Aftershock: Protect Yourself and Profit In The Next Global Financial Meltdown, Second Edition

Where Did All This Begin? When Could It Have Been Stopped?

With so many interacting bubbles first driving up and then pushing down the U.S. and world multibubble economies, it may seem impossible to know what caused what. But based on our analysis, we believe there was one critical moment that got everything started. That critical moment came back in 1981 when the U.S. government decided to start running large federal budget deficits. This big deficit spending sowed the early seeds for the coming asset bubbles in real estate and stocks. Big deficit spending boomed the economy, attracting U.S. and foreign investors to jump on the surging investment returns of a blue-chip (normally slow growing and secure) stock market on its way to 1,400 percent growth. The dollar soared, stocks kept climbing, private debt and discretionary spending rose tremendously, and real estate prices went intergalactic before plummeting back to Earth and, well, the rest is history.

When could we have stopped it? We’ve had a lot of internal discussion about increased deficit spending and at what stage we passed the point of no return. Our best estimate is that by the time we surpassed $200 billion in our annual federal deficit, it became politically infeasible to turn back. The economic pain that would have come from halting this level of deficit spending and moving instead to a budget surplus to pay down the accumulated federal debt, would have been simply too enormous to sell to voters. And honestly, given ...