Wednesday, March 07, 2012

The "We're Americans" Bubble

After nearly 4 years of the media citing "green sprouts" or "slow downs in collapsing prices" and other such optimistic spins, there are some signs the economy is indeed turning around. Not booming (like it should based on economic history), but it is growing and and it is slowly turning around.

Naturally democrats (who have depressed and lowered people's expectations with essentially 3 years of economic stagnation) highlight this tepid recovery as proof positive Obama's economic plan is working. Republicans, actually fear it because with Obama at an incomprehensibly high 45% approval rating already, a continued economic expansion will hurt their election chances. I, however, fear this small economic recovery for another reason:

It's going to cause another bubble.

Understand Americans are incredibly and overly optimistic about the country, about the economy, about their futures and about themselves. They have this foolish notion that there is something "special" about America. That somehow America is "unique" and "we always get out of it! Because we're America!" Unfortunately there is nothing unique or inherent about America that makes us special or immune to economic collapse or the economic realities of the real world. Americanism, yes, THAT is special and unique. Free markets, free people, total personal responsibility, void of government interference and reality TV. Yes, that had never been tried before in the history of the world and it was the "Great American Experiment." But modern-day Americans are simply American't's who prefer to collect a government pay check, major in a worthless subject, expect the government to solve all problems and just plain don't have the work ethic or innovation to achieve Americanism.

Regardless of how delusional the average American is, it doesn't change the fact that they are operating under the false premise that "America always comes back." And this, combined with other ingredients makes it very likely we're going to have another bubble.

First, no matter how convinced you are "America always prevails in the end" it is ultimately the people residing in the geographical location known as America that will determine whether or not we do indeed come back. There is not an "American God" or "deity" looking down at us, intervening with his divine powers to make the land under our feet somehow magical and great. It is the people and their ability to produce, innovate, create, pursue profit, wealth and fun that makes the country great. And frankly boys and girls, we just aren't as great as we think we are.

Long term average economic growth is collapsing. It was originally 4.25% back in the 40's-60's and now has collapsed to about 2.5%.

The economic growth necessary to rationalize a genuine, booming, and sustained economic recovery is just not there. And it is no function of "monetary policy," it isn't even a function of fiscal policy. It's the fact most Americans rather watch "American Idol," major in communications, get a job in a non-profit and vote for socialism than get off their lazy asses, study up on economics, go to school for something that will produce genuine economic growth, and start voting for policies and politicians that advocate creating wealth instead of merely spreading dwindling levels of it around. Again, the country is full of American't's, not your WWII grandfather who became and engineer and could fix his own car. The economic growth just plain isn't there to "bring America back."

The second contributing factor to the "Yeah for Us" Bubble is the harshness and length of the current recession we're in. People, psychologically, are desperate for a recovery, whether we have the economic growth to make it a reality or not. And given the length and the painfully slow progress the economy has made, any little sign of a sustained recovery, no matter how weak, is going to be heralded as the greatest news ever. All one has to do is look at articles from 2003 when the unemployment rate peaked at 6.3% under Bush and the media ripped him apart and called the economy "the worst in 50 years," versus today where the people have become so desperate (and effectively brainwashed) that they're thankful that the unemployment rate dropped below 9% and a two-freaking-month extension of the payroll tax actually makes headline news.

And finally, there is the 9,000 pound gorilla in the room I'm amazed nobody on the left talks about, and that is debt. Forget wars, forget "big oil," forget "evil corporations." The majority of debt is caused by social spending we just plain can't afford (look it the freak up instead of thinking you know more than me). Not only have we gone into debt by multiple trillions of dollars per year for the past 3 years, given future commitments to entitlement spending such as Medicare and Social Security, our current debt levels are dwarfed by what we must incur in the future.

