Bubble Economics

Bubble Economics: Economic bubbles are funny things.  They are funny because in hindsight they are very predictable.  The best traders throughout history have been able to lead the bubble, and then abandon ship before the messy "pop" at the end.

The Dutch Tulip bubble was the first in modern history, and it still provides the guidelines for modern bubbles.  Tulips were a "safe" investment because they were "rare" and had no history of market failure.  Just like the analysis that showed that houses in the US were a "safe investment, good as cash" because most Americans pay their mortgage on time.  The tulips crashed, the housing market crashed, the stock market crashed (a couple of times), the S&L crisis, the dotcom bubble burst, etc.

The next big crash is the "sovereign debt bubble" as historically bonds have been "as good as cash" over the course of modern history.  But we only need to look to smaller currencies, from the Mexican Peso to the East German Mark to see that nothing is ever truly safe.

So what happens after the bubble bursts?  Well for all those who clamor about "redistribution of wealth" that is exactly what happens.  Those who made money and got out before the pop have gained some wealth, and those that stayed committed to the end lose a lot. 

So get out of bonds now.  The bubble can only burst, and right now sovereign debt has been stretched to 300% of the worlds GDP.  If we stopped spending money now, and put the output of every wage earning job on the planet to paying off the debt it would take three years.  Three years of not paying for a military, police, fire department, zoning official, dog catcher, mayor, senator, or president.  Three years of dedicating your life to pay off debt.

You know what they used to call it when you had to dedicate years of your life to pay off a debt?  "Involuntary servitude."

So what will the market look like after the "pop" happens?  I don't know, but if history is a teacher, debt will become next to worthless (just like tulips or mortgage backed securities) and the market will value them that way for a long time.  The scary thing is that like the "Tally Stick" swindle in Britain, governments don't play fair with the markets.  Governments can confiscate your wealth (FDR's gold confiscation) at the drop of a hat.  And they will always have enough useful idiots to give the government full approval (Hitler was a very popular leader, winning 98% of the vote in some cases).

Bottom line?  Things will get worse.