Debt Is What Makes A Bubble

I’ve noticed that ever since more attention has been drawn to the debt crisis, thanks to Occupy Wall Street protestors, suddenly, everybody I know thinks they are an economist. What’s sort of interesting though is that most do not really fully understand what is going on, not even the Occupy Wall Street protestors. All they really know is that they are buried in debt, have college degrees, can’t get jobs no matter how much schooling they take on, and meanwhile, there are all of these rich folks around them who went through life during a period of rising assets, specifically real estate, and who are for the most part much older than they are and never had to suffer financially what they are suffering through in America. Ask a baby boomer if he ever lived in a car while searching for work. The answer is no. Even the drug addicts of that generation didn’t have to worry about finding a place to sleep that was warm. The ones that lived in cars, CHOSE to live in cars like VW Vans, and  thought it was cool.

Most conversations I have are all over the place, people blame the Federal Reserve, and half don’t even really know what that is. They blame “corporations,” they blame “the banks” and they blame “Wall Street.” Sometimes they name specifically wealthy people who are what I like to call the celebrity wealthy, which are rich people who for some reason like to see their names in the media and pay publicists to get them in there. [expand]

I think the reason people like to weigh in with their opinions on the economy is because they think it is subjective, as if to say, if we all agree on an idea of something, then it will be true. But money does not work like that, although I will agree the illusion is there and it is very seductive. Real estate prices didn’t go up because we all thought that they would, and was thus a self-fulfilling prophecy. No, real estate went up because of the willingness of people to put themselves into destructive un-payable debt and the banks were willing to let them be that stupid, thanks to deregulation of banking policies, caused by the government. [expand]

The same is true for student loan debt, by the way. I’ve been doing a lot of thinking about the vast amount of people I know who have debilitating student loans. I can remember vividly being in high school and being advised (more like being told) that taking out student loans was the way go. So many people did this, and like the real estate loans, are now in dire situations. It’s so important for parents to really think clearly about what they are getting their children into. College does not guarantee success financially, in fact, many degrees today that are tenaciously pursued by students guarantee the exact opposite. And then those same students end up on Occupy Wall Street because when they graduate, the illusion of a degree in ancient pottery being of any bankable value is lifted.

The word is debt. That is the word that is the elephant in the room. Every single bubble leading to a crisis, has to do with taking on too much debt. This is true from the dot com bubble, to the real estate bubble, the growing student loan bubble, the banking bubble and every other bubble ever made. That’s how bubbles are made, through crushing debt.

People keep asking me what the next bubble is and the answer I give them always scares them. They argue with me that gold is the next bubble until they are blue in the face. I am an avid gold investor and frequently defend it. They believe gold is a bubble and I sort of feel sorry for them that they believe this, because nobody is taking out an adjustable gold rate mortgage these days.

I believe, and I believe this strongly, that the clearest bubble happening right now, continuing to build, is the government. We have so much debt paying for debt within many sovereignties all throughout the world that it’s as if we are financing World War III. But we are not financing World War III, we are simply paying for things that we cannot afford, but we have been led to believe that we can afford through the use of out-of-control debt instruments that have been building on the government’s balance sheet with nobody willing to acknowledge it seriously, and the reason nobody is willing to acknowledge it is because, much like an out-of-control real estate loan, the thought of what will happen (losing your home) is too much to bear.

The governments of Europe and the largest one, the United States, are operating in a scenario like this. We can’t imagine what a government shutdown will look like, so we delay it, raise the debt ceiling, print more money and keep it all going and pretend that it is not important and that somehow, through something magical (words like “the business cycle,” “recovery,” and “the ups and downs of the economy” are all thrown in at this point), it will work itself out and it will be something Americans will never have to face. Kind of like the kid taking out a student loan unable to imagine actually ever paying it back, so he just signs it thinking, “I’ll worry about that when I have to.”

But taking on debt on top of debt is all just delaying the inevitable, and increasing the debt just makes it worse. Much worse.

We will continue to delay it and the reason we will is because we can. We will do it until we have no choice not to. How long that will be is the unanswerable question. It could be in the next two years, it could be in the next 10, but it is going to happen, one way or another, and in a lot of ways, we are already seeing signs of it.

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