Stephen Roach: Double Bubble Trouble

The United States is now going through its second post-bubble downturn in seven years. Yet this one stands in sharp contrast to the post-bubble shakeout in the stock market during 2000 and 2001. Back then, there was a collapse in business capital spending, a sector that peaked at only 13 percent of real gross domestic product.

The current recession has been set off by the simultaneous bursting of property and credit bubbles. The unwinding of these excesses is likely to exact a lasting toll on both homebuilders and American consumers. Those two economic sectors collectively peaked at 78 percent of gross domestic product, or fully six times the share of the sector that pushed the country into recession seven years ago.

For asset-dependent, bubble-prone economies, a cyclical recovery ”” even when assisted by aggressive monetary and fiscal accommodation ”” isn’t a given. Over the past six years, income-short consumers made up for the weak increases in their paychecks by extracting equity from the housing bubble through cut-rate borrowing that was subsidized by the credit bubble. That game is now over.

Washington policymakers may not be able to arrest this post-bubble downturn. Interest rate cuts are unlikely to halt the decline in nationwide home prices. Given the outsize imbalance between supply and demand for new homes, housing prices may need to fall an additional 20 percent to clear the market.

Aggressive interest rate cuts have not done much to contain the lethal contagion spreading in credit and capital markets. Now that their houses are worth less and loans are harder to come by, hard-pressed consumers are unlikely to be helped by lower interest rates.

Japan’s experience demonstrates how difficult it may be for traditional policies to ignite recovery after a bubble. In the early 1990s, Japan’s property and stock market bubbles burst. That implosion was worsened by a banking crisis and excess corporate debt. Nearly 20 years later, Japan is still struggling.

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Posted in * Economics, Politics, Economy, Housing/Real Estate Market

One comment on “Stephen Roach: Double Bubble Trouble

  1. Sick & Tired of Nuance says:

    The Mission of the Federal Reserve Bank is:

    [blockquote]The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.[/blockquote]

    In this mission, they have utterly failed. They failed during the Great Depression and in all the boom/bust cycles that have followed.

    This parasitic private institution has made misstep after mistep. since creation of the Federal Reserve in 1913 the U.S. dollar has lost over 90 percent of its purchasing power. Sure, we are all making “more” money, but it is worth less and less.

    The price of of a 2008 US MINT 999 Silver Eagle 1 oz. $1 DOLLAR COIN (BU UNC) is currently 25.99 Federal Reserve Notes. Think about that for a moment. [b]A single paper Dollar used to be redeemable for a single silver Dollar.

    It currently takes 26 Federal Reserve Notes to buy a single Dollar.[/b] How can that be? It is because the Federal Reserve Bank has “inflated” the currency through fractional reserve banking.

    The entire system is corrupt. The Federal Reserve has [i]stolen[/i] the difference between the 24.99 Federal Reserve Note “dollars” and a real Dollar.

    [blockquote] [b]Proverbs 11:1[/b]
    The LORD abhors dishonest scales,
    but accurate weights are his delight.[/blockquote]

    The Federal Reserve is a group of 12 private banks.

    The Federal Reserve has share holders.

    The Federal Reserve creates “dishonest” scales by fractional reserve banking.