The Last Bubble
by Eric Janszen
Written for the German broadsheet daily
Oct. 2, 2008
That was it. The housing boom. The leveraged buy-outs. The high flying hedge funds. Mega houses. Super cars. Big dreams of endless credit. All gone. All over. Done, once again.
A fantasy creation of the latest grand experiment in global Ponzy capitalism. A Disney world of wealth produced by debt.
This last great credit bubble grew since 1980 until its peak in 2007 when nearly US$5 of new debt was needed to fund a single dollar of US national income growth up from US$1 a generation before.
It started when the US abandoned the international gold standard in 1971, replaced with a global monetary regime based on dollars that the US could issue in unlimited supply. Nations outside the US created dollar demand and value not as a reward to the US for a positive balance of trade but for lack of other international pricing and transaction options. As demand for dollar denominated financial assets grew, the market price of finite global commodities, such as oil, was distorted downward, interest rates declined, money became cheap.
Cheap money funded asset bubbles. The LBO bubble of the late 1980s. The 1990s technology bubble. The 2000s housing bubble.
The era of cheap credit to fund asset price inflation ended with the crash of the securitized debt market in the spring of 2007.
The physical world left behind will be with us for decades, the way the credit bubble of the 1920s haunted us with its images of excess through The Great Depression, WWII, the Soviet era, all the way into the 1980s in some nations before the wave of socialization and nationalization receded and market economies recovered, before finance capitalism arose once again.
As we face the economic wreckage of the second credit bubble in a century to rebuild, our leaders will promise restoration of the mirage. But our old debt based reality was a fantasy, a dream. We have no more chance to recreate it than we have in the morning after waking from a lovely dream to fall asleep again back into it while the alarm is ringing.
To preserve the great institutions of American capitalism, government will need to cut tax subsidies to non-productive industries, such as real estate, become less dependent on borrowing and domestic consumption, encourage saving and investment, and reallocate financial and human capital to rebuild America’s physical and economic infrastructure, a new economic foundation that nurtures the next generation of globally competitive American private enterprise.
In a decade, after our economy recovers, the history books will echo the age-old refrain “what were we thinking?”
Eric Janszen is the Founder & President of iTulip, Inc., previously CEO of Bluesocket, Inc. and Autocell, Inc., EIR Trident Capital, Managing Director Osborn Capital.