Is The United States In A Bubble Economy?ByRaymond D. Matkowsky
Is the United States in a bubble economy? My belief is yes. Let me just say that my belief is contrary to many that believe otherwise. Let me also point out that in general, economists have a 100% track record. 100% wrong! Also, very recently, a major investment firm told their clients that the economy is not in a bubble and they should to buy and reap the profits. It sounds to me that they want to reap their own profits. There are plenty deniers, but every bubble in the past has had their share of deniers.
Past Bubbles
In 1634, the world saw the Dutch Tulip Mania. In 1716 it was the British South Sea Bubble. In the 1840s it was the British Railway Mania. In the mid-1920s, it was the Florida Real Estate Bubble. Then there was the stock market crash of 1929 which followed the stock market peaks just a short time before and was the forerunner of a world-wide depression. You can go back to Roman Empire times and find instances of bubbles.
There was a common factor in all of the above bubbles. When prices got so high, people began to realize their yields did not justify the sizeable investment requirements; a large number of people took their profits when they could. Those that did not, were left “holding the bag” when prices dropped. Much of the money invested was borrowed and couldn’t be paid back. Many banks went bankrupt. Many banks tightened their lending practices and raised their interest rates to make up for their losses. Many businesses could not get the loans they needed to operate and they went bankrupt etc. This is the economic effect that should be of concern.
Negative Economic Factors
One of the first supposedly positive factors mentioned is the recent tax cut. Predictions of 4-5% GDP growth are commonly put forth. This tax cut has little chance of stimulating the economy. First of all, the new tax law will cost $1.45 trillion over the next ten years. This is money that the country cannot afford and it will more likely slow down the economy further. The middle class will get an average decrease of $930 in 2018, but may pay more in the future. This is not promising for long term business growth. The Congressional Budget Office predicts growth to be less than 3% over the next ten years. A tax cut may have worked for Kennedy and Reagan, but the underlying conditions now are not the same. In the years following his tax cut, President Reagan was forced to raise some taxes because of increasing deficits. Several years ago, Kansas instituted tax cuts similar to the federal cuts of 2017. It did not spur business. It turned out to be a budget catastrophe. The legislature was forced to reverse many of the cuts.
Real wages are supposed to increase under the tax bill under the assumption that the cut in corporate taxes will be funneled to workers. The advice that consultants are giving business leaders is that their most productive use will be stock buy backs and increased dividends to shareholders. This will only inflate the stock market bubble further.
There is a myth that e-commerce is killing brick and mortar sales. This is simply not true. E-commerce has increased, but 90% of sales still occur at brick and mortar locations. Sales are decreasing because the middle class is under a great deal of financial stress. For example, revolving credit has increased by an average of $11.2 billion in each month for most of the year. At the same time non-revolving credit has increased $16.2 billion in the last three months of 2017. Consumers with few assets will have to temper their spending. This does not bode well for future sales.
Summary
For the reasons stated above, I do not see the economy growing by 4 to 5%. When the bubble breaks and it will break, it is human nature to panic in the face of losses. This panic will bring down the economy. Regardless of what you believe be prepared for all possible outcomes.
If you have any further suggestions, do not keep it to yourself. Help your fellow readers!
If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.
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