In most U.S. post-war business cycles, recessions were followed by above trend growth in output and employment. After the last three recessions, however, output and employment growth were sluggish. … This paper shows that each of the last three recessions coincided with a collapsing bubble in a category of private fixed investment: commercial real estate (1990-91), internet equipment (2001), and housing (2008-09).
From the Abstract, John Edwin Golob, Investment Bubbles and Jobless Slow-Growth Expansions: A Tale of Three Recoveries, Social Science Research Network, April 5, 2013.
We have highlighted the two major subprime lending booms we’ve seen in that period — the subprime mortgage lending boom from 2003 to 2006, and the subprime auto loan boom from 2010 to 2014. … It appears that the key to boosting spending in the U.S. economy is subprime lending.
Atif Mian and Amir Sufi, Subprime Lending Drives Spending, House of Debt, June 13, 2014.
Investors have grown hungrier for higher-yielding assets in far-flung parts of the world, even if they’re more volatile, as yields on junk bonds have fallen to new lows.
Lisa Abramowicz, Wall Street Clashes Over Emerging-Market Bonds as UBS Says Sell, Bloomberg, July 9, 2014.
“It definitely feels like investors are getting overexuberant, and you can stay in overexuberant conditions for a while,” said Fred H. Senft Jr., director of fixed income and equity research for Key Private Bank in Cleveland. “But when it turns it will turn quickly and it will turn very ugly.”
Bob Ivry, Complacency Breeds $2 Trillion of Junk as Sewage Funded, Bloomberg, July 8, 2014.
Households can take on more debt as their wealth increases. With more borrowed money, households can purchase more goods and services. Thus, we can get job growth from wealth growth.
But there is a hitch. The wealth growth that fuels job growth can be real or imaginary. When wealth growth is imaginary (speculative wealth bubbles), the new jobs created are unlikely to last. We saw this very dramatically in the housing bubble that preceded the financial crisis of 2008.
U.S. job growth in that era floated on a chimera. It crashed with the evaporation of the chimera.
Millions of people bid up home prices by buying them with the intention of holding them briefly and then reselling them for profit. But this could only work if, somewhere down the road, all of those speculatively purchased homes could be sold to families who wanted to buy them as homes, not investments, and who would pay the higher prices and could pay those higher prices with jobs and real incomes that would endure year after year for decades.
As everyone knew, job and income growth in the U.S. had already been compromised by outsourcing, growing competition from companies in low wage parts of the world, and other changes associated with globalization. There was no reason to believe the future of real job and income growth in the U.S. would be better, so there was no rational basis for housing speculation.
Why did it happen anyway? A good explanation is too many investors with too much money chasing too few real investment opportunities. Two decades of tax cuts for corporations and their wealthy owners (supply side economics) had pumped up the supply of investment capital far beyond the ability of the world economy to absorb it in productive ways. In addition, years of importing goods and services from China had turned China into holder of vast amount of investment dollars.
The problem for people with vast amounts of money is that they can’t spend most of it on consumer goods and services and they can’t just put it in a mattress. They have to invest it. When there is too much money for the existing investment scene, they have to invent new investment opportunities. A whole industry grew up just for the purpose of inventing investment instruments with pretty faces and questionable (sometimes nonexistent) substance. Front and center was the packaging of imaginary housing wealth.
Optimism about the economic scene is rising in the U.S. these days. Are we sure it is not rising on the surface of another speculative bubble? The relevant fundamentals have not changed since the early 2000s: The wealthy have even more wealth; taxes on corporations and the wealthy are still very low; neither U.S. nor global consumer demand are taking off.
Debt in the U.S. is growing again – but on what economic basis? That is the key question. Best bet: the job growth we are seeing now should not be trusted.