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Economists Look Back at Previous Economic Bubbles

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Economic bubble concept | Image by microstock3D

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In the not-too-distant past, the U.S. economy survived the dot.com bubble of 2000-2001 and the housing bubble of 2007-2008. Now many economists are predicting the “everything bubble” will burst in the near future.

According to Investopedia, “A bubble is an economic cycle characterized by the rapid escalation of market value… followed by a quick decrease in value… During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value.”

In contrast to the previous economic bubbles noted above, which were primarily limited to one market sector, the current economic bubble has encompassed many market sectors. Economist Howard Marks of Oaktree Capital has described the situation as an “everything bubble.”

People are investing enormous amounts of money and are paying far beyond market values, from bitcoin and other cryptocurrencies to real estate to NFTs (non-fungible tokens) and many other items.

The United States’ gross domestic product is currently valued at 200%, according to ZeroHedge. However, while that is an astronomical value, it is down 28% from November’s all-time peak of 228%.

By comparison, the tech bubble allowed the GDP to reach a peak value of 182% in March of 2000 before it receded.

Jeremy Grantham, the co-founder and chief investment strategist for Grantham, Mayo, and van Otterloo, says the U.S. economy is in a “super bubble,” the fourth of which the U.S. has seen in the past century.

He likens the current economic situation to the “super bubble” of 1929, which triggered the stock market crash and subsequent Great Depression.

Sandy Nairn, the author of The End of the Everything Bubble: Why $75 Trillion of Investor Wealth is in Mortal Jeopardy, offered an explanation of how the economy got to this point.

In a discussion with Merryn Webb on the MoneyWeek podcast, he stated, “But basically, we’ve had a period where the cost of money has been artificially suppressed, and if you want an explanation of why it’s an everything bubble, you can actually just go to the Bank of England website, and they explain what’s the reasoning. And they basically say, we’re suppressing the cost of money to make people take on riskier assets, to inflate assets, to make them feel wealthier and make them spend. And they’ve been highly successful.”

Nairn continues to say that any number of things could be responsible for bursting the “everything bubble.” It could burst due to the conflict in Ukraine, and it could be policy issues, an election, or a combination of those factors.

According to economic analyst Eric Basmajian, the U.S. economy is not in a recession today but is on a “pre-recessionary path.” He says that the labor market will be a determining factor in whether the U.S. economy falls into a market recession in the next six to eight months. He advises investors to exercise caution, as the risk of recession is rising with each passing day.

The question now is how bad it will get when the current “everything bubble” or “super bubble” bursts. According to Axios, what happened in 2000-2001, when the tech bubble burst, offers some insight into what may be coming in the months ahead.

In March of 2000, the economy had reached a peak, much like today’s current situation. The economy that year remained stable, and unemployment rates were at an all-time low for some months.

However, a full year later, the economy began to see the ramifications of the bubble bursting and was plunged into a recession by March 2001. But because the bubble was primarily limited to one sector of the economy, it was a fairly mild recession.

Axios notes that there are signs to watch for to determine how the current economy may fare. This may be a mild recession, or it could be one of monumental proportions.

Warning signs of a major recession to watch for include:

Corporations across many sectors begin laying off workers or cutting capital spending.

Consumer demand for goods and services falls sharply.

A large number of companies are falling into debt, as indicated by investors attempting to rapidly sell corporate bonds.

However, the Federal Reserve remains optimistic that it can achieve a “soft landing” for the economy, as opposed to a hard fall, by carefully applying an economic policy of incremental interest rate hikes to gently steer the market back on course.

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