American Bubble from Barrons
As in the 'Twenties, it will burst, bringing deflation and painful recession By David W. Tice
While Wall Street wonders whether these past few weeks signal
the end of the stock market bubble, a more important question for
Main Street is, "Is the economic bubble ready to burst, as well?"
This bubble is the result of America's new found limitless ability to
create credit, which in turn has induced businesses to expand too
far and for consumers to spend far beyond their means.
This credit-induced bubble will burst, sooner rather than later. We've
seen credit bubbles popping elsewhere, in Japan nine years ago
and in Southeast Asia recently. These economies imploded
because expanding credit turned quickly into contractions. It could
happen here, leading to a self-feeding economic and financial
collapse.
This, of course, sounds crazy to anyone looking only at low inflation,
moderate interest rates and a Fed chairman who seems to have the
economy totally under his control. But there is more to economic
health than stable prices. Just because most recessions start with a
rise in interest rates, it doesn't mean they always do. A tug-of-war
between supply-driven deflation and credit-driven inflation has
yielded the stable price level so prized today by the Fed and most
investment strategists. By separating these countervailing forces,
we can see the end of the credit bubble.
Let's take deflation first. Effective use of technology, corporate
layoffs and manufacturing outsourcing have generally raised
productivity and reduced costs. Meanwhile, a worldwide
capital-spending boom has brought down the marginal cost of
production. As a share of gross domestic product, American capital
investment has risen to 17% in 1997 from 13% in 1990,
representing a 30% increase. Specifically, half the real annual
increase in investment has been in the high-tech sector.
One would expect all of this new capacity and efficiency to result in
lower prices overall. In fact, we should be asking ourselves how
consumer prices can be increasing at all. Yet consumer prices are
creeping higher at a rate of 1%-2% year. This rise in the general
price level wouldn't have been possible without substantial monetary
stimulus in the form of rampant credit and the issuance of new
equity. This liquidity boom has been the force tugging frantically
against deflation, creating a dangerous asset inflation in stocks, real
estate and luxury goods.
Our environment of easy, breezy credit can be demonstrated both
anecdotally and with hard numbers. The U.S. money supply as
measured by M3 has been growing at an annual rate of more than
10% for the past year. The balance sheet of Japan's central bank
has recently grown at a 50% annual rate, providing a massive
injection for bond and equity markets around the world. Fannie Mae
and Freddie Mac have expanded their assets at compound rates of
17% and 31% over the last five years. U.S. bank loans for securities
purchases have increased at a 50% rate over the past year.
Meanwhile, total household debt is at a record percentage of GDP,
and has grown as a percentage of income to 95% from 68% over
the past 10 years. For that we can thank the home-equity loan, the
six-year car loan and junk mail with credit cards attached.
The boom in home-equity loans is especially worrisome. When
individuals who were arguably overleveraged before are given the
ability to borrow 125% of their home value, families can easily live
beyond their means. Additionally, a tremendous amount of money
has been borrowed by consumers in anticipation of stock-market
gains, much of it in home-equity loans or loans against 401(k)
accounts. This is in addition to margin debt, which has recently
swelled at a 50% annual rate...........
<and Pay-Per-View for the rest> |
