Great Depression Online Archive Issue:

Taking A Bubble Bath

Great Depression Online
Long Beach, CA
June 03, 2008

Inside This Issue You Will Discover…

*** Taking A Bubble Bath
*** A Bottle of Bubbly on New Years Eve
*** The New Bubble is Dreadful
*** And More

Taking A Bubble Bath

Bubbles are fun…especially when you’re 17-months old.  That’s how old our son is.  And he loves bubbles.

We blow them in his face and he giggles…laughs…and shrieks for more.  And when they pop he looks around to find where they went. 

Something that was there…that was real…that was in front of his eyes just moments before – now gone.  Pop!  Where did it go?  So we blow some more.  And some more.  He can’t seem to get enough bubbles.

And former Federal Reserve Chairman Alan Greenspan loves bubbles too.  In fact, frolicking in them is a regular hobby of his.  If you didn’t know, Greenspan loves a good bubble bath.  In his recent book, The Age of Turbulence, Greenspan says… “To this day, the bathtub is where I get many of my best ideas.”

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It is with this knowledge of Greenspan, and his intimate relationship with bubbles, that we can better appreciate his legacy.  For it was there, day after day, year after year, soaking in a tub full of them, where Greenspan huffed and puffed and blew two of the largest and most marvelous bubbles the planet has ever seen.  First the dot com bubble and next the housing bubble.

A Bottle of Bubbly on New Years

We don’t know if Greenspan considers these to be on his list of “best ideas,” but last Thursday, May 29th, he was out witnessing the good news of bubbles and his love for them.  NewsMax reports…

“Bubbles represent almost a natural outgrowth of a vigorous economy, Greenspan told the Financial Times in a recent interview.”

We’re not sure what was natural about the dot com or the housing bubble.  We remember, in both instances, wondering where was the money coming from.  And upon further examination, we discovered they were both a fraud…that loose monetary policy caused the money to bubble over like a bottle of bubbly on New Years.

Greenspan also added that… “‘If we want rapid growth in productivity, innovation, standards of living, we may have to accept that there will be periods of turmoil.’”

We won’t deny that there was rapid growth in productivity, innovation, and standards of living over the last ten years.  But it didn’t happen in the United States…it happened in India, China, and Brazil.  The average American instead watched their productive jobs disappear, their debt grow, and their real income idle away.

But while Greenspan’s bubbles were inflating, everyone loved them.  For they were a rip-roaring good time.  We’ll recount some of the absurd delusions that accompanied their expansion.  Just ‘buy and hold’ a mutual fund, you’ll retire a millionaire tomorrow.  You can’t go wrong with real estate, ‘prices always go up.’  A successful business plan consists of ‘going public.’  And a zero down, no doc, ARM, is a great way to be ‘in the housing market.’  Because once you are in, then you can ‘build equity’ and – even better – spend it.

For many it was fun while it lasted.  And for many others, the consequences were – and still are – ruinous.  But now the world has shifted from the glory of the Greenspan years.  Price inflation is heating up.  Oil, energy, and food have become more expensive.  And all this is occurring at a time when economic growth is waning.

The New Bubble Is Dreadful

We filled up our gas tank Saturday for the dreadful price of $4.23 per gallon.  What gives?

Here’s what gives…

Now the old central banker con of goosing the economy with money cheap is not so fun.  For rather than puffing up the stock market or the housing market, the loose money is flowing into gas prices and other essential items like food.

In 1998 a barrel of oil was under $12.  Today, it’s around $130.  That’s over a 1000% increase in 10-years.  We consider these price dynamics to be indicative of a bubble.  But still, it could run-up much higher if a full mania phenomenon takes hold…with people hoarding jugs of gas in their garage.

And here’s what else gives…

The federal funds rate is at 2%.  The annual rate of inflation – based on the very suspect CPI – is at 3.94% as of April 2008.  That means the Federal Reserve’s artificially set the price of money at about half the rate of inflation. 

In a free market, only an idiot would lend money out for that price.  Doing so is like a retail store owner selling goods at half of wholesale cost.  It may fill the store up with excited customers, but they’ll just be helping you go broke in rapid order.  But that’s the great conceit of central bankers…that they can somehow give the world something for nothing.  And in today’s world that notion has backfired.  Current Federal Reserve Chairman Ben Bernanke wanted to reinflate house prices yet he got $4 per gallon gas.

Later in the article Greenspan, now in dire need of a bubble bath, asked… “‘Is there a bubble today in food, energy, gold, currencies?’  ‘If so, what specifically should we do about it?’”

To answer the first question: Yes.

To answer the second question: Stop fixing the price of money; let the market – and all its participants – decide what it should be.

Sincerely,

M.N. Gordon
Great Depression Online

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