But debt is a crafty little creature. To simplify it for the non-economists out there, debt you can consider to be "future anti-economic growth." Kind of like matter and anti-matter. You can spend the money today, but in the future when it needs to be paid back, it counters economic growth. Also making matters worse, it's not like we're spending our trillions of dollars in debt on veritable INVESTMENTS. We giving the majority of it away to people who plain don't provide anything in return. Welfare recipients, social security recipients, WIC recipients, colleges and universities, Solyndra, GM, the "chillllldren," retirees, medical bills for people on the verge of death, even wars fall under this category. This isn't to insult or criticize these people or items (though some certainly do deserve criticism, ridicule and an immediate cutting off of funds), but to point out the fact NONE of these expenditures provide a return. It's not like you're lending money to IBM to build a new factory in Georgia at 7% and their ROI is 13%, paying back not only the taxpayer, but creating jobs and providing a net return of 6% to the shareholder. No. The $89,000 in medicare you spent to keep Grandpa Jones alive another 6 months is GONE.

Such debt levels, debt commitments and the fact most of it is merely wealth transfers that have no return, will inhibit any long term economic growth (not to mention drive productive people and businesses away who don't care to be around when the tab comes due).

Now, you combine all these factors and you now have the perfect storm for another bubble.
  • A delusional population
  • desperate for any good news,
  • believing in an almost religious belief that "America always wins,"
  • none of whom seem to be willing to go and produce something but all want to major in "music therapy,"
  • who also coincidentally keep voting for socialism
all residing in a country that;
  • has deteriorating and declining long term economic growth
  • crippling levels of debt
  • all of which was wasted (not invested) on items that will never pay them back
  • and a population so ignorant about basic economics they cannot vote real leaders to effectively lead it
Mix that all in with a dash of "entitlementitis" and BLAMO! Congratulations, you got a bubble that dwarfs the insanity of the tulip bulb bubble, the dollar volume of the housing bubble, and the the arrogance of the Dotcom bubble!

Of course, where will we see evidence of the bubble occurring? Asset prices as always, my dear Watson. Asset prices.

The stock market is overvalued if you want to look at it using P/E ratios or dividend yields.

I can't believe the US Treasury is getting as cheap of interest rates as it is.

The only reason the US dollar has recovered slightly is because the US' debt situation sucks only marginally less than Europe.

Why people keep going into debt to finance an education when there isn't an economy to provide them any jobs, I'll never know.

And let's not forget about that retirement bubble too. Yes, you just keep investing in that 401k because the government told you to. Never mind the ROI is laughable. You just keep plugging away thinking you're going to "retire" at, well, any age.

In the end I do know I'm fighting something more difficult than a 250 pound jiujitsu black belt. Because, whereas I can take on a 250 pound jiujitsu master, at least I can engage him (albeit, very briefly). When it comes to convincing people of the real and dire economic consequences facing the nation, and their galactically optimistic attitudes towards the future, I'm dealing with a mental disease. I'm dealing with people who have a psychological problem. I'm dealing with delusional American't's whose perceptions of themselves are only outdone by the enormous economic problems this country has. And since the situation is so hopeless, and there is such a discrepancy between what American't's think they're capable of versus what they'll inevitably deliver, there is, of course, only two things to do:

1. Sit back and watch reality crush their little "Yeah for Us" La-La Land Bubble


2. Enjoy the decline!


Jim said...

I was watching the movie Duel the other night. America is the 18 wheeler that bullied the little Dodge Dart with reckless speed and doing things no mere truck of that size should do. High speeds, going around turns like a race car, flat out full on hardcore driving. So much so that at the end, the driver was so full of confidence that he forgot to hit the brakes and drove right over the cliff.

sth_txs said...

What? You mean it is not Bush's fault?!?! :LOL:

Sadly, Americans are too stupid to implement this program:

Anonymous said...

Debt? What debt? We can just print the money! 15 trillion dollars you say? Well, just print a print a piece of paper with a 15 and 15 zeros behind it, have the President and the Secretary of the Treasury sign it and you got yourself a paid off debt. Easy! :-D

Anonymous said...

So what expiry date should our puts have? I am thinking October.

Anonymous said...

Not to mention the ever increasing diabesity epidemic among the young. This delusional thinking is a product of the American Dream and belief in him upstairs.

Captain Capitalism said...

Oh, never underestimate American's ability to make a bubble last for years. Unless there's a major event (say, obama getting relected), it will be a slow gradual decline.

