Your sensible source for apocalyptic predictions.
March 15, 2006 6:46 AM   Subscribe has returned. Back in the go-go days when Internet stocks ruled the world, iTulip was one of a very few voices warning about the Nasdaq bubble and the likely fallout. (Prudent Bear was another.) As bad as things got, the overall financial bubble never really popped, it just shifted into debt and real estate after furious slashing of interest rates and money-printing by the Fed. Financial manias are terrible; their unraveling has been compared with economic nuclear weapons. (cf: The Secret History of the South Sea Bubble [amazon book link] and the Dutch Tulip Mania.) The only good solution to a bubble is not to have one in the first place. [more inside]
posted by Malor (13 comments total)
The United States' current account deficit exceeded $800 billion last year, and looks likely to exceed a trillion dollars this year, over 7% of GDP. Historically, countries have had their ears pinned back at about 5%, but the United States' unique position as the world's reserve currency seems to be letting us exceed that limit. For now.

On top of that, the federal government is running a catastrophically large deficit, and has been for more than twenty years; the claims by the Clinton administration to have 'balanced the budget' were absolute crap. The GAO has not certified the government's books as being accurate in many years. The tricks the politicians are pulling with your money would make Enron blush. We have written enormous checks that we cannot possibly cash.

If the new is as good as the old one was, it'll be a great place to start learning about how the world economic system works, and the truths behind the platitudes you get in the daily paper.
posted by Malor at 6:47 AM on March 15, 2006

This is really interesting stuff. Lots of reading to do. Thanks!
posted by saladin at 10:05 AM on March 15, 2006

I read iTulip almost daily back in the late 90's. At the time, the idea that the internet financial scene was a "bubble" was pooh-poohed by almost everyone, but as I learned by reading iTulip, that was a classic sign of a bubble!

Parallels: when the internet bubble began to pop, there was much talk among the stockbrokers about "adjustments" and "soft-landings" and "10-30% corrections", just before NASDAQ fell 80%. Now real-estate brokers are using almost exactly the same terms to describe the anticipated downturn in real estate. (Apparently the bubble has already popped and popped good in certain areas, notably Australia.)
posted by telstar at 10:16 AM on March 15, 2006

Folks who like this might also like The Daily Reckoning.
posted by sonofsamiam at 10:28 AM on March 15, 2006

James Howard Kunstler is my usual source for apocalyptic predictions, and like him, these sites are entertaining and informative but not worth betting on. I'm not an economist, but it seems that the market's innate sense of optimism and/or self-preservation almost always wins out over the dire predictions on these sites.

Prudent Bear has been saying this kind of stuff all along (pointed out in MeFi posts from 2002 and 2004. Yet their mutual funds have lost more value in the last 10 years than just about any other fund out there.

On the other hand, maybe the tipping point just keeps moving into the future slightly faster than the skeptics can predict. The end may well be nigh, but maybe it's more like nigh +1.

If I were flush with cash to invest, I'd rather spend my money trying to avert their predictions. Not by maxing out credit cards or buying more house than I can afford, of course, but by heeding the warnings of irrational exuberance and investing rationally. Saying "I told you so" won't buy a bowl of soup if/when the bubble bursts.
posted by danblaker at 10:44 AM on March 15, 2006

I just finished reading "The Coming Economic Collapse" by Stephen Leeb. In his previous books he had also accurately predicted the tech bubble and its subsequent collapse, and more recently the runup in oil prices.

The reason I mention this is that he is also very attuned to market bubbles, and yet he (against my original beliefs) is predicting that the real estate bubble will NOT be popping anytime soon.

The reasons are based on oil supplies. Rather than a political crisis (like in the 70s) that caused an sharp increase in oil prices, this time we have a supply/demand crisis. As such, the prices will not be going back down. The DOE's long-term estimates of crude at $54/barrel are wildly optimistic. More than likely it will break $200 within the decade.

The reason this affects the real estate bubble is simple - such a large and sustained increase in energy costs will likely result in double-digit inflation if the Fed does not take action to head it off by raising interest rates. Yet Leeb argues that that is one thing they will not do, because with the level of consumer debt held today, the effect that would have on the banking system would be utterly crippling (just as iTulip predicts). So, he reasons, the Fed will have to keep interest rates low to prevent another depression, and thus will be forced to live with double-digit inflation for the near future. This will result in asset prices rising even farther, thus actually reducing the debt burden on most people - which makes it the more attractive option to the Fed (although still only the lesser of two big evils).

Of course, despite rising asset prices you'll still be losing money in real terms if your investment return doesn't exceed inflation. Which may make gold a very smart investment right now - if the energy shortage develops as Leeb expects, by the end of the decade it may be on its way to $2000/oz (it's around $550 now I think).
posted by chundo at 11:05 AM on March 15, 2006

Thanks for the link!
posted by nofundy at 11:17 AM on March 15, 2006

Thank you for the link, I know what I'll be reading this evening.
posted by rollbiz at 11:54 AM on March 15, 2006

Wait, theres a real estate bubble?
posted by petsounds at 1:19 PM on March 15, 2006

I'm hoping they're wrong ... but I've been fearing this for a long time. Our economic tools work best when it's a very casual correction, but it doesn't sound as if that's the case in this situation.
posted by farlane at 1:51 PM on March 15, 2006

Telstar, house prices in Australia haven't "popped", although growth has definately slowed. From the Sept quarter of 05 to the Dec quarter of 05 established house prices in all capital cities rose by between 0.9% and 6.6%. In the year to Dec 05 prices rose in all capitals except Sydney, which dropped by 3.9%.

If you look at the quarterly figures going back 18 months or so it has been pretty steady at this level after 2 or 3 years of huge growth.

Numbers from here.
posted by markr at 4:56 PM on March 15, 2006

Argh! Gawdammit! I'm confused again! Are we supposed to buy a house or not?
posted by lumpenprole at 5:02 PM on March 15, 2006

lumpenprole -- Ignore this site and everything on it. It is manifestation of a permanent literary genre, akin the the apocalyptic, whose published expressions since Gutenberg could fill a library. In every time at every place, people have been creating these fantasies to make our hair stand on end. Enjoy the Crash of '79. A little more Googling, and you'll find more outdated disaster mongering (and for those of you at Union Theological Seminary, get someone to let you into the library stacks for a peep at their large collection of old end-of-the-world-as-we-know-it literature).
posted by Faze at 1:52 PM on March 16, 2006

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