Bubble Economy

Is there any doubt that we are living in a bubble economy? At this moment in the United States we are simultaneously experiencing a stock market bubble, a government debt bubble, a corporate bond bubble, a bubble in San Francisco real estate, a farmland bubble, a derivatives bubble and a student loan debt bubble. And of course similar things could be said about most of the rest of the planet as well. In fact, the total amount of government debt around the world has risen by about 40 percent just since the last recession. But it is never sustainable when asset prices and debt levels increase much faster than the overall level of economic growth. History has shown us that all financial bubbles eventually burst. And when these current financial bubbles in America burst, the pain is going to be absolutely enormous.

You know that things are getting perilous when even the New York Times starts pointing out financial bubbles everywhere. The following is a short excerpt from a recent NotQuant article…

The New York Times points out that just about everything on Earth is expensive by historical standards. And then asks the seemingly obvious question: Does that make it a bubble?

Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

“Quite possibly?” We’re not sure what definition of the word “bubble” they’re using. But in our book when the price of literally everything blasts upwards, obliterating the previous ceilings of historical benchmarks, it’s a pretty good indication that you’re in a bubble.

Of course when most people think of financial bubbles the very first thing they think of is the stock market. And without a doubt we are in a stock market bubble right now. The Dow has risen more than 10,000 points since the depths of the last recession. And it is nearly 3,000 points higher than it was at the peak of the last stock market bubble in 2007 when our economy was far stronger than it is now…

But of course these stock prices do not reflect economic reality in any way whatsoever. Our economy has not even come close to recovering to the level it was at prior to the last financial crisis, and yet thanks to massive Federal Reserve money printing stock prices have soared to unprecedented heights.

At some point a massive correction is coming. No stock market bubble lasts forever. For a whole bunch of technical reasons why serious market turmoil is on the horizon, please see a recent Forbes article entitled “These 23 Charts Prove That Stocks Are Heading For A Devastating Crash“.

The bubbles in the financial markets have become so glaring that even the central bankers are starting to warn us about them. For example, just consider what the Bank for International Settlements is saying…

The Bank for International Settlements has warned that “euphoric” financial markets have become detached from the reality of a lingering post-crisis malaise, as it called for governments to ditch policies that risk stoking unsustainable asset booms.

While the global economy is struggling to escape the shadow of the crisis of 2007-09, capital markets are “extraordinarily buoyant”, the Basel-based bank said, in part because of the ultra-low monetary policy being pursued around the world. Leading central banks should not fall into the trap of raising rates “too slowly and too late”, the BIS said, calling for policy makers to halt the steady rise in debt burdens around the world and embark on reforms to boost productivity.

In its annual report, the BIS also warned of the risks brewing in emerging markets, setting out early warning indicators of possible banking crises in a number of jurisdictions, including most notably China.

“Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on,” it said.

Sadly, just like in 2007, most people are choosing not to listen to these warnings.

Another very troubling bubble that is brewing is the massive bubble of consumer credit in the United States. According to the Wall Street Journal, consumer credit in the United States increased at a 7.4 percent annual rate in May…

The Federal Reserve reported Tuesday that consumer credit—consumer loans excluding real estate debt—in May increased at an annual rate of 7.4% to a record $3.195 trillion. Most of that gain came from a 9.3% increase in nonrevolving credit, the bulk of which is accounted for by auto and student loans. Revolving credit, which is primarily credit-card debt, expanded at a more muted 2.5% rate after jumping 12.3% in May.

That might be okay if our paychecks were increasing at a 7.4% annual rate, but that is not the case at all. In fact, median household income in America has gone down for five years in a row. As the quality of our jobs goes down the drain, our paychecks are shrinking even as our bills go up. This is putting an incredible amount of stress on tens of millions of American families.

And when you look at the overall debt bubble in this country, things become even more frightening.

In a previous article, I shared a chart which shows the incredible growth of total debt in the United States. Over the past 40 years, it has gone from about 2.2 trillion dollars to nearly 60 trillion dollars…

Is this sustainable?

Of course not.

None of these financial bubbles are.

It is not a question of “if” they will burst. It is only a question of “when”.

