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If
you do not change direction... “If
you do not change direction, you may end up where you are heading.” The stock market bubble of the late 90’s seems long forgotten. The major media outlets have swept the memories under the carpet as the recent rally has buoyed believers. Investors claim to have learned the lessons of the past and now only buy quality companies (What were they buying in the past?). Greenspan congratulates himself and his team on the impeccable handling of the bursting of the bubble. The aftermath has been smoothly addressed with the least amount of dislocation possible. Economists across the country proclaim prosperity reigns in America (for those without a job, keep spending the prosperity will come to you too). As a student of history, I cannot share in the collective joy and place blind faith in the pundits. Every major bubble in the history of man; from the south seas bubble in England, to the experience of John Law in France, to the tulip craze of Holland, to the most recent example of 1980s Japan, has ended in economic disruption, displacement and pain. In a bubble, massive amounts of capital are misallocated in economically questionable endeavors. The purging of the bubble addresses the excesses of the mania and creates the foundation for future growth. Economists call the process “creative destruction” in which the uneconomic entities are displaced and their resources are allowed to flow to viable projects. Preferably, the adjustments fall upon the participants who engaged in economic insanity. Failure to allow the adjustments to occur through rigid markets, easy credit and government protection only delays the inevitable and transfers the pain to those not directly responsible for the bubble. In Japan, Zombie companies technically insolvent, stagger on, enabled by low interest rates, cross-holdings, and government subsidies. By not allowing the markets to adjust, the Japanese have prolonged the malaise and still have yet to build a foundation for real, sustainable growth. I fear the United States, despite the proclamations of Greenspan, will be no different. The bubble of the 90’s, by some measures, measures as the largest bubble in history. Massive amounts of capital flowed to wholly uneconomic endeavors. Debt imbalances soared. Excesses abounded. Stock options were the risk free path to prosperity. Then the bubble burst, the stock market tumbled, and the economy looked set to fall. Instead of allowing the economy to sort out the mess and let the chips fall where they may, the fed intervened by flooding the market with liquidity. Add to the mix a stimulatory fiscal policy, fueled by more debt, and the results were almost a given. Housing markets soared. Refi’s soared. Debt levels soared. The added debt delayed the inevitable and allowed the consumer to continue shopping. New bubbles were created and capital markets were further distorted, compressing the spring even more. The overcapacity justifies the extra liquidity, yet it is that very liquidity which keeps the overcapacity alive. Instead of redirecting those resources to more productive uses, the present environment keeps them in operation and begs for more investment into those sectors. Until firms are allowed to fail, and their operations allowed to disappear, American will underperform beset by deadweight. In my opinion, this economy will continue to sputter dependent upon government stimulus. Job creation will lag. The conditions are not in place for a sustainable period of growth. Simply put, we have yet to address the imbalances created by the bubble. Until we do so, moving forward will be tenuous at best. In summary, I think Greenspan’s victory celebration is premature. I use history as my guide and it is history that will determine who is ultimately correct. I do not think it is different this time. I do not think we are in a new paradigm. I think the reckoning is due. I think delaying the inevitable only makes the pain greater in the long run and diffuses it to those not responsible for the insanity. Valerious Maximus, the Roman historian, once quipped, “The divine wrath is slow indeed in vengeance, but it makes up for its tardiness by the severity of the punishment.” I fear he along with Lao-Tsu are correct.
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