Monday, February 16, 2009

Economic bubbles

The cornerstone of the CPA profession is independence, integrity and objectivity.  I wish I could tell you that our financial system was going to be okay and that President Obama and our elected and appointed leaders in Washington were going to save the day.  Unfortunately, I'm highly skeptical and I have obligations to my friends, clients, family and readers to share my concerns.  Your future depends on understanding these matters.

Economic bubbles exists when asset price inflation rises beyond what income can sustain.  The ride up a bubble is exhilarating as everyone thinks they've found a fountain of gold and the ride down is devastating, as the economic system collapses and the artificially inflated values people assigned to certain assets retreat to their actual value.

One of the most famous bubbles was the Dutch tulip mania that peaked in 1637.  On the run up, people actually believed a single bulb was worth more than a house.  

We've actually experienced two bubbles in the past ten years ( and housing).  These were partially fueled by cheap credit (corporate, governmental, private).

Ludwig Von Mises (1881-1973), an influential Austrian Economist wrote:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion.

The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

If this is true, current government actions to expand credit (print a $Trillion and get banks lending again) will ultimately lead to the collapse of the US currency.  A collapse occurs when people no longer have confidence in a fiat currency. Historically, thousands of currencies have collapsed.  Given time, is it possible that they all will? 

It would be unfair to freak you out without providing a solution.  The first step is to get educated and then to take action.  Two items I'm imploring you to read/watch are 

  1. Chris Martenson's Crash Course.  The first sentence on the home page reads, "Ready to learn everything you need to know about the economy in the shortest amount of time?"  
  2. David Korten's Agenda for a New Economy: From Phantom Wealth to Real Wealth
I'm on Chapter 17 of the 20-Chapter Crash Course, and I'm in Section 2 of Korten's book.  

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