And some believe that we are rapidly approaching that point. In fact, Marc Faber believes that we are seeing signs that it may be starting to happen already…

It’s the question investors everywhere are wrestling with: Are asset prices in a bubble, or do they simply reflect the fact that the global economy is growing once again?

For Marc Faber, editor of the Gloom, Boom & Doom Report, the answer is clear. In fact, he says the bubble may already be bursting.

“I think it’s a colossal bubble in all asset prices, and eventually it will burst, and maybe it has begun to burst already,” Faber said Tuesday on CNBC’s ‘Futures Now‘ as the S&P 500 lost ground for the second-straight session.

So what do you think?

How much time do you believe that we have before these bubbles start to burst?

Please feel free to share your thoughts by posting a comment below…

The Federal Reserve continues to pump up this “bubble economy” by recklessly printing money and by setting interest rates artificially low, and the U.S. Congress continues to stand aside and allow them to systematically destroy our economy. The U.S. Congress could choose to end this madness at any time, but the truth is that Congress won’t even pass a law that would allow the American people to see what is going on over at the Federal Reserve. Congress has voted down every single bill that would authorize a comprehensive audit of the Federal Reserve. So the folks over at the Fed will continue to be able to destroy our future in secret. In fact, back in July Federal Reserve Chairman Ben Bernanke actually sent five thank you letters to members of Congress that gave speeches on the floor of the U.S. House of Representatives encouraging their fellow lawmakers to vote against the bill to audit the Fed. Since the U.S. Congress continues to refuse to do anything to hold the Federal Reserve accountable, the Fed will continue to print unprecedented amounts of money, it will continue to set interest rates insanely low and it will continue to pump up the greatest debt bubble in the history of the world. Unfortunately, all debt bubbles eventually burst, and when this one does it is going to be a financial nightmare unlike anything we have ever seen before.

It was Politico that first broke the story about the thank you letters that Federal Reserve Chairman Ben Bernanke sent to five members of Congress back in July. Bernanke acknowledged in the letters that there was never any worry that the “Audit the Fed” bill would actually get through Congress and be signed into law, but he was still extremely grateful that a number of members of Congress got up and publicly denounced the bill….

In July, the Fed chairman sent letters of gratitude to five Democratic members of Congress after they delivered speeches on the House floor urging fellow lawmakers to reject the “Audit the Fed” bill authored by retiring Texas Republican Ron Paul, the central bank’s chief antagonist.

Their efforts failed to defeat the bill, but they were not in vain, at least in Bernanke’s eyes.

“While the outcome of the vote was not in doubt, your willingness to stand up for the independence of the Federal Reserve is greatly appreciated,” Bernanke wrote in the letters, which were obtained by POLITICO through a Freedom of Information Act request.

So who did Bernanke send those letters to?

According to Politico, the thank you letters were delivered to U.S. Representatives Barney Frank, Elijah Cummings, Melvin Watt, Carolyn Maloney and Steny Hoyer.

By refusing to take action against the Federal Reserve, the U.S. Congress is silently endorsing their incredibly foolish policies.

Sadly, most Americans don’t even realize that the Federal Reserve has more control over our economy than anyone else does. Most Americans that are actually concerned about politics are busy arguing over whether Obama or Romney will be better for the economy when it is actually the Fed that controls the levers of economic power.

Just think about it.

The Federal Reserve played a major role in creating the housing bubble which severely damaged our financial system a few years ago.

As the chart below shows, after 9/11 the Federal Reserve dropped interest rates to historically low levels. This allowed potential home buyers to get into much larger mortgages, and the big banks (which the Fed supposedly “regulates”) started making home loans to almost anyone with a pulse.

When interest rates started to go back up to normal levels in 2005, many home owners discovered that their adjustable rate mortgages started to become much more painful. By 2007, we started to see a massive wave of mortgage defaults. In 2008, the financial system crashed.

In response to the financial crisis of 2008, the Federal Reserve dropped interest rates to record low levels. The effective federal funds rate is essentially at zero at this point, and the Fed has promised to keep interest rates at ultra-low levels all of the way into 2015.

