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A FORMULA FOR BUBBLE ECONOMICS

March 10, 2014
tags:

+ Demographics (baby boomers) = expanding workforce = expanding consumption = expanding GDP
+ Dual-income families
+ Debt growth (“borrowed prosperity”)
+ Liquidity/easy monetary policy/the grand experiment
+ Deregulation
+ Investment risk
+ Leverage
 + Investment complexity (complex investment instruments such as derivatives)
+ Ill-advised incentives and other moral hazards on Wall Street
+ Mini bubbles (dot-com/real estate)
+ Market manipulation
+ Worldwide economy

All these forces combined equals one giant bubble, which in turn equals volatility, uncertainty and risk. What it does not equal is stable, transparent, consistent and safe investment returns — or the type of market savers desperately depend on. 

We have had forces in effect for decades that should have warned us that a natural contraction would be coming as the baby boomers began to reach retirement age. We should have recognized that we needed to plan for the natural contraction as the bubble in our population moved from their productive and consuming years into retirement, and for lack of better terms, burdensome and socially costly years. Instead of looking forward and dealing with this possibility decades ago, we encouraged consumption through escalating debt, which now only compounds our problems. Increasing our consumption by exponentially increasing our debt is truly living on borrowed prosperity. Even when a natural contraction began to occur (2000 dot-com correction and 2008 real estate collapse), our elected leaders and monetarists implanted policies to encourage more leverage, risk and debt — the very same thing that caused our problems in the first place.

Only these “accommodative” monetary policies were implemented at an exponentially increased rate. As our economy burns, our fiscal leaders show up to the fire with gasoline! We are living in an age that I refer to as “the grand experiment”! Many claim that our current monetary and fiscal policies are better than the alternative: an economic contraction. I would suggest that it is too early to tell. We have so much liquidity in the system that it is impossible to know what the real economy is. But regardless, we have a tremendous headwind; hurricane force winds, as detailed in the formula above, will certainly encumber economic growth and stability. The ultimate question is: “Can you manipulate growth with supply side economics?” Certainly we have proven that in the short term, you can. However, I would argue that the jury is out on whether the grand experiment can be effective in the long-term.

I think it is reasonable to ask, “What will history write about these times we are living in?”

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