Credit Bubble Fuelled by Little Real Wealth

“Greenspan blamed for double bubbles,” says a headline in the NY Post. At last…finally…they’re on to the old humbug.

Of course, Greenspan is not really responsible – at least, not alone – for today’s huge credit bubbles. As Ben Bernanke explained, there was a lot of money coming into the world financial system from other sources. The Asians, for example, seem to know how to make money but not how to spend it. Thus are they left with billions of dollars of savings. And when the price of oil rose from under US$20 to over US$70…it put a lot of money in the hands of oil producers. What could they do with all that extra money but put it into investments? And whose investments were better known, more liquid, and more universally accepted than those that were quoted in US dollars?

Naturally and inevitably, people who earned dollars…or who had dollars…or owned dollar-based assets…or who printed up the dollar bills themselves…thought they were hot stuff. Everyone wanted what they had. Prices on Wall Street went up. Wall Street bonuses soared. Hustlers started up hedge funds…private equity funds…and funds of funds to grab some of the loose change.

All this money coming into the United States drove down interest rates. But it wasn’t just the foreign savers who drove down US rates…and it wasn’t just the foreigners who were stuffing American capital markets with cash. After the mini-correction of 2001-2002, Alan Greenspan and George W. Bush panicked. Greenspan cut rates to “emergency” low levels… the lowest rates since the Great Depression…and the federal government jacked up spending while cutting taxes. The result was the biggest wad of new cash and credit ever to come into world capital markets.

What happened next? Boom…Bubble…now, B…ust?

Yesterday, the price of oil hit a new record high at US$79.91. Meanwhile, the dollar fell to a new record low – at US$1.39 to the euro (EUR). Wheat hit a new record high of US$9 a bushel – twice what it was a year ago. And the commodity index registered a new high too.

Gold, the ultimate measure of paper currency destruction, held steady…despite estimates that the US money supply has been growing at a fantastic 50% annual rate – following the market shock in the summer!

So much new cash and credit…so little real wealth!

Pity the poor American householder. Just a few months ago he had people lining up to lend him money. Now they’re on the phone wanting it back! He had gotten used to refinancing. But now refinancing is tough…and more expensive.

He goes to the grocery store and finds his bread and breakfast cereal have gone up in price. He gets his health care bill and finds it rising faster than his income. He drives into the gas station – he’s shocked by how much it costs to fill up his tank. He hears on the news that the government says inflation is under control…the federal budget is balanced…and all is well. But then he looks at his own cost of living and realises that the feds’ numbers are nonsense; they merely left out two of his biggest expenses, food and fuel…and cheated on the others.

And as for the Bush Budget…he’s sure the feds are pulling a fast one there too. Look at the numbers more carefully, says Fortune Magazine, and you find a deficit of more than US$400 billion…and then, he discovers that his adjustable rate mortgage is going to be reset. Get ready for a ‘deluge’ of resets, says Reuters. So far, only about a third of the subprime ARMs of 2005 and 2006 have been reset… the crest of the wave is still ahead.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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