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The Great Asset Bubble - another great educational piece from Chris Martenson
Where are we going, and what lies next? To address these questions, we need to know how we got here in the first place.
I want to share with you an interesting observation that I think will provide great clarity and insight into our current predicament, as well as indicate that our recovery, such as it is, will be protracted and incomplete.
It begins with our old friend, the Debt-to-GDP chart (below), with our long-term average circled in green and our recent debt experiment in red. Today we're going to focus on what happened there in the 1980s, when we began our long climb to our current levels of over-indebtedness.
Now, this is not a partisan statement by any means, because both parties played along, but Ronald Reagan's terms in office (1981-1989) are marked by the blue box. It was during his tenure that we initially began our experiment with ever-larger piles of debt. Somewhere in the early 1980s, we clearly broke out of a long-established normal range of debt and into new territory. Something happened there, but what?
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The great illusion created by the demographically-driven rise in asset prices was the notion that one could park excess money in some form of paper or housing asset and "get wealthy" over time. For a while, it seemed so simple. Buy the right index fund and sit back and wait. Just buy a house and wait. Just pick the right stock and wait. That's all it took to ‘get rich.' Right?
But if you stop and think about it, this is really not possible, at least not in aggregate and certainly not over the long haul. It is a cheap, temporary illusion. Real wealth is created by people producing things. Once a company has sold stock through a primary offering, no new capital is "invested" in the company, by virtue of the fact that people are bidding up its stock in the secondary market. So all secondary stock-market purchases are really just bets on the prospects of the company to earn future money, not actual capital investment.
The impact of the failure to save
Real wealth comes from actual production. Somebody, somewhere, has to turn sand into a silicon wafer, and somebody else has to turn that into a semiconductor chip, which somebody else has to turn into a computer. That's creating value. Along the way, it is vital that the property, plant, and equipment of these manufacturers be refurbished and replaced as necessary. Unless we want to fund these investments from a steadily rising mountain of debt that will someday collapse on itself, the borrowings must come from savings.
.
.
.
.
.
I want to share with you an interesting observation that I think will provide great clarity and insight into our current predicament, as well as indicate that our recovery, such as it is, will be protracted and incomplete.
It begins with our old friend, the Debt-to-GDP chart (below), with our long-term average circled in green and our recent debt experiment in red. Today we're going to focus on what happened there in the 1980s, when we began our long climb to our current levels of over-indebtedness.
Now, this is not a partisan statement by any means, because both parties played along, but Ronald Reagan's terms in office (1981-1989) are marked by the blue box. It was during his tenure that we initially began our experiment with ever-larger piles of debt. Somewhere in the early 1980s, we clearly broke out of a long-established normal range of debt and into new territory. Something happened there, but what?
.
.
.
.
.
.
.
.
The great illusion created by the demographically-driven rise in asset prices was the notion that one could park excess money in some form of paper or housing asset and "get wealthy" over time. For a while, it seemed so simple. Buy the right index fund and sit back and wait. Just buy a house and wait. Just pick the right stock and wait. That's all it took to ‘get rich.' Right?
But if you stop and think about it, this is really not possible, at least not in aggregate and certainly not over the long haul. It is a cheap, temporary illusion. Real wealth is created by people producing things. Once a company has sold stock through a primary offering, no new capital is "invested" in the company, by virtue of the fact that people are bidding up its stock in the secondary market. So all secondary stock-market purchases are really just bets on the prospects of the company to earn future money, not actual capital investment.
The impact of the failure to save
Real wealth comes from actual production. Somebody, somewhere, has to turn sand into a silicon wafer, and somebody else has to turn that into a semiconductor chip, which somebody else has to turn into a computer. That's creating value. Along the way, it is vital that the property, plant, and equipment of these manufacturers be refurbished and replaced as necessary. Unless we want to fund these investments from a steadily rising mountain of debt that will someday collapse on itself, the borrowings must come from savings.
.
.
.
.
.
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