I loathe bubbles. Not because bubbles distort prices, misallocate resources, trigger recessions and drop standards of living, but because they keep screwing up my economic predictions. And it's not even that they screw up my predictions. My economic predictions normally come true, I guess a better way to say it is they "postpone" my economic predictions.
For example I intuitively knew a long time ago that the US was on an unsustainable economic path. We would have to balance the budget, cut government spending, otherwise the private sector would be crowded out, etc. etc. I was in my 20's and naturally I was a "party pooper" I was the "loser Republican who was wound too tight." At parties people would try to start arugments with me and i would say, "Look, this is not going to work, it's not sustainable!"
Was I right?
Of course I was, I'm always right!
But was I proven right at that time?
Worse, I was temporarily proven WRONG by a bubble, Namely the housing bubble.
With the housing bubble the US (and other) economies looked incredibly great. People were making money, GDP was going through the roof, unemployment was below 5%. What is that idiot republican talking about? Why is he such a downer?
And good luck being the one republican at a 20 something party who now has to explain the masking effects a housing bubble has on the underlying, long term fundamentals of the US economy. You're always the life of the party then!
And so, even though I would be proven right in due time, at that moment in time I was a bad economist. I was put into the penalty box and I felt shame.
Of course, inevitably I was vindicated. The housing bubble popped and the ensuing crash came. And if anything the election of Barack Obama merely hastened my prediction of an "ultimate" crash coming triggered by unsustainable government spending. But particularly vindicating was the aging and thus maturing of my friends and peers. A decade ago I was the "tight, loser, most-likely-racist republican." Today, now that my friends are married, have houses, have children, had jobs, lost jobs, lost their houses, etc., they're paying a little bit more attention to what the Ole Captain is saying. And I might add there have been several friends who have said something to the effect of,
"You know, we all thought you were just this nerd who didn't know what he was talking about, but man, you were right!"
It was almost as if I was becoming a WELL-RESPECTED ECONOMIST!!!
Of course, the irony was that as the economy worsened my reputation and career improved. Predicting doom, but living in a doomed world. Watching the US get destroyed and capitalizing off of it. But I was happy. I was on the vanguard of predicting the crashes, the envelop of economic thought (Enjoying the Decline, ID-ing feminism as a marxist threat, minimalism, etc.), things were finally going the way I predicted they would...until....
Though thoroughly enjoying drinking Rumpleminze and playing video games, sadly I'm starting to see another bubble on the horizon. Another stinking bubble that is no doubt going to postpone my predictions. Another bubble that will mask our severe and crippling financial problems here in the US and give the desperate investing community the false rationale they need to start driving asset prices WAY above the value of their underlying cash flow.
The "Less Sucky Economy" Bubble.
The Less Sucky Economy Bubble or "LSEB" is precisely that.
Is our economy great?
Is our economy good?
Is our economy even sustainable?
But it is LESS SUCKY than all the other economies out there so LET'S FLOOD THE US MARKET WITH MONEY ANYWAY!!!!
The reason we're "less sucky" here in the US is NOT because of the problems of Greece and Europe. I know people have been talking about that for a while analogizing the US to the "best looking horse in the glue factory." And that is true. What I'm talking about is that combined with a crash in China.
I am no expert on the Chinese economy, but what I have read and studied it is becoming more and more apparent the Chinese economy will contract, maybe even crash (perhaps some junior, deputy, aspiring, official or otherwise economist can speak more of this). HOwever, it doesn't even have to crash, it just has to stagnate and its other drawbacks (corruption, inefficiency, bureaucratically managed SOE's) will be the end of China being a beacon of economic growth in the world, and thus no longer a destination for foreign investment.
Stagnation or crash, the question will be the same - where do we invest? Who will lead the world economy out of its doldrums? Who will be our hero!?
You won't believe the answer.
The United States.
That fat, bloated, overeducated, unskilled, lazy, gluttonous, debt-ridden, crippled country who re-elected a bread and circus man is going to be the "savior" of the world.
Again, it's not that there are any genuine economic growth prospects, let alone an economic future in the US, it's that we're pretty much "less sucky" than everybody else.
Europe??? Are you kidding? They hate themselves and are being run over by immigrants from other countries who not only want to destroy western civilization, but disproportionately live off the state. Their debt problems are definitely "more sucky" than ours and if France is any indication they love socialism even more than we do.
China? Well if China does crash/contract/stagnate, every quants black-swan models are going to be thrown off because their forecasted growth rates will no longer apply. That means the prices we're paying for Chinese investment assets are way too high and likely to come crashing down. So China is out for the count.
South America/Central America? Well, while I do like Mexico, it's going to be impossible because of its relatively small size to counteract the larger South American continent, namely a collapse in growth in Brazil and Argentina (besides, just watch what happens to Argentina with their socialist fool ruining the country).
That leaves the United States as the default go to economy in a world of really sucky economies.
Sadly, this bubble will again mask our underlying problems and provide faux growth (like the housing bubble did for Bush and the Dotcom bubble did for Clinton) for Obama. I don't believe it will result in "booming" GDP growth or lower employment, as much as continued financing for our government to borrow and low interest rates in general. It will also improve the value of the dollar. Debt will continue to go up, and if there is any improvement in headline economic statistics (GDP, unemployment, etc.) that good news will once again overshadow our more pressing problems (entitlement programs, spending, and debt).
However, this brings up another aspect of the United States that people don't realize. What we are relying on is our previous reputation as the "United States." Keep in mind most people in the world, just like the US, are spectacularly ignorant about economics. They are too lazy to look things up, let alone think through and develop a functional understanding of how economics works. So the majority of people and thus money, flows based on perception and reputation. The US dollar is still the reserve currency of the world only because of the reputation we earned ourselves when we did some serious ass-kicking we did in the 40's and 50's. Today it will remain so because we're "less sucky," regardless of the rot and decay in our economic fundamentals.
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