Copyright 2011 by John T. Reed
In April 2000, the high-tech stock market bubble burst. A previous stock bubble had burst in 1929.
In 2006, the U.S. home price bubble burst.
So we’re done now, right? No more bubbles will burst? We’ve learned our lesson?
Nope. Not even close.
Going up faster than fundamentals
Howard Schilit wrote a book called Financial Shenanigans. One of its points is that when you graph multiple metrics of anything, they should all move together. For example, over recent years, the following numbers in a corporation might move upward at a three-degree angle
Then, all of a sudden, one number jumps out of the pack and shoots upward at a 70-degree angle while the others keep going up at only a three-degree angle. Which number? Whatever most effects the stock price?
What happened? Some sort of accounting shenanigan by the corporate top executives to raise the stock price which is probably tied to their compensation.
This also happens in markets.
Other current bubbles
For example, in the late 1990s, the value of high-tech stocks exploded upward. Was there a corresponding explosion in the growth rate of people’s incomes, sales, profits, population, or any other fundamental that would cause stock prices to increase?
So what was it?
Irrational exuberance. A speculative mania. Mindless optimism.
In other words, you could define a bubble as a dramatic increase in the price of something NOT accompanied by similar growth of any other related number.
Okay, so is that definition being met anywhere in the U.S. or world economy now?
Yep. In the following categories:
• health care
• higher education
• government employee union benefits
• the U.S. dollar
• local, state, and federal government spending
• green energy
Are these all bubbles? Almost certainly.
So they will burst?
What will prick the bubble?
Departure of those doing the inflating
At some point in the chain that supports these bubbles are people whose participation is optional. They will stop participating.
Because we are spending far more than our tax revenue, at all levels of government in the U.S., we are dependent upon the world bond market to borrow the money to spend more than we are willing to tax ourselves. Lending the various governments in the U.S. money by buying bonds is an optional activity that become less attractive the greater the debt-to-GDP ratio of the government entity in question. The bond market is moving closer to saying no to American government bond auctions.
When those auctions fail—that is, no one buys the bonds—the U.S. government will either have to “print” money which creates hyperinflation—or default on existing bonds and/or other promises made, namely Social Security, Medicare, Medicaid, Obamacare, and so on. State governments cannot print money, so they have to make spending cuts—as you can see on the TV daily.
On that failed-auction day, the bubbles in health care, government employee benefits, the U.S. dollar, American government spending, and green energy will burst.
China and India bubbles
What will burst the Indian and China bubbles? I do not know enough about that stuff except to say it is growing faster than any fundamental explains. My best guess would be that tariffs will kill growth in those two countries. Where would the tariffs come from? Countries whose economies are shrinking watching China and India grow, seemingly at the expense of the countries to whom they export. Domestic consumption has been growing in China, but they are building too many empty buildings for investment purposes and they do not have the sort of credit card habit that causes Americans to do so much domestic consumption.
Short the bubbles, or at least stop relying on them. Shorting has carrying costs. So if the burst comes later rather than sooner, you could end up being “right” but losing money nevertheless because you did not time it right. In particular, do not short in a way that exposes you to margin calls. They can kill you if you are too soon.
But the more important message I have here is not speculating through short selling. Rather, it is not to rely on these bubbles continuing.
Medical party will end
If you are in the medical business, the party is going to end.
Fundamentally, the total amount of money spent on health care is going to fall back to what it was when the medical care spending was not going up faster than other spending. Some people will have to take a pay cut to get back to the pre-going-nuts rise in medical costs. Most probably will simply get fired.
U.S. medical costs are now by far the highest in the world per capita. We spend 16% of GDP on them; the other major, developed Western countries, 8 to 10%. Much of the unexplainable rise in medical costs stem from performing tests and other procedures that did not used to be performed. Some of it is defensive medicine in response to ambulance chaser lawsuits (which exist in no other country) and unnecessary or questionable procedures and tests that were performed not for the benefit of the patient, but because they were profit centers for the companies that performed them.
In the prior U.S. medical care system, doctors and patients knew what things cost and that retarded performing unnecessary tests or procedures and it retarded high charges. So if you are in the business of performing dubious tests or procedures, you are going to be fired when the bond market stops lending money to pay your salary. You are and have been riding the medical bubble. It will burst.
There are three medical systems in this country that have not turned into the highest cost in the world: veterinarians, dentists, and cosmetic plastic surgeons. Why not? Because those doctors and patients know the costs and feel them and the patients resist high costs and have many alternative providers.
