|This is somewhat startling, not because it hasn't been said before,
but because of who is saying it.
From: The Economist: Sept. 25th to Oct. 1st. issue
American households and firms are on a borrowing spree:
The private sector's financial deficit is now five times
as large as what it has been any time in the last 50
years. And the nation's trade deficit is soaring: we
continue to buy vastly more stuff from other countries
than they buy from us. There are now more American
households with debts exceeding assets than there are
households with assets exceeding their debts. This is
the first time this has happened since the 1930s.
Meanwhile, corporations (i.e. non-financial businesses)
increased their debt load by more than $400 billion last
year. And what did they do with this borrowed money?
Did they invest in plant and equipment? No. Instead
they bought other businesses. They bought stock shares.
So what if foreigners eventually become much less
willing to finance America's widening current-accounts
deficit and what if inflation eventually kicks in and
pushes up bond yields? Stock prices would slump as
investors moved to bonds. And what about all those
Americans whose nest egg is invested in stocks and who,
as they approach retirement, anticipate that they might
need some of that money sooner rather than later? If
too many of them try to get out of the market at once,
stock prices are going to fall dramatically, maybe as
much as the 40% drop in share prices that occurred in
1987. Problem is, almost twice as many Americans have
money invested in the stock market today as did in 1987.
And far more of them are in debt than were in 1987.
Credit card debt (and write-offs) have soared since
1987. So have personal bankruptcies. So a stock market
sell-off would be much more likely to dump this country
into a long lasting recession (or worse) than it was in
So is the bubble about to burst? Non-performing bank
loans have risen and the default rate on corporate bonds
is running at its highest level since the early 1990s.
And remember the words of Yale professor and economics
guru Irving Fisher who, on the eve of the 1929 crash,
observed that "stock prices have reached a permanent and
high plateau." He, like many others, was convinced that
the boom-bust cycle was a thing of the past. Japan,
too, believed that in the 1980s. Yet these proved to be
the two biggest economic bubbles of the century. And
both developed, and popped, when inflation was modest.