Quote from achilles28:
Underconsumption because Americans took on too much debt. Now, they must pay it back (interest + principle). This equates to reduced disposable income. What happens when you borrow money just for consumption? You spend more than you earn. What happens when you pay it back? You must spend less than you earn (pay back interest + principle). The debt repayment cycle goes a long way to explaining economic expansion and contraction. And by proxy, market bulls and busts. We overconsume during periods of increased debt creation (bull market). Then underconsume during periods of debt repayment (bear market). Which is why the market oscillates to such extremes...
Bubbles destroy wealth by creating debt at valuations the economy can't support. Home prices or equities, doesn't matter. If DOW goes to 20K, it'll look like the Chinese stock market, where half of all loans made by banks chase better returns in the market. Like the crash of 1929, when the market collapses (and it always does), "investors" will be on the hook for hundreds of billions in principle collateralized by stock valuations worth 50-80% less than the principle originally invested. Hopefully, not leveraged. So now, if we get an equity bubble (then crash), investors will have MORE DEBT to pay down from market returns that collapsed. In terms of real equity.
The markets being a zero sum game doesn't mean bubbles are good for the economy. Bubbles screw the middle class/average consumer, while enriching investment banks and speculators that can see the hammer before it drops. Economies like Mexico where wealth is concentrated in the hands of the few, create material prosperity for none. A broad-based middle class is key to strong consumption and a strong economy. Bubbles wipe out and destroy middle class wealth, thereby weakening the economy. Which is exactly what happened with housing and explains present economic conditions in America.
Exporters will float their currency once American consumers get so heavily indebted, they can no longer consume at prior levels. This is happening already. Another bubble could seal our fate on demand side. Supply side, 0% interest rates and massive quantitative easing spell big inflation in the medium term for America (and any Country dumb enough to peg their currency to ours). IF we get another bubble, the American consumer will have to contend with a dual assault - high personal debt and massive inflation. Disposable incomes will decline precipitously. Foreigners will have to make a decision to import American inflation (and destabilize their economies at the outrage of voters) for far less return, or depeg, let their currencies free float, and accept a New Normal. Its all relative. Asian countries enjoy a high personal savings rate. They haven't learned to mortgage their futures via consumer credit, like we have in the West (a hallmark of Western Capitalism). Japan, China, Taiwan and Singapore could realistically introduce consumer credit to offset collapsing overseas demand, if they chose to depeg. Very real possibility as China (and Japan) are not as dumb as we think (or need).
