second chart. If you look at the decline in the dollar, it almost exactly coincides in the rise in the Dow! I estimate the date of the bubble to be March 2002. First there is good news here. Bush says that the bubble began over 10 years ago. I don’t think so, and obviously the longer a bubble persists, the larger its magnitude.
Now look at the dollar. It is clear that someone made a conscious decision to devalue the dollar. Now it makes sense to me! Here we have Republicans spending money like they won the lottery, and worse yet lowering taxes. But the kicker is that interest rates go DOWN! That makes no sense. Interest rates in Bush’s presidency are less than Clinton’s when we ran a surplus. How can that be? Something has to give, and it is the dollar.
Who would invest in the United States when interest rates are so low? No one. Of course, as the dollar weakens, investing in the US becomes more attractive so money flows into the economy. But this is all so upside down! People are investing in our country because we have a weak currency, not because we have a strong economy! Through out all of my life no matter what president, the dollar has always been strong. Until now. And not only has it fallen, it has fallen off a cliff. Why? It seems like there can only be one reason, to attract foreign capital. It is evident to anyone that this strategy is unsustainable and ultimately the bubble must burst.
There is one conclusion that I can make. This is not something that happened to us. This is something that someone consciously did. The root of this problem is our money supply. Someone has been increasing the money supply at a much faster rate than our underlying economy can support. This is very very dangerous and I don’t believe it has happened in my life time until now. I do not know why someone would do something so hazardous with our economy, but I can speculate.
When the money supply increases, credit loosens automatically, the economy gets a bump. It is an artificial unsustainable bump, but nevertheless a bump. It is good politics to show economic growth, and so the Bush administration continued to force the dollar lower to show artificial economic growth. During the internet boom, although there was a bubble, there was at the core true economic growth. American companies such as eBay, Google, Yahoo became worldwide leaders of the internet. Furthermore the global demand for the internet, further entrenched American companies such as Intel, Microsoft, and Dell into the global economy. The bubble popped but underneath the economy was strong. Plus our goal was not to create a bubble. The reality is that the Bush administration was using the bubble as a proxy for economic growth. So once the bubble pops, what do we got underneath? NADA.
So who is responsible? Who would increase the money supply? There is only one person that has this responsibility. Federal Chairman, Alan Greenspan. Dude, what were you thinking? This is more than bad judgment, and I really can’t believe that greed would be a factor. What were you thinking? I do find it strange that as the entire country is running around like chickens without heads, that you remain silent.
I am not an economist. I am just a really concerned citizen, that wants to inject some analysis and thought into a dialog that appears to be lacking of both. Here are some conclusions. Take them for what they are worth.
Numbers. Economics are all about numbers. Economists are hard core mathematicians. But whenever we discuss this problem or the bailout, no one is quantifying anything. When did this problem begin? How large was the bubble? This is why I did my little quickie analysis, because it is a huge hole in our plan. The answer to this problem is in the numbers and no one is looking at the numbers. The only number we get to know is $700B. This is beyond pathetic. It is reckless and irresponsible.
Bubble size. Just based on my numbers, it seems that the relative size of the two bubbles are comparable. I agree that the Dow Jones is not a surrogate for the economy as a whole, but the last bubble burst without a bailout and we ended up OK. What is driving the panic? What makes us think that this is the worst since the Great Depression? Again, where are the numbers? We had a saying at Gateway, “In God We Trust, all others bring data.” Give us data that backs up the panic.
Responsibility. Let me make a key point. This should never happen. Never, never, never. It is someone’s job to watch critical indicators (also called fundamentals) such as the price of the dollar, unemployment, in flows of capital, and so on. The warning bells have been going off for years and no one has done anything to fix it. Worse yet, it is clear that the bad acts just continued unabated. Not only was this 100% preventable, it was easily preventable. We need to know who and why before we can trust again. This guy Paulson wants $700B of our money. Before this all happened, I had know idea who he was. Was he part of the problem? Or maybe he is incompetent? These questions must be asked, and no one Republican nor Democrat should be offended when they get asked.
Spending. What is the root of the problem? The Republicans from 2000-2006 have spent like no other Congress in the history of the nation. We have the biggest, humongous, behemoth government in the history of the WORLD. The waste turns my stomach, plus it is 100% contrary to the vision of the great Ronald Reagan. The smaller the government, the lower our taxes, and the less intrusion in our lives. The people in power are NOT Republicans nor are they Democrats, they are the worst of everything, and in my view, THEY ALL SHOULD LOSE THEIR JOBS. I am appalled by the spending in Washington as if God wrote a blank check, and said “Go have fun kids.” Geez.
Taxes. Then on top of that, they lower taxes. This is an abomination. Furthermore, anyone that opposes tax decreases, is labeled as UnAmerican or Liberal. These guys are so clueless. Every American has to balance a checkbook, and spend within their means. Is it so much to ask our government to do the same thing?
Balanced Budget. We have to demand that our officials live within their means. Increased spending should NEVER be coupled with lower taxes. It does not work that way in the real world. Does it bother anyone that the war was supposed to cost $50B and now we are going on $1000B? We need to instill a discipline in Washington that somehow has been thrown out the window in the last 8 years. This is the most important thing we can do.
I am going to say it out loud. People. America is BROKE. We are not the richest country in the world. Not even close. Why is our currency falling off a cliff? Because we do not have the money to peg our currency. All of our wealth has been squandered away. It is all gone. The only hope is that we start living within our means.
