The Crash Course - Chris Martenson [44]
CHAPTER 11
The Great Credit Bubble
In order to understand what the future may hold, we need to see the excessive accumulation of debt between the early 1980s and 2010 for what it really was—an enormous and protracted credit bubble. Debt levels doubled, redoubled, and doubled again with uncanny mathematical precision. Within that larger credit bubble, we had several minibubbles—one in stocks and the other in housing—and while these were both financially destructive, they were sideshows on the way to the main act.
Because our hopes and dreams for the future rest upon a well-functioning economy, we need to understand what bubbles are and the financial risks they pose. If my analysis is correct, the main bubble has only just begun to burst. Under the best of circumstances, this will exert profound influences for a long time to come; under less favorable circumstances, it will prove to be a uniquely unfortunate and disruptive period of economic adjustment.
Because this past episode of credit expansion was so ubiquitous (it spanned the globe) and lasted for so long (30 years), it came to be accepted as normal and logical by otherwise bright and intelligent people. Like all credit bubbles, this one was founded on the most enduring of human weaknesses: the desire to get something for nothing.
Before we dive into the Great Credit Bubble, let’s spend a bit of time defining what an asset bubble is and examining some of the more common characteristics of bubbles.
What Is a Bubble?
Along the continuum of irrational financial behavior, it can be tricky to tell the difference between a bubble, a mania, and a touch of overexuberance. The designation “bubble” is reserved for the height of folly, but unfortunately, history is rich with folly. Throughout the long sweep of history, the bursting of an asset bubble has always been a financially traumatic event and has often precipitated social and political upheavals.
Because they are so culturally and financially painful, bubbles used to be separated by one or more generations because it took time to forget the experience. Bucking this convention, less than 10 years passed between the bursting of the dot-com bubble in 2000 and the housing bubble in 2006—a thoroughly unprecedented event—which calls into question the mindfulness of its participants. However, it is my contention that instead of these being two separate and distinct bubbles, they were merely subbubbles housed within a much larger and more profound credit bubble, which partially (but not entirely) excuses the all-too-close nature of their occurrences.
The Federal Reserve famously likes to claim that you can’t spot an asset bubble until it bursts. This is something of a mystery, because the definition of a bubble is pretty simple: A bubble exists when asset prices rise beyond what incomes can sustain. There is nothing especially tricky about that definition, and it provides an easy test that can be founded on solid data.
For example, when houses in Orange County, CA1 rose to the point that the median house cost more than nine times the median income,2 housing there was clearly in the grip of a bubble. A more normal ratio for housing would be in the range of roughly three times income, while anything over four times income really begins to stretch things a bit.3 When you get to eight times income, you’ve been in a bubble for quite a while, it’s completely obvious even to casual observers, and it’s going to burst with predictable, economically painful results.
This seems pretty straightforward, but for some reason the Federal Reserve, under Greenspan and then Bernanke, continued to insist that bubbles couldn’t be spotted, and even if it were possible to spot them, that nothing should be done about them until after they burst. Greenspan