We Need Another Bubble!

I think we will all agree that the rollercoaster economic ride of the last decade has been very unsettling and financially destructive for many people in this country. Conventional wisdom suggests that we need to find a way to put our economy on a more stable upward trajectory that doesn't alternate regularly between boom and bust cycles.

But, is this really possible?

In other words, is it realistic to expect that, given the basic structure of our economy, we can ever get to a point where we have both significant and stable economic growth? I am increasingly becoming convinced that we cannot and we likely will not achieve this happy medium any time soon.

Unless we change the basic nature of our economy, significant and stable economic growth is not in our future. We can have significant growth, but it will not be stable. On the otherhand, we could settle for stable growth, but it will not be significant.

Here's my logic:

Since we have primarily a consumption-based economy (i.e., 70% of our GDP is based on personal consumption), we periodically need some new catalyst to keep the consumption engine firing on all cylinders. In other words, we continually need to give people a reason and the financial ability to consume more than just necessities in order for our economy to grow significantly.

In the 1990's, we did this with the tech bubble. As a result of hefty stock gains during that period, people felt wealthy and they ramped up their discretionary consumption as a result. The consumption cylinders were firing.

In the 2000's, we did it with the real estate bubble. Again, people felt wealthy as a result of the hefty gains in the values of their homes. Again, the consumption cylinders were firing.

Now, generally speaking, people feel poorer than they have felt in years. So, frivilous consumption has fallen and saving has increased. The consumption cylinders are sputtering.

Is this a good thing?

On a very basic human level, I think this change in financial attitudes is good. However, on a macroeconomic level, this means that our economic engine will not be firing on all consumption cylinders again for a long time. So, as long as we remain a consumption-based economy, this will not be a good thing.

I suspect that at some time in the not-so-distant future we will be longing for another bubble.

Stay tuned..................