This is no normal business cycle, but the bursting of the biggest bubble in America's history. Never before have shares become so overvalued (see chart 1). Never before have so many people owned shares. And never before has every part of the economy invested (indeed, overinvested) in a new technology with such gusto. All this makes it likely that the hangover from the binge will last longer and be more widespread than is generally expected.
Can the economy recover from such a large capital overspending and asset price bubble with just a mild to moderate recession? Seems to me that consumers need to enter an extended period of spending less. They can't drive their debt up to higher levels. When they fully internalize the prospects for slower stock market rises and the consequent need to save more for retirement they are going to want to spend less, save more, and reduce debt. Just as the consumer debt run-up helped fuel the boom the consumer debt run down will lengthen the bust.
|Share |||By Randall Parker at 2002 October 10 09:11 PM Economics Political|