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Chapter 1: America’s Bubble Economy


Understanding How We Predicted the Current Bubblequake Four Years Ago is Key to Understanding Why Our Latest Predictions are Correct

When our first book, American's Bubble Economy, came out in 2006 (the book proposal was actually submitted 18 months earlier), we were right and almost everyone else was wrong. We don’t say this to brag. We say it because it’s important for understanding why you should bother to pay attention to us now.

America's Bubble Economy (John Wiley & Sons), accurately predicted the popping of the housing bubble, the collapse of the private debt bubble, the fall of the stock market bubble, the decline of consumer spending, and the widespread pain all this was about to inflict on the rest of our vulnerable, multi-bubble economy. We also predicted the eventual bursting of the dollar bubble and the government debt bubble, which are still ahead. In 2006, these and our many other predictions were largely ignored. Two years later, it started coming true.

How did we see it coming? Certainly not by looking only at current conditions, which, at the time we wrote the first book, still looked pretty darn good. In fact, real estate prices were close to their record highs in 2006. With home values high and credit flowing, American consumers were still happily tapping into their home equity and credit cards to buy all manner of consumer products, from diapers to flat screen TVs, importing goods from around the world, boosting the economies of many nations. Businesses and banks appeared to be in good shape (very few banks were even close to failing), unemployment was relatively low, and Wall Street was still on an upward climb toward its record closing high (Dow 14,164) a year later on October 9, 2007.

With so much seemingly going so well back in 2006, how could we have been so sure that the housing bubble would pop, private credit would start drying up, the stock market would begin to fall, and the broader multi-bubble economy, here and around the globe, would begin a dramatic decline in 2008 and beyond? Our accurate predictions were not a matter of blind luck, nor were they merely a case of perpetual bearish thinking finally having its gloomy day. In 2006, we were able to correctly call the fall of the U.S. housing bubble and its many consequences because we were able to see a fundamental underlying pattern that others were-and still are-missing.

In this pattern, we saw bubbles. Lots of them. We saw six big economic bubbles linked together and holding one another up, all supporting a seemingly prosperous U.S. economy. And we also saw that each conjoined bubble was leaning heavily on the others, each poised to potentially pull the others down if any one of these economic bubbles were to someday pop.

In this pattern, we also saw the opposite of big airborne bubbles; we saw the evolving economic facts on the ground. As is always the case with bubbles, the facts on the ground did not justify the volume of the bubbles; therefore sooner or later, we knew they would have to burst. In a little while, we will tell you more about our six big economic bubbles (the first four have already begun to burst and the other two will shortly) and how we knew they were bubbles. For now the point is that economic bubbles, by nature, do not stay afloat forever. Sooner or later, economic reality, like gravity, eventually kicks in, and bubbles do fall. After they burst, they never are able to re-inflate and lift off again. In time, new bubbles may grow, but old popped bubbles generally do not take off again. When the party is over, it's over.

Most people, even most "experts"; find it much easier to recognize a bubble (like the Internet bubble of the 1990s) after it pops. It is a lot harder to see a bubble before it bursts, and much harder still to see an entire multiple-bubble economy before it bursts. A single, not-yet-popped bubble can look a lot like real asset growth, and a collection of several not-yet-popped bubbles can look a whole lot like real economic prosperity.

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