(06-13-2016, 07:40 PM)beechnut79 Wrote: Your second paragraph reminds me that today's economic climate is so reminiscent of a holiday observed at the end of every October. Treats for the rich and powerful; tricks for most of the rest of us. When the whole MBA craze was on, to some extent the Me Generation culture no doubt helped push that along. The dark side of things didn't come home to roost for a while, but the scholarly types and those who hadn't yet sucked up to what was happening had already figured it out by 1987, by which time we had the largest homeless population since the Great Depression. The one thing which has prevent Great Depression II so far? No doubt it's consumer credit. This Christmas how about coming up with an adult letter to Santa requesting a world that feels a little less stressful?
No, consumer credit is way too small. To get a Depression today, you need a financial crisis. To get that you need an asset bubble crash. To get that you need a bubble. To get a bubble you need Congress to authorize one. Now the Great Depression happened as a result of the financial crisis stemming from the crash of the stock market bubble in 1929-32. It was deemed unfun, and so Congress deauthorized bubbles. As long as those who lived through the Depression still lived, Congress refrained from a new bubble authorization. But all men die and by 1997 just about everybody at the scene in '29 was gone (Roy Neuberger, the guy who shorted RCA at its peak in 1929, was still around but he was like 100). So Congress decided it was time to reauthorize a new bubble. I recall in 1997 as the market was getting close to the valuation it had had in the late 1960's whether the bull would just peter out like the 1960's or end with a blowout top like '29. When Congress passed the bubble act, it settled the issue, blowout top and I stayed invested for two more years.
So we had our first giant bubble in 2000. And in August 2000 I thought its collapse would trigger the 4T.[1] It didn't. The Fed swung to the rescue and stoked the real estate bull market so real estate investment compensated for falling corporate investment yielding a mild recession. It takes time (one business cycle) to build up a bubble so we had to wait for the next recession to see if we can get a Depression. Congress did its part by passing another Bubble Act in 2003. This was successful; they managed to blow up a real estate bubble of unprecedented size and to get the job done in just seven years. This time there was no healthy asset class which could be used to blow up a counter bubble to offset the collapsing real estate bubble. Stocks were still sick and they suffered their second worst bear market in history despite not being all that overvalued. The Fed could not contain the damage with normal policy and the Bush administration came up with a quick plan to help financial elites. Congress quickly agreed. The Fed did their part by creating cash and handing it out to financial elites in an effort to make them whole. These actions were successful, the financial markets recovered and financial elites are rolling in new gains.
To get the economy to recover, a new president and Congress passed a stimulus designed to deliver a nudge to get the economy going at minimal cost to elites. The new administration and Congress also refrained from passing any new Bubble Acts and even repealed the 2003 Act (although the 1997 Act is still on the books). As a result they have not rushed the development of the next bubble (this one in stocks). The business cycle turns 9 at the end of year with no sign of a top yet. Right now the stock bubble is the third largest in history (1929 was slightly larger and 2000 was quite a bit higher than that).
Sooner or later the stock market is going to peak and this business expansion will end. This time the Fed has little room for conventional policy. And if real estate is still damaged (likely) there is little prospect for a counter bubble in real estate. The Fed could try more QE but this strategy has been played out I think. So the markets and economy should fall and fall. If Congress can throw up a sufficiently-large wall of stimulus to contain the collapse, a Depression can be avoided. But with the rise of a Tea Party stimulus is off the table. So it looks like third time is the charm.
[1]see Aug 21 post in the Kondratieff Wave thread in The Future section in the 1990's T4T site: