Did you know we already had the equivalent to the Great Depression, but first, no one noticed. Second, the system was inflated to prevent a much worse situation. Dont believe it? Note that as a percentage of the population, there were more people on food stamps in the 2008 crisis than there were in the Great Depression. Of course, food lines were invisible because of EBT cards.
The dot-com bubble burst and that was replaced by the Fed in what became the housing bubble. The housing bubble was rescued with money printing (a.k.a. “quantitative easing”). Now the debt bubble lies in assets like stocks and bonds, and the govt itself. So who will bail out the govt?
Let’s establish the following:
- The dot com bubble of 2000 was rescued with lower interest rates, which in turn caused the housing bubble
- The housing bubble crashed and it was rescued by QE and the Fed buying things like stocks (for the first time). Here is their balance sheet.
So, let’s convert these to numbers:
- Dot com bubble: “As such, the NASDAQ fell by more than 75 percent between March 2000 and October 2002, thus wiping out more than $5 trillion in market value.” – source
- Housing bubble: “estimates a loss of $7 trillion in the real estate industry.” The Treasury says total household wealth lost was a much higher $19 trillion.
- The next bubble: Now that the Fed keeps buying securities (stocks and bonds) to keep the game going, propping up the markets, the logical question is, how much bigger with the next downturn cost?
Perhaps the bubble sizes are linear, or perhaps they are exponential. But even if linear, that means the next one would be $15 T larger than the last, or $34 trillion. It’s hard to say what that means in real terms, but a lot more painful than the last one for sure.
Consider that the banking system almost got sucked into a contagion spiral, leveraged by debt, bad investments, and a run on banks like Wachovia. This is why the Fed stepped in. They did not want another Great Depression, but they should have weaned off far more risky banks instead of incentivizing future bad behavior (moral hazard).
In the future, bankruptcy may affect banks, consumers, and the govt itself. This will not be pretty. However, the ponzi scheme could run for decades, depending on how long its citizens, holders of US debt, and common sense stand up. Even Japan manages to function with the highest debt-to-GDP in the world and yet investors see its currency as safe as gold, but I sometimes wonder if the US is really the lynchpin to their downfall as well.
Eventually the system will crash, but I look at social unrest as an equally, if not more important predictor, which could come much sooner than financial problems. If there’s one thing that you need to understand, it’s that trust has also been on the decline for decades. I’ll write about that more later.
So it will be no surprise if we also see another run on the banks, perhaps to cryptos and gold.
When we have the next meltdown, what percentage of the population will be on food stamps then?
This failure of the system will lead to loss in hegemony, continued societal decay, and other issues such as war. There is a possibility though that crisis brings people together, but if you have read other articles on this site you will see that’s not looking like the case. The other possibility is that the growing divide in America between the left and right, and top and bottom is resolved by external threats (a common enemy). Time will tell.