That was almost the title for this blog. Not only am I a fan of Robert Johnson, I usually do have a good deal of rambling going on upstairs.
Currently rolling around in my melon are the consequences of the unprecedented global credit bubble which, over the past few years, has rambled from stocks, bonds and commodities to consumer spending and, yes, real estate. Know that I do believe that these are indeed individual bubbles but, more importantly, symptoms of a larger, more problematic global credit bubble.
A major part of the problem, I believe, is that an accommodative Federal Reserve has encouraged a “gambling society” by being unwilling to take away the “punch bowl” when things get overheated (remember Greenspan’s “irrational exuberance” speech from almost a decade ago?). The Fed has publicly stated that it would rather do nothing to prevent a bubble from forming and only try to fix things after they have blown up. (By the way, didn’t Greenspan and his buddies ever hear the story of Humpty Dumpty?) Fed Governor Ben Bernanke has gone so far as to suggest the Fed would drop cash from helicopters in the event the US experiences actual deflation.
For all intents and purposes, this has taught everyone (consumers/speculators) and their mother (the banks) to say, “hey, don’t worry, if things go bust dollars will simply fall from the sky!” Thus we see speculators and their bankers everywhere who believe that speculating and lending in all these bubbles is riskless. In the event of a problem, Greenspan will arrive on the scene in the nick of time and, with fists on his hips, declare, “never fear liquidity is here!”
What I think most people don’t even have a whiff of is this: the US economy is a phoenix whose time is up. In fact, it was probably up a few years ago but the powers that be have simply kept the decrepit bird on life support with tax cuts, negative real Fed Funds rates and a liquidity IV. So now the economy may technically still be alive but is, in reality, on its death bed.
In the business world, overcapacity is still a major problem. As for consumers – we make up over 2/3rds of the economy – most of us have debt coming out of our ears (yes debt on your house counts). As Steve Roach at Morgan Stanley has prodigiously demonstrated job growth and wages have been anemic. As noted earlier, bubbles are everywhere (pause for comic relief: picture Greenspan in a bubble bath). Now ask yourself, does this sound more like the makings of sustained economic growth or the end of an era?
Here’s what the powers that be have forgotten: the phoenix must first be cremated before it can be reborn. (Or if they prefer the Humpty Dumpty metaphor, “all the kings horses and all the kings men…”) Bottom line is we need a recession. A recession to clense a good deal of the debt that has built up. A recession to rein in the trade deficit. A recession to drain Greenspan’s bubble bath. This has all been discussed before by more insightful minds than yours truly.
What hasn’t been discussed before, to my knowledge, is the repercussions of such a recession. It just may be too early to wonder what such a recession would look like. There is no doubt, however, that the bubbles we’re witnessing are the greatest our country has ever seen. “The bigger they are…” you know the rest.
LIV