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Economic Review

4/26/2010

Are the financial gurus looking to re-create the mid-1990s bubble economy?

Many look back to the economy of the mid-1990s as the true goldilocks scenario as jobs were plentiful, wages were rising, deficits falling and of course the most important of all, US Stocks were bubbling to historic levels.  Unfortunately, this economic scenario was yet another example of bubble policy as it proved itself to be unsustainable. 

The introduction of dotcoms and new technologies (which had intrinsic macro-economic value as productivity enhancing facilitators) also helped create a hype of massive expected returns and valuations in the Equity sector.  Individuals were ramping up their 401ks into stocks and corporations were riding the Equity financing train as share prices did one thing…go up.  The capital gains in portfolios propelled consumption as the wealth effect kicked in.  The results were significant tax revenues for the government and the posting of a short term surplus.  Unfortunately as 1999 and 2000 rolled up, this unsustainable bubble scenario burst, but many remember the ride as being nirvana like.

Our current economic scenario has involved the sustained policy of negative real short term interest rates with little opportunity for normal yield returns for investors.  As a result, more and more funds are finding their way to Stocks which are beginning to exude the “always going higher” characteristic.  Why push stocks as high as possible?  With little to no job creation, higher stocks can increase consumption and spending due to the enhanced wealth effect, otherwise consumption given high unemployment will continue to sputter.  One problem this time around however is that many investors are very skeptical and have avoided stocks.

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