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Reply #41: ALL SIGNS POINT TO BUBBLE (Last article at The Daily Reckoning) [View All]

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54anickel Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Feb-03-05 10:27 AM
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41. ALL SIGNS POINT TO BUBBLE (Last article at The Daily Reckoning)
Heh, some of the stories on the way down the page are interesting - people drawing on their home equity for SuperBowl tickets? :crazy:

http://www.dailyreckoning.com/Issues/current/020205.htm...

Historically, consumer price inflation has, indeed, been the regular key feature of credit excess. But this pattern began to change drastically in the course of the 1980s. For the first time, protracted, exceptionally sharp increases in stock and real estate prices occurred in various countries, while price increases for goods and services remained moderate.

At first, there was little inclination to see in soaring asset prices a feature of inflation, even though all countries concerned showed a simultaneous surge in money and credit growth. It irritated many experts that this monetary explosion did not show in higher prices for goods and labor, as it had done in past booms. In the late 1980s, Japan had double-digit money, credit growth and soaring asset prices, yet virtually stable consumer and producer prices.

For years, this strange coincidence of soaring asset inflation and simultaneous moderate consumer price inflation was hailed as a sign of economic health and dynamism. It has long been one of Mr. Greenspan's favorite arguments that this unusual coincidence proved the existence of a "new paradigm" economy.

snip>

But to repeat, the pivotal hallmark of a "bubble economy" is that the ballooning asset prices are widely used as collateral for a general consumer borrowing and spending binge. In the United States, mortgage borrowing by households during the first half of the 1990s increased by an annual average of $168 billion. This accelerated in the decade's second half to $296.9 billion. But after 2000, it virtually exploded to an average annual growth rate of $615 billion.

It is undisputed that the greater part of the escalating mortgage borrowing in the United States was for purposes other than house purchases. In short, it boosted consumption as a share of GDP at the expense of business investment and the trade balance. That is, it radically changed the U.S. economy's pattern of growth - actually an unsustainable pattern of growth.

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