The Crash Course - Chris Martenson [48]
But look at the enormous gap between house prices and incomes for the most recent housing bubble. There’s no historical precedent for the size of that gap, and there were disturbing warning signs as early as 1999 that things were getting off track. It’s interesting to ponder how the Federal Reserve had access to this same data but still managed to convince itself that nothing was amiss. In fact, at the time, Greenspan was busy extolling the wonders and virtues of the massive “wealth-creating” effect of housing for the average person, apparently unaware of the wealth-destroying impacts of the future bursting of the bubble he enabled.7 It was completely obvious that we had a bubble on our hands, and prudent people could have simply looked at this data and then trusted themselves to avoid getting swept up in it.
But back to the story. Based on simple calculations performed on the base data for Figure 11.3, we can predict a minimum 34 percent national decline for house prices from peak to trough. That’s what is required to get those income and housing price lines back together again. Given the propensity of bubbles to sometimes overshoot to the downside, we can’t discount the possibility that a steeper decline of perhaps 40 percent or even 50 percent is in store. That was my conclusion, published in 2007,8 and it seems as sound here in 2010 as it did then. Based on Figure 11.3 and the assumption that the housing bubble will burst with the same rough symmetry as prior bubbles, my prediction is that housing prices in the United States will bottom in 2015.
A Bubble Thirty Years in the Making
All of this review of bubbles was meant to get us to the point where we could talk about the biggest and what will almost certainly be the most destructive bubble in history: The Great Credit Bubble.
So far (as of 2010) this bubble, like every serious bubble worthy of mention, has largely escaped attention. Most economic experts are convinced that a credit bubble doesn’t exist, and few people think twice about using credit in their daily lives or dwell on the past four decades of debt accumulation. Bubbles that have not yet collapsed are incredibly hard for most people to detect; that’s why they exist in the first place.
As mentioned in Chapter 10 (Debt), total credit in the United States has doubled five times over the four decades between 1970 and 2010. At the end of 2000, when the stock bubble was bursting, total credit market debt stood at $26 trillion, but by the end of 2008 it stood at an astounding $52 trillion. This $26 trillion increase in borrowing was five times larger than the increase in U.S. Gross Domestic Product (GDP) over the same period of time. As profound as the housing bubble was, it represented only a small piece—only around $5 trillion out of $26 trillion9—of this massive surge in debt.
Figure 11.4 Growth in GDP Compared to Total Credit Market Debt
1980 to present. Both in nominal dollars. Debt excludes all unfunded liabilities.
Source: Federal Reserve.
If the idea is that debt is meant to be paid back, then over the long term debt cannot rise faster than income. Now let’s look at the increase in the size of the United States’s debt compared to its GDP over the past 30 years.
Where debts have increased by just over 1200 percent since 1980, GDP has advanced by just under 520 percent. Imagine your credit card bills growing at more than twice the rate of your income for the next 30 years. Sooner or later that has to come to a stop. It is a thoroughly unsustainable proposition.
Recall that the definition of an asset bubble is that it exists when asset prices rise beyond what