Tuesday, April 6, 2010

The Third Bubble

The first bubble was the Dot Com boom of the late 1990s, fueled by flooding the world with dollars. Unlike previous times where it caused inflation, this time people pushed those excess dollars into technology investments. Their minds were subconsciously dazzled by the idea of the year 2000 and all the magical technology associated with it during the past 50 years. The emergence of the Internet and personal computers reinforced it.

The second bubble was the housing inflation/deflation that immediately followed. The Fed never turned off the money spigot, so the dollars simply flowed directly to the next bubble. By giving investors the profits and sticking the taxpayer with most of the risk, Fannie Mae was a guaranteed disaster. Everyone in the chain had a strong incentive to play the game: housing speculators, loan officers, banks, Congress. Only the diffuse sea of taxpayers had any reason to worry, and they were asleep.

The third bubble is a government bubble. The world is still being flooded with dollars. This time they're flowing into the government where they're rapidly wasted on a funhouse of distorted incentives. Our government is mud-drunk with money. This will end very badly unless it's stopped.

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