Here are my rambling thoughts about the end of the bubble.
For the fifth quarter in a row, the companies that make up the S&P 500 have spent more than $100 billion to buy back shares of their own stocks. This amount is not as extreme as it might sound, since the value of the shares of these companies exceeds $12 trillion, but I wonder how much these buybacks contribute to the glorious collection of bubbles that permeate the economy.
Profits, as just about everyone knows, are high. Even so, profitability in competitive businesses is quite low. The real big bucks are in industries protected by intellectual property or with economies of scale that prevent entry. You and I cannot expect to compete with Windows.
In a competitive business, such as automobiles, it is big news when GM produces a small profit this quarter, for the first time in a while. Surges in demand can temporarily boost profits in steel, but such victories will not last long. Similarly, ethanol subsidies might give agriculture a short run of prosperity.
So with the opportunity for profits limited, investors turn to sub-prime loans or the Chinese stock market. The influx of money into a stock market creates momentum that give equity prices a boost, which encourages still more investment. That is the nature of a bubble.
Even as successful a retailer as Wal-Mart is hitting a wall, because their non-affluent customer base is strapped for cash.
So now we have an economy with three massive debts — personal debt, foreign debt, and government debt. The Democrats are beginning to whine about the excessive government debt, which is the least important of the three. The Democrats have cooperated with the Republicans in an effort to keep personal debt from hemorrhaging by passing the bankruptcy bill, which will more or less keep debtors in perpetual servitude if they can afford to (or dare to) declare bankruptcy.
The foreign debt is the trickiest of the three. Our creditors cannot bail out of the dollar too quickly, because it will destroy the value of the dollar-denominated assets that they hold, but the cannot afford to accumulate too many more dollars, which are sure to devalue sooner or later. We have something like co-dependence here.
A depression can clear out all this deadwood, but at a terrible cost. The last two great depressions, 1873 & 1929 (really 1931, but that is another story) lasted for more than a decade and only ended because of external events. World War II brought recovery during the more recent depression. The discovery of gold is usually credited with ending the earlier depression, but I believe that the elimination of competition through a massive wave of corporate consolidations was more important by allowing the corporations to avoid competition.
I have probably gone on long enough.