The hardest bubble to see is the one you are in. We have survived the Internet bubble, later the housing bubble and the stock market, private debt and discretionary spending bubbles.
You would think after all this experience with popping bubbles, we could spot the next one coming, but we don't. If there are those out there who think that we have no more bubbles, you are not paying attention to the growing dollar and government debt bubble. When these two bubbles pop, it will be more like an explosion. And they will pop - the question is when.
As we have seen in the past, the markets can remain exuberant longer than we can remain solvent, so it is almost impossible to time a popping bubble.
I want you to consider a few statistics if you doubt there are bubbles in the dollar or national debt.
First, concerning the dollar, size does matter. Since 2008, the Federal Reserve has increased the money supply threefold and it still is growing. The Fed is hoping that money printing will be a great short-term plan to prop the economy up. Long term, it has serious consequences, mainly inflation. The Fed is hoping that by paying banks interest to keep their capital reserves on deposit, they will keep all this currency out of circulation. This is the main reason why no one can get a loan anymore . All the blame is being spun onto the banks, when the truth is that the government does not want the banks to use any of the money on deposit to prevent inflation.
Think about it: Why would a bank lend out money with the risk of not being paid back if it can collect interest from the Federal Reserve with no risk at all? It is obvious what the banks are choosing to do, and logical, too. Predicting the pop on the dollar bubble will be hard to do, as inflation has a way of creeping into an economy without much attention until it gets out of hand. Then it is too late. The core consumer price index includes housing, so deflation in the price of a house may offset inflation in food commodities. Inflation rarely makes the news, so unless you are tracking prices yourself, inflation is hard to spot.
Government debt to me is an obvious bubble. Currently at $15 trillion and counting, it is already at levels that can never be paid back or grown out of. As an established economy now, much of our growth is in the service sector. We do not make things like we used to, and our growth rates will reflect that. Last quarter, growth as measured by Gross Domestic Product was 1.30 percent.
This is hardly enough to offset $15 trillion already spent, not to mention the trillions in unfunded entitlement benefits for the baby boomers.
Currently the Treasury has a big fat zero saved to cover benefits to boomers and, with less growth in population for the following generations, there is no way to cover benefits from payroll withholding. Without balancing our budget we must continue to borrow to meet annual needs, and eventually our creditors will see that we have no plan for repayment and that their principal is at risk. They will have little desire to continue to fund our lifestyles and will cut us off. In the past year, the Fed has gone in and bought 70 percent of all government debt, but the Fed cannot be the only one buying bonds. Foreign investors - previously willing buyers of Treasury bonds - will no longer see as much value in the supposed safety and liquidity of our bond markets. They will first demand higher interest rates to take on added risk before finally refusing to buy at all. Since the Fed has deliberately kept rates low in order to be able to afford debt service and pay all the government's other bills, if rates rise, something must go. That could be the Department of Education, Homeland Security, Defense and then entitlements. Eventually all tax money collected will be going to interest on our debt.
We are already seeing falling demand for our debt, and even with the fancy "twist" from the Fed recently, bond yields have risen. When there is no demand or we cannot afford to service the debt we already have, POP.
Everyone is happy when the bubble is heading in the right direction: up. No one wants to believe there really is a bubble until it bursts. This go round, there is enough time to prepare for the final two bubbles to explode and be prepared. These bubbles are too big already and are only getting bigger. We already know what happens when a bubble gets too big, so there is really no reason to kid ourselves here. It is not a matter of if, but when. And that I cannot answer.
• Carol Perry is a retired financial adviser and has been a Northern Nevada resident since 1983. She can be reached at Carol_Perry@att.net.