Bubbles “R” Us: A Quick Review of America’s Bubble Economy
What is a bubble? This should be an easy question to answer but there is no academically accepted definition of a financial or economic bubble. For our purposes, we define a bubble as an asset value that temporarily booms and eventually busts, based on changing investor psychology rather than underlying, fundamental economic drivers that are sustainable over time.
For quite a few years, America’s multibubble economy has been growing because of six co-linked bubbles, some of which you may find easier to believe in than others. These six bubbles are outlined next.
The Real Estate Bubble
Now that it’s popped, the housing bubble is easy to see. As shown in Figure 2.1, from 2000 to 2006, home prices almost doubled.
Contrary to what some experts say, the earlier rapid growth of housing prices was not driven by rising wage and salary income. In fact, from 2001 to 2006, housing price growth far exceeded income growth.
Source: Bureau of Labor Statistics and the S&P/Case-Shiller Home Price Index.
If nothing else, just looking at Figure 2.2 on inflation-adjusted housing prices since 1890, created by Yale economist Robert Shiller, should make anyone suspicious that there was a VERY big housing bubble in the making. Note that home prices barely rose on an inflation-adjusted ...