Bubbles represent extreme conditions resulting from people doing extreme things and extremism is almost never good. Bubbles are always wonderful on the upswing. The trouble comes when the bubbles collapse, as they eventually do. The U.S. is facing a lot of them right now due in part to how our country has been run over the past few decades by both our government and the Fed.
The first bubble is the national debt bubble which, as of the writing of this post was $28.9 trillion and growing at a tremendous rate. And there is absolutely no plan in place to start reducing this because of gridlock in our government. Eventually we will end up at the fiscal cliff that some economists have been warning about for some time but whose effects are not clear.
Next, we have the Fed bubbles that were intended to pull us out of the Coronavirus slump but were likely way overdone. The current Fed holdings are about $8.7 trillion or about 40% of GDP, way more than the typical 5% or less, and the Fed is still buying. This seems to be kind of like throwing gasoline on the fire. Some think the Fed is out of touch by doing this. This QE has been going on since 2008 and the Fed has proven incapable of undoing it even as the economy was booming.
On top of this, interest rates are at zero with real interest rates at about -6% taking inflation into account. This is the lowest that they have been since before 1980. But the Fed will have to start raising rates very soon to fight the inflation which they have caused.
Then we have the personal debt bubble which is the highest it’s ever been. This is the result of people spending more than they have. Much of this has been borrowed at record low interest rates by people with questionable credit ratings.
When it comes to stocks, margin debt is also near a record. Margin debt is the amount of money people borrow to buy stock using their existing stock as collateral. This works well as long as the stock market is going up but when it goes down, look out.
Then we have the stock market bubble itself. According to the Shiller PE Ratio, the stock market is overvalued by a massive amount, including that leading up to the 1929 crash and far exceeding 2008. It is only shy of the 2000 Dot-Com bubble peak, but barely. The Wilshire 5000 divided by GDP, which is Warren Buffett’s favorite indicator shows an even greater overvaluation of the market.
Finally, we have the price of housing at record highs due to the Fed’s low interest rates. The trouble is that when any one of our many bubbles starts going down the toilet, the others will soon follow resulting in an economic collapse such as a recession or stagflation which many economists are warning about.
We have had such economic collapses before but this time we have one more bubble – a political bubble caused by our two-party political system which is threatening our democracy. It is important to recall what happened as a result of the economic collapse in Germany in the 1930’s. That ended up being the open door that the Nazis were looking for.
We cannot allow that to happen here but it very well could unless something changes in our political structure. The U.S. is one of only a few countries in the world to have a two-party political system and it is failing us.
According to recent polls, the Democrats represent about 31% of Americans and the Republicans represent only about 25%. They sometimes refer to themselves as conservatives and liberals but these terms have become meaningless for the simple reason that moderates and extremists in each group have little to nothing in common with each other. Independents, most of whom are moderate conservatives and moderate liberals, make up over 40% of Americans but we have no political party and little say in how our country is run.
Based on recent polling data, over 60 percent of Americans and over 70 percent of millennials agree that we need a third major centrist political party. There are several fledgling efforts out there to accomplish this such as the Alliance Party (theallianceparty.com), the Reform Party (reformparty.org), and Represent.Us, however they are somewhat missing the mark. But another option is coming. Hopefully we are not too late.