There is no feeling, perceptible from my house, within the other parts of medicine that they need to reform.
Higher education costs have soared way beyond inflation rate and the incremental salary increase rates received by graduates of those institutions as a result of having graduated from those institutions. Why? They are unionized, they have tenure, the federal government has been providing easy money student loans. In the aftermath of the 2008 finacial crash, the federal government nationalized the student loans business. Now, all student loans come from the federal government. Once again, that means that the money to pay the skyrocketing, no-fundamentals-to-justify-them costs of higher education is being borrowed from the world bond market. That will end because the federal government is approaching the limit of the bond market’s patience. When the bond buyers stop lending the U.S. government more money and more money, there will be little or no money to fund those low-interest student loans.
Education has been called America’s secular religion—that is, Americans believe getting a good education is just an absolute, unquestioned good. You gotta do it. But in recent years, they have been getting the growing-like-a-cancer-tumor bill for it. And young people have spent a decade or more burdened by their student loans. And the promised big dividends have not been materializing. Recent college grads get no acceptable job offers and end up living with their parents. They tend bar, wait tables, and work other jobs that do not require the education they paid $100,000 to $250,000 for.
Many parents and students have been forced into in-state colleges if not commuting from home to colleges and community colleges. They still believe in the secular religion that you gotta get a good education, but they simply cannot afford it. Others who can afford it are hearing more and more stories that make them realize expensive private education have become a colossal fraud to a large extent.
Colleges and universities have also, since the Vietnam war era, turned into Madrasas for Marxist indoctrination. This does not sit well with the capitalist parents who are about the only ones who can afford private colleges these days.
There is no feeling within higher education that they need to reform.
Unionized local and state government employees
For years, we have been reading about government employee unions driving cities and states into bankruptcy. Not far from where I live is the City of Vallejo. It was home to the large Mare Island Navy Base which was closed.
Vallejo declared bankruptcy. Why? The mayor said they have three police forces and fire departments. How so? Two of each are retired guys and the third is the active duty police department and fire department. To pay the pensions and medical benefits of Vallejo’s retired policemen and firemen, they had to fire active-duty police and firefighters. Last week, my local paper said Vallejo has become a center of prostitution because they do not have enough cops to enforce such low priority laws.
We also have a lot of states that have multi-billion dollar deficits. State constitutions, unlike the federal one, prohibit deficit spending. States have to either raise taxes or cut spending or both when they want to spend more than current tax receipts. Two states do not have deficits—NH and TN; 48 do.
Government employee unions own the Democrat party. One year, probably 15 or 20 years ago, I heard that almost every delegate to the Democrat national convention was a government employee. A memo apparently went out and that embarrassing statistic was lowered by quotas, one assumes. But even now, something like 20% of the delegates to the Democrat national convention are public school teachers. We have become government of the government employees unions, by the government employees unions, and for the government employees unions.
This is penetrating the consciousness of the public more and more. Thank you for that Wisconsin and California government employee unions.
Furthermore, the public, at least in 2010, elected many Republicans because they are fed up with the now perennial state government deficit crises. And the Republican governors and legislators are refusing to raise taxes—largely out of fear of rendering their states even more uncompetitive compared to other states and foreign countries.
Even California governor Jerry Brown, who was governor decades ago, is telling his union backers they are going to have to take cuts. And he is the former governor who initially gave public employees the right to collectively bargain back in his first gubernatorial term. Furthermore, he has only cut spending about half as much as required, planning to take care of the other half with a big tax increase. But he won’t introduce the tax increase as a bill and sign it into law because he promised not to during the 2010 campaign. So he is trying to have the public approve the state tax increase through a statewide referendum. But he may not even be able to get that onto the ballot let alone persuade the voters to approve it.
I doubt the voters will approve it.
The dollar bubble
The U.S. dollar is a bit different from a good or service, but the same bubble theory applies.
Economic fundamentals indicate that if a nation’s debt-to-GDP ratio goes up, the bonds of that country become more risky therefore the interest rate those bonds pay must go up to attract bond buyers.
That has not happened to the U.S. dollar recently.
When the price of something goes up in spite of no relevant fundamentals going up at the same time, you have a bubble. Bubbles burst.
I have discussed the dollar bubble extensively elsewhere at this web site and in my book How to Protect Your Life Savings from Hyperinflation & Depression.
Although it is theoretically possible that the Congress and president will reverse the growth of the national debt before the bond market goes on strike, there is no likelihood of that. We need a $1.65 trillion spending cut—this year. $1.65 trillion is the amount of the current deficit. If we cut spending that much, we will be living within our means for the first time in many years.
But the biggest spending cuts proposed by anyone in Congress are the ones proposed by the Rand Paul and a group of conservative congressmen. Rand wants a $500 billion cut this year; and the group of conservative Congressmen proposed $2.5 trillion.
$500 billion is not enough. $2.5 trillion would be great.
So what passed? The Washington Post says the House—only—passed “dramatic” cuts of $61 billion. The New York Times called those cuts “ruinous.” Actually, geniuses at the New York Times like Paul Krugman, what is ruinous is our having a deficit-to-GDP ratio that is orders of magnitude larger than those we harshly criticized through the IMF when various banana republics ran them in past years. What is ruinous is our having a national-debt-to-GDP ratio that will soon rocket above the World War II record.
You gotta be kidding me! “Dramatic!?” “Ruinous!?” $61 billion is just 4% of the deficit for this year alone!
Many young people are majoring in “green” energy in college because Obama and others say it’s going to be big.
No, it’s not. It makes little or no economic sense. It is a leftist fantasy.
Some say it will make economic sense when the economies of scale kick in as a result of government mandates and subsidies.
Nope. The laws of physics are in the way.
A gallon of gasoline contains 130,000,000 joules of energy.
One hundred square meters of earth surface receives 100 watts of energy from the sun which, for one hour is 3,611,000 joules, 3% of the energy in a gallon of gasoline.
Technological advances only bring us closer to extracting all 100 watts of the solar energy falling on that square meter. In other words, technological advancements can only increase our efficiency at getting all 100 watts. You cannot ever get more than 100 watts from one square meter of the earth’s surface unless you make the sun burn hotter.
There are some marginally cost-effective solar and wind applications in unusual situations, like bouys, emergency highway phones, far-from-power-lines rural homes and other uses, outer space, top of Mount Everest. So there are jobs in those applications, and long have been.
There are also problems like the sun does not shine all the time everywhere on earth and neither does the wind blow all the time everywhere on earth. So if you have solar or wind, you also have to have traditional electric or fossil fuel appliances and vehicles to keep you in business at night or in cloudy weather or when there is no wind. So in terms of initial capital costs, green energy is roughly twice as expensive as traditional fossil fuels because you have to install both. All you get out of wind and solar are less consumption of fossil fuels during ideal conditions for wind and solar.
Are the mandates and subsidies of “green” energy going to stop?
You bet. They are funded by deficit spending which will end when the bond market stops buying U.S. bonds.
Some of these bubbles affect relatively small groups of people like the “green” energy, medical, and higher education bubbles. The dollar bubble, however, affects almost everyone. Indeed, the popping of the dollar bubble—which will probably be called a “run on the dollar” when it happens—will trigger the popping of the other bubbles at the same time. In other words, the bubbles other than the dollar bubble can pop before the dollar bubble popping. But no bubbles are going to last longer than the popping of the dollar bubble.
So if you thought economic bubbles were all in our past or distant future, think again. We have at least another eight inflating right now, including the dollar which will be the bubble to end all bubbles in every sense of the word.
One reader said there is also a lawyer bubble—too many in the U.S. and when it pops many law schools will go out of business. Makes sense.
It also occurs to me that there may be a commodity bubble but the behavior of commodities seems to me to be unrelated to the sort of fraud inherent in things like “green” energy, the value of the dollar, and so on.
As you can see in the comments section below, I got a load of crap essentially about saying that solar/wind are way too expensive. Where did you ge your figues and all that. Here is an item from the 4/5/11 Wall Street Journal. It is typically of hundreds of similar articles I have seen over the years. It says the average cost to produce a megawatt hour in the U.S. is as follows:
Natural gas $60
It also notes that coal and natural gas work 24-7 but wind and solar only work when the wind blows or the sun is out. Also, wind’s market share of electricity generation worldwide is 1%, in spite of all the government mandates and subsidies. Part of the problem is the locations of the windy and sunny spots are often far from users of electricity which means lots of expensive, old-fashioned wires have to be stretched between them.
The simple message to wind and solar supporters is grow up. There is no Easter Bunny and there is damned little renewable energy that is competitive with fossil fuels. And economic hard times are going to force the government to knock off the subsidies and mandates. Like I said, green energy is a bubble that is about to burst or already has.
John T. Reed