From 1995 to 2000, we experience a
stock bubble that had a large effect on the U.S. economy going into what I believe will be the start of a depression. Lots of businesses overbuilt capacity using money they financed through their own stock. When it turned out that they didn't need the capacity, they stopped purchasing lots of technology products and other items needed to grow. THe companies that depended on that no longer had income, and they retrenched as well. Soon all their stock prices were falling. They couldn't finance through equity offerings anymore, and without the revenue from sales to support their infrastructure, they had to start laying off people. So that's where we are now. The easy money available through the stock market caused the over-production, to a degree.
Why this will continue, and why I believe we are in a recession is because of our economy's similarities to Japans in the late 1980s and early 1990s. They too had a stock market run up. They also had a real estate bubble as well. Wanna know something? We also have a real estate bubble right now. According to Dean Baker, of the Center for Economic Policy Research:
The housing bubble has led home sale prices to outpace the overall rate of inflation by more than 30 percentage points over the last seven years, creating nearly $3 trillion of bubble wealth.
Basically this means that housing prices have gone up faster than inflation, partially fueled by the easy money available from mortgage lenders (spurred by cuts in the Fed rates in order to spur the economy). What's going to happen is that all the people who are being laid off won't be able to buy new homes for more money than their last home. They'll make do with their current living situations. So prices will come down on houses, and that is going to mean people will have mortgages to pay back when they don't have the incomes they used to have. So now they are going to have to spend less as a percentage of their income because a portion is going to have to go to pay off these old mortgages. Which means less money flowing through the goods and services portion of our economy.
The second additional worry I have is the dollar bubble. The strong dollar has made foreign goods cheaper. It's one of the way our economy was fueled during the 1990s and early 2000s. We saved money by purchasing cheaper foreign goods, and reaped a consumer windfall. Stores and trade-based companies made lots of money. But right now it means about $500 billion dollars is flowing out of our country every year to the countries that ship us these imports. Again, it's not sustainable though. It depresses prices for stuff in the U.S. Eventually the future return on investment for U.S. based businesses will look so good that foreigners will start pumping the money back into the U.S. This will in turn make our products more competitive overseas, as exchange rates turn toward a weaker dollar.
All this will put us much in the same situation as Japan is now. Where we will actually be facing a deflationary economy. Frankly, I don't see it getting any better overall for another 4 to 5 years. I don't see if getting horribly bad like the Great Depression. More like Japan's economy where our economy doesn't grow very fast, but still grows a little. We don't really have any increase in our standard of living. And our society continues to cut out many people on the lower end of the scale, while benefiting those already at the top.
That's my view anyway. I'm not trained, I just read a lot. But everything I read says that the real estate prices, the trade deficit, and the still too high stock market are going to continue to bedevil us for a while.