It is only good sense to recognize that our current prosperity is precarious, for a multitude of reasons.
- Much of the recent rapid growth in wealth has been due to speculative buying. Look at the soaring prices of stocks for high-tech companies, many of which will never be profitable. Theoretically, a market fueled by fad or speculation can grow without limit. But perpetual growth is extremely unlikely. The probability that such a market will crash increases as more and more participants decide that the items being traded—stocks, tulip bulbs (as in the classic example of a hysterical market, back in seventeenth-century Holland), or whatever—are overvalued. Then, a random turn downward can precipitate panic selling.
- The wealth created by the security exchange markets is convertible to money, but most of it remains in the form of investment documents and computerized records. When the growth of wealth on paper outstrips the growth of real value, as it has recently, there are two unwholesome results, each engendering economic instability and danger.
- One result is inflation. The abundance of liquid capital pushes up the prices of things having real value. Notice how expensive real estate, medical services, and higher education have become in recent years. The cost of living index has failed to detect that we are living through significant inflation because it is improperly calculated.
- Another result is volatility. Because the new wealth is not anchored in tangible property, it is highly restless, continually on the move in search of a better investment. The ease of quick transactions anywhere in the world also fosters volatility. One cause of the Asian economic crisis in '98 was capital flight. The daily swings in the American stock market are becoming more pronounced year by year.
- One place of refuge for restless capital is new construction. As a result, throughout the country we see overdevelopment. In my own community, builders are putting up new malls and subdivisions at a frantic pace, all of them trying to cash in on current demand before the market turns sour. Do we learn nothing from experience? In every boom there is a bust around the corner.
- Aggregate personal net wealth is the great national cushion against economic disaster. Yet savings per capita are quite low, and indebtedness per capita is high, extremely high. Any shock to our economy could set off a tidal wave of uncollectable debts and personal bankruptcies.
- The banking system and other sectors of the economy have unwisely been undergoing consolidation. A conglomerate of smaller entities can fail if only a few of them are weak, whereas the others might have survived on their own. Moreover, the failure of such a conglomerate has a greater negative impact than the separate failures of its components would have been, if they had remained independent. Why? For one thing, the failure of a conglomerate comes all at once.
- We are still dependent on foreign suppliers for many vital resources, especially petroleum. Recently, we have again tasted the power of OPEC to manipulate our economy.
- Globalization makes us susceptible to any economic disease that arises elsewhere in the world. In '98, the richest countries were able to stem the contagion that started in poorer countries. But if another contagion hit us when America was already in recession, or when capital reserves in international lending agencies were depleted, what would happen?
It is evident that God could burst our bubble at any time.
© 2007, 2012 Stanley Edgar Rickard (Ed Rickard, the author). All rights reserved.