We are just at the peak of the biggest debt bubble in human history. It dwarfs the level of debt reached in the 1930s largely because conventional economists like Greenspan and Bernanke allowed a “natural” debt bubble that should have burst in 1987 to keep going for two more decades.
“Business as usual” growth since the end of WWII has been underwritten by a rising level of debt (right from 1945 in the USA’s case, and from the mid-1960s in Australia’s).
This was always going to lead to a crisis when the debt-financing load became too great, and the asset bubbles financed by this Ponzi Lending finally burst. The government rescues of 2009 have clearly re-ignited this bubble in the stock market, giving us the longest running and biggest bear market rally in history.
Whether that rally can continue–and “business as usual” growth resume in the real economy–is the moot point for 2010. The rally, though impressive, has still only taken the market back to 25 percent below its peak in early October 2007.
My expectation is that, some time during 2010, the disconnect between the financial markets’ euphoric expectations and the hard reality of a deleveraging private sector will bring the optimism of both “born again Keynesian” neoclassical economists and the markets to an end. Growth will not resume once the stimulus packages are removed, since deleveraging will then assert itself in the absence of government stimulus. Falling debt will subtract from growth, as it once added to it, and unemployment will start to rise again.
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