But didn’t artificially low interest rates cause many of our problems in the first place? The central planners over at the Fed are convinced that this is the right course for our economy, but can we really live in a zero interest rate bubble indefinitely? Won’t this eventually cause even greater problems?….

The Fed is also destroying our economy by recklessly printing money.

Once upon a time, the U.S. monetary base rose at a very steady pace. But since the financial crisis of 2008, Ben Bernanke has been flooding the financial system with money and this has caused an unprecedented explosion in our money supply.

It isn’t too hard to see from this chart what the foolish “quantitative easing” policies of the Federal Reserve have done to our monetary base….

Fortunately a lot of the money from previous rounds of quantitative easing is being stashed by the big banks as “excess reserves” with the Federal Reserve, but when that money starts flowing into the “real economy” (and it will at some point), we are going to have a major problem on our hands.

But more than tripling our monetary base was not enough for Bernanke. He recently announced yet another round of quantitative easing which he says will last indefinitely.

Basically, Bernanke is taking a sledgehammer to the U.S. dollar. Our currency is being systematically destroyed, and the U.S. Congress is standing by and doing nothing.

For a lot more on why QE3 is going to be so incredibly destructive for our economy, please see the following five articles….

-“QE3: Helicopter Ben Bernanke Unleashes An All-Out Attack On The U.S. Dollar”

-“How QE3 Will Make The Wealthy Even Wealthier While Causing Living Standards To Fall For The Rest Of Us”

-“The Federal Reserve Is Systematically Destroying Social Security And The Retirement Plans Of Millions Of Americans”

-“QE4? The Big Wall Street Banks Are Already Complaining That QE3 Is Not Enough”

-“Quantitative Easing Did Not Work For The Weimar Republic Either”

The Federal Reserve seems to think that printing more money is always the solution to whatever economic problems we are having.

But of course the Fed has been debasing our currency from the very beginning. The entire Federal Reserve system is designed to create inflation.

From the time that the Federal Reserve was created back in 1913, the purchasing power of a U.S. dollar has declined from $1.00 to only about 4 pennies today.

And now Bernanke seems bound and determined to wipe out those last 4 pennies.

The Federal Reserve system was also designed to create a never ending spiral of government debt.

Sadly, most Americans simply have no idea where money comes from. Most Americans have no idea that money that the Federal Reserve zaps into existence out of thin air is loaned to the U.S. government at interest. Most Americans have no idea that the primary reason why we are 16 trillion dollars in debt is because this is what the system was designed to do to us.

Today, the U.S. national debt is more than 5000 times larger than it was when the Federal Reserve was originally created in 1913. This did not happen by accident….

Not that our politicians should be off the hook for this. They have been spending money as if there is no tomorrow. Most of them have shown no concern at all about the legacy of debt that they are passing on to future generations of Americans.

If our politicians had been more responsible, the national debt would still be there, but it would be at a much more manageable level.

If we ever want to totally get rid of our national debt, the Federal Reserve must be abolished.

There is no other way.

And government debt is not the only bubble that the Federal Reserve has pumped up.

The following is a chart that shows the growth of all forms of debt (government, business, consumer, etc.) in the United States. The total amount of debt in the United States has grown from less than $2 trillion to more than $55 trillion over the past 40 years….

How in the world could we have been so foolish?

How in the world did we allow the total amount of debt in our country to get more than 27 times larger over the past 40 years?

As you can see, there was a slight “hiccup” in the bubble as a result of the financial crisis of 2008, but now it has started growing again.

At this point our entire financial system is based on debt, and if the debt bubble does not continue to expand the entire thing will collapse.

But no financial bubble grows forever. History has proven that to us over and over.

At some point this bubble is going to burst.

When it does, we will either experience a deflationary collapse or a hyperinflationary collapse depending on how “the powers that be” respond to what is happening.

History has shown us that financial collapse is often accompanied by social upheaval. Many times it even leads to war.

So what will happen to America when our economic collapse happens?

That is a very good question.

How would you answer it?

Bubbles, Bubbles Everywhere

The Federal Reserve Sends Thank You Letters To Congress For Allowing Them To Destroy Our Economy In Secret