Bubbles "destroy" vast amounts of consumer wealth. The consumer being the ultimate driver of the Global Economy.
Consumers across all demographics usually get suckered in with enormous debt in the height of RE bubble tops.
And, in the case of markets, see their entire portfolios wiped out or decades worth of growth destroyed. In the case of Japan, imagine investing your retirement at Nikkei 20K only to see half your cumulative savings wiped out 20 years later!!
How would that affect current spending? And future? Now imagine that plus a 500K mortgage saddled with a 17$ per hour jobâ¦..
The result is forced austerity across demographics. To save and pay off debt.
Further problems that exacerbate the meltdown.
The US is the worlds economic engine. Japan suffered during the "lost decade" while America was in the midst of a Tech Bubble.
If Japan couldn't be saved by America's late 90's boom, who saves America when we go down? Uruguay?
Banks are insolvent. They've got trillions in derivative losses. X Trillions more in future derivative losses. Nobody knows for sure how much and whoâs holding it because the derivative market and accounting standards are so opaque. Further, total losses depend 100% on future Government hand-outs. Governments must bailout everyone or else massive D losses get booked - even after "netting" sessions.
This is why Banks are hoarding cash. Everyone's holding the Old Maid, and no one knows if the Invisible Hand will axe them next. Commercial and consumer loans are thus more difficult and costly to get. Why loan if you might not be around next month? Or year? 30 year fixed keep rising despite Trillions minted and Given to Banks. They've also got to recoup past losses booked in the hundreds of Billions.
The consumer itself is fucked. Their 401K and mortgage is only topped by consumer debt. We just blew out the funny money millennia juiced with 0% credit cards and home loans refinanced up the wazoo.
The consumer shot its load in 2005-06. Not much to do now except suck it up.
On top of that. All the Trillions handed over to banks will become very inflationary once the worst clears. The markets discount this accordingly.
Another point of interest â since 1990, Corporate America has nearly quadrupled its profitability, according to the S&P.
But if one looks under the hood, quadrupled earnings are rarely evident. Not even a mere doubling.
That says hyped valuations are largely paper-based = asset inflation.
And the ensuing Bear Market âdeflationâ which could take values way below Fair, well, thatâs a Big Problem.
Fair value S&P is somewhere around 600.
DOW at 3-5K.
Thats what happened to the Nikkei. Return to fair value after an explosive run up in Money supply.
Our Money Supply has been pumped since the 1995. We haven't corrected yet.
