Back in 2001, I wrote an article warning about the excesses in the stock market. Today, we have many similarities that can cause a stock market crash. Chief among these is money and credit expansion. It’s probably true today that central banks use this money through their proxies to support the markets. The Obama administration in particular would use any means, no matter how unprecedented, to support stock prices. Nevertheless, a crash can still come. The selling could be overwhelming. Furthermore, creating new billions for stock purchases causes both price and asset inflation.
The economy remains unhealthy. Many indicators suggest we are going into another recession. Corporations are using massive borrowing to fund stock buybacks that finagle higher earnings per share. Leverage and margin debt are at record levels. Stock brokers and asset managers are cocky and optimism reigns. The financial sector of the economy grows exuberant on excessive credit and speculation while the producing sector languishes. The money and credit excesses are gargantuan and promise retribution.
Years ago, I became close friends with Kurt Richebacher (1918-2007), a European economist who carefully studied the U.S. economy. Kurt warned incessantly about the inevitable outcome of our monetary excess. In 1999 he wrote, “The U.S. financial system today hangs in an increasingly precarious position, a house of cards literally built on nothing but financial leverage, speculation and derivatives.”
As the Nasdaq bubble deflated he wrote in June of 2000, “The decisive cause of every single, serious economic and currency crisis are credit and debt excesses. Apparently, we cannot repeat it often enough: the U.S. credit and debt excesses of the past few years are beyond past experience in history, essentially leaving behind a totally vulnerable economy and financial system.”
He concluded, “The crucial thing to see about the U.S. economy is that its growth during the past few years was driven by uncontrolled debt creation for consumption and financial speculation, while in the process domestic savings and the potential for capital investment have been devastated as never before...The first thing to get straight is that this was – and still is – the most outrageous bubble economy in history, far worse than the U.S. bubble of the 1920s and Japan’s bubble of the late 1980s.”
Not much has changed. In fact, the excesses are worse. If he were alive today, this brilliant economist would be certain that a financial crisis of historic magnitude awaited. He argued that loose money and artificially low interest rates boosted consumption at the expense of savings and capital investment. This was not wealth creation, but only impoverishment. He once told me that the economic backwardness commonly practiced in America ensured our social decay and financial doom.