Panic. Stop the panic. Stop the panic. I do not want the people responsible for our economy in a panic. I want them thinking clear and looking at lots and lots of numbers. We need clear thinking and unemotional leaders looking for solutions. Not just quick fixes but real solutions. The Dow fell 700 points in a day. Big deal. We are dealing issues with much larger than that. I as a citizen want to know the root cause. I want assurances that we will never get in this situation again.
Let me say it again. I hate the panic. The chances we find an intelligent solution diminish greatly the more our leaders panic.
Conclusion In conclusion, I am not seeing evidence for the panic we are seeing from our leaders right now. Yes, we have a problem, and yes it will be painful. But we should not panic. If we made it through the internet bubble, can you not survive this bubble as well?
I have not yet heard anything from our leaders that indicates that anyone understands the true underlying problem, and I feel like they are just shooting in the dark. Lastly, I do not trust this man Paulsen with $700B of our money when he is the prototype Wall Street insider. Kudos to the Republicans for killing the $700B Panic Bailout Plan. There is a better solution out there if we only take the time to find it.
Why did I write this? Because I am disgusted to see how the President and Congress are behaving. It’s like watching Romper Room. We deserve better and we should demand it. If you agree, please pass this post on to as many people as possible. Thanks for reading.
Rob
Very good write up as always, very in depth. I value articles like this that clearly took a lot of time and research to write. I will link to this article.
I agree completely. It’s absolutely astonishing that no one representing us, or our country, has even the slightest understanding of what’s taken place. Infact the more I see the more I think they are not even capable of understanding the questions much less the answers. Many of todays online service people can read script with more conviction than what I’m seeing from our representatives.
To say that I am in fear of the future is an understatement.
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Rob,
Great article and I definitely feel your pain and frustration. You have to realize that we are being governed by a higher order called the Bilderberg Group (must read book called the “The Bilderberg Group” by Daniel Estulin). This is a group of the elite such as the Rothchilds, Rockerfellers, and many government officials like the Clintons, Bush’s, Kennedy’s, Kissinger, JP Morgan, Warren Buffett, Kings, Queens, Prince Charles, Albright, Feldstein, Bernanke, Greenspan, Paulson, Condi Rice and so on… They control or are involved in all Central Banks including the US Fed Reserve. The CFR, Trilateral Commission, and the Club of Rome are the wealth behind the United Nations. The United Nations ultimate goal is to create a global society which consists of 1 World Government, 1 World Currency, 1 World Religion and take control of all natural resources and a universal education system. The way the U.N. accomplishes this feat is to devalue all currencies so that we have no choice but to create a world currency (Great article from today: http://www.washtimes.com/news/2008/oct/01/foreign-economists-prod-us-on-global-plan/ ). Read Obama’s “Global Poverty Act S-Bill 2433” that was just passed this July and the U.N. Millennium Plan (If you think you are scared now wait until you read these bills). You could also google John McCain’s “League of Democracies”. Please don’t think this is conspiracy theory until you read at least the U.N. Millennium Plan. You will begin to see that everything that has happened over the last 100 years is by no ACCIDENT or incompetent leaders. Another great read is “The Creature from Jekyll Island” which explains the creation of the Federal Reserve where this really all began. It all has been done for a specific purpose!!! Socialism will PREVAIL. We are SCREWED!!!
I liked the two charts, and looks like an interested potential correlation, but the article is not deep, and does not reflect any real analysis of the situation. In particular, the basis measures of money supply show that it has not been growing faster than the economy. And the biggest contributor to this mess is likely Clinton and the democratic congres, who, through the Community Reinvestment Act (“CRA”), pushed banks to grant mortgages to borrowers who could not afford them for the sake of increasing home ownership, combined with senators like Dodd and Obama who were receiving substantial contributions from Freddie and Fanny, while the latte were permitted to become overleveraged. Reforms, including those requested by McCain, were blocked by the Democratic Congress, along with some complicit Republicans, who “were on Freddie and Fannies payroll.” Big, irresponsible government that cannot see past the next vote, or to recognize the unintended consequences of their “well meaning” policies, is the cause and the problem.
To be fair, Reagan spent money like crazy and cut taxes, too, and it was a problem (recession in the late 80s, early 90s). Dems are going to win and win big. Things should improve in the short term, although control of the white house and congress both may let the Dems spend unfettered, too.
I’m not watching my portfolio — I’m young and want to be in for the big up days. I am enjoying the effect on the exchange rate recently as the money moves from stocks to cash.
Yes, as Mike pointed out, Reagan may have had a vision of small government, but it was as small government for ordinary people. Reagan believed in and implemented a very big government for concentrated power. There was nothing really “great” about Reagan, it is all mythology. Look at his record. He had the largest budget deficits in history until Bush 2 took office. He helped set in motion the deregulation that has reduced standards and lead to this financial bust. Furthermore, this deregulation has effected quality in everything from the FDA to trucking safety as well. One cannot on one hand praise Reagan, while denigrating Bush, as they are too similar to notice any significant contrast.
Even speaking about a vision of Reagan is not logical. Reagan was an ex-actor who climbed to power by doing what he was told. He was elected to the screen actor’s guild because he did what Lew Wasserman told him he received a steady stream of movie roles through Wasserman’s MCA. He wore a fake cowboy hat and was photographed walking around his “ranch” with a chainsaw doing yard work. He and was a media construction. He could not read complicated material, quoted the Reader’s Digest as CIA material, had a child’s understanding of the economy and of science (recall the Star Wars Program?), and had his “mommie” schedule meetings based upon astrological timing. I say lets get real about who Reagan was and what he did and not rely upon mythology created by PR firms or an uncritical media.