The Evidence
Make no mistake; extremely difficult times lie ahead. Our nation’s character will be tested like never before. Whether it will rise to the occasion or be found wanting remains to be seen. While we can all hope for the best, the pragmatist in me suggests that we had better prepare for the worst.
-Peter Schiff, Crash Proof: How to Profit from the Coming Economic Collapse
The material found on Boom2Bust.com is based on research conducted by the editor, Christopher E. Hill, who predicts that a U.S. financial crash is imminent. Mr. Hill believes that the United States is afflicted by a number of interconnected “bubbles” that when one is pricked, a “domino effect” will follow and result in a major economic crisis in the United States. A bubble exists whenever an asset’s perceived or psychological value exceeds its real economic value. Eventually, all bubbles burst and perceived values retreat back to their true economic values. Today, bubbles are present in the Stock Market, the Dollar, Real Estate, Consumer Debt, International Trade Deficit, and Government Debt.
Stock Market Bubble
The value of U.S. blue chip stocks grew nearly ten-fold from 1983 to 2000, while real earnings (adjusted for inflation) increased only three-fold during the same period. By contrast, in the previous 54 years (1928 to 1982), the stock market, as measured by the Dow Jones Industrial Average, grew a much more reasonable three-fold during a time of significant economic growth.
Dollar Bubble
In the last few years, the central bank of Japan has bought almost $1 trillion of U.S. currency, with the Chinese not too far behind at $800 billion. Why would a foreign government buy so much of our money? Because everyone loves the United States and the greenback, right? Wrong! Japan and China buy U.S. dollars to keep its value high so that we will continue buying their exports. Anytime a nation’s currency (or any asset, for that matter) has to be bought up in large numbers in order to maintain its value, this is evidence of a bubble.
Real Estate Bubble
In the 20th century, U.S. home prices consistently rose about 1% a year (when adjusted for inflation) in response to rising incomes and growing population. More recently, however, the average U.S. home price defied gravity and shot up (average annual growth rate of 11.2% in 3Q 2005) while real wage growth has been essentially flat and population growth is dramatically slowing.
Source: New York Times/Robert J. Shiller, “Irrational Exuberance”
If the most fundamental drivers of real estate prices, increasing income and growing population, are simply not present, then there is no real solid economic basis for skyrocketing real estate prices. When real wages doubled from 1950 to 1970, rising home prices made sense. Today, that economic logic is simply not there. Still, Americans had been borrowing like mad and buying pricier and pricier homes… that is, until the housing slump began. With increased delinquencies and foreclosures, tighter lending standards, a growing glut of unsold homes, and potential buyers either unable or unwilling to purchase a home, this is one bubble that has been pricked and is steadily deflating.
Source: Federal Reserve Bank of Dallas
Consumer Debt Bubble
Collectively, American consumers went from owning a mere $19 billion in loans (excluding home mortgages) in 1950 to a staggering $2.56 trillion of debt as of March 2008. Look around you. It appears buying on credit has become a way of life in America. This is a far cry from generations past, where saving money for a future purchase was the norm. Today, savers are seen as losers and instant gratification permeates throughout American society. Even if we cut up all our credit cards and continue to make our minimum payments, it would take American consumers many decades to pay all that debt off.
International Trade Deficit Bubble
The imbalance between what we buy from other countries and what we sell to other countries is called the International Trade Deficit. The trade deficit (the difference between our imports and exports) means, as we buy more and more goods in today’s global marketplace, more and more of our dollars end up in the hands of foreigners. Currently, we import so much more than we export that our trade deficit is constantly setting new record highs, and our cumulative trade deficit is massive.
The United States has posted a trade deficit since the 1970s, and in 2007 imports outstripped exports by $711.6 billion.
Source: U.S. Census Bureau
Government Debt Bubble
In 1980, the U.S. government had a deficit of only about $50 billion. In 1982, the deficit had tripled to $150 billion based on the decision to stimulate the floundering U.S. economy through deficit spending. Alas, deficit spending became so seductive that each year the government borrowed more and more (especially from foreign investors) until our total government debt (the sum of all our deficit spending, over many years) went from less than $1 trillion in 1980 to a whopping $9.4 trillion as of mid-May 2008. It’s important to note that few people realize the U.S. government’s annual budget deficit is actually much higher than reported amounts. The government borrows the “extra money” from your Social Security Trust Fund, thus reducing the amount of deficit that the government normally reports. Of course, they intend to pay back the borrowed Social Security funds in the future. Don’t hold your breath, Generation X, Y, and beyond!
What will happen when any one of these “bubbles” pop? The result will be a “bubblequake” say David Wiedemer, Robert Wiedemer, Cindy Spitzer, and Eric Janszen, authors of America’s Bubble Economy: Profit When It Pops. They state that:
The bursting of any one of the above financial bubbles would create real trouble for the United States and many other nations. Not only are these financial bubbles linked and bound to fall together here in the United States, they also tied the U.S. economy to so many other economies around the world. The bursting of these linked, interdependent bubbles will be nothing the world has experienced before… Never in our history have all these factors and conditions coexisted at the same time, so it is understandable that many people don’t fully appreciate the real dangers we now face. No one can predict the exact moment when our linked bubbles will begin to burst, but this much we know: it’s not a matter of if, but a matter of when… On top of all these dangerous bubbles, there is one other issue that cannot be ignored. Foreign investors now own more U.S. assets than ever before in our nation’s history- a massive $12 trillion, all together… Why does this matter? It matters for a number of reasons we address later, but the most urgent reason is this: Anything that spooks investors to start selling off their U.S. stocks, bonds, dollars, and other assets would have a very negative impact on the value of these assets. In other words, our bubbles will burst and our economy will fall… Think Internet Bubble… times 10.