Jim said...

Not so fast Cap. China is starting to forecast a slowing growth rate. Down to 7% from 9%. Yeah that's really nothing but China is also manipulating its currency, building its military, and looking at conquest abroad. Our bubble will collapse because of external pressures and forces that the Fed cannot make up for. Namely one where China stops buying our debt or forces us into a conflict in which we either stand up and fight or submit to them.

Anonymous said...

"They say the lion and the lizard keep
The courts where Jamshyd gloried and drank deep."

"The sun never sets on the British Empire."

"The glory that is Greece, and the grandeur that is Rome."

"It's not the end of the world, it's just the end of you."

"'My name is Ozymandias, King of Kings. Look on my works, ye mighty, and despair.' No thing beside remains. Round the decay
Of that Colossal Wreck, boundless and bare,
The lone and level sands stretch far away.'

America too, shall pass. Will anything be left? Of the present era, nothing.

Anonymous said...

I am from British Columbia in 1991 the NDP ( New Democratic Party) they are the socialist party of Canada. BC is where OWS started not NYC FYI.They are big into socialism up there.

Anyways, when they NDP got into POWer IBM, Toyota and all of soon to be real companies backed up and left due to the high taxation. They took the jobs with them and the province has been lagging ever since. I lived there for 30 years . I was at expo 86 I know exactly what Im talking about. BC is the heart of socialism and it's dead stagnant place

Anonymous said...

Other goverments and nations are also culpable. If other nations actually expected fiscal responsibility from us, or each other, then we would have collapsed long ago. What's real sad is this is a coming global catastrophe. Most people don't realize that the third largest foreign debt holder is the UK, a nation also heavily indebted and that we purchase their debt as well, and that our FED gave their banks money. It's one giant cycle of fraud. And don't look to China since they are even in worse shape in terms of long term economic viability. The crash is going to hurt hard and its going to be global.

Aurini said...

(Wishing I'd posted this somewhere, so I could prove it).

I've been predicting since early January that 2012 was going to be a bubble year; not because of the economics, but because of the psychology.

People are finally beginning to admit, subsconsciously, just how bad it is. In Nov Dec of last year the media finally started admitting that things are bad - really, really bad - and the the unemployment rate they were telling us was a lie.

The direness is beginning to sink in.

So what do people do? Well, hey, let's have one final party! We're all going to be laid off in 3 weeks time, with no plan, no idea how we're going to find a job - the economy's going to tank - why not party it up while we still have the chance?

A mania born of hopelessness.

Captain Capitalism said...


I'd like to believe that, but the average American is so satiated, and so ignorant, they're numbed to any concept of just how much trouble we're in. I really don't believe more than half of them understand the difference between a billion and a trillion and just write it off and "big numbers people in the government will take care of" and then go on their merry way.

Besides, I still talk to people and they're just as dumb and clueless. People in my industry think I'm a "mean guy" because I get sick and tired of working out loans for dead beats and start demanding payment. The whole society is just so damn ignorant about what it takes to support themselves and never questioned how we've made it this far.

FSK said...

This is a mistake many people make. They wonder "Why are Treasury yields so low when inflation is so high?"

The reason is that the Federal government buys back its own bonds. Technically, the Federal government sells bonds to banks, and those banks sell them to the Federal Reserve for a profit. The Federal Reserve creates new money to buy the bonds.

When trading Treasury debt, the Primary Dealers buy low and sell high. It's a practically riskless trade. That's one reason that big banks have "perfect trading quarters" making money almost every day.

The Federal government buys back its own debt, in collusion with the Federal Reserve and Primary Dealers. Treasury yields have *ZERO CORRELATION* with inflation.

Anonymous said...

One thing which you should point out, Captain, is that because of interest, debt grows if left to its own devices. Of course you know that, and I know that, but I bet half of the people we talk to don't realise it. Not only does debt have to be paid back (by real people anyway), not only does it cost money to borrow, but the debt grows and grows all by itself.

I learned compound interest in Grade 6. Our teacher was thorough (this was a long time ago) but he didn't mention that compound interest is the key to the universe.