A Little Forethought Never Hurts
March 3, 2008
I've heard it said that when news from the financial world hits the mainstream press, prompting I-bankers' mother-in-laws to start inquiring about the questionable assets used to back collateralized debt obligations, that it's a clear sign the markets have landed in deep muck.
With that in mind, I'd like to point to an article in the February issue of Harper's Magazine, a publication more intellectual than mainstream but still known more for its verbose essays on political and social issues than for coverage of the financial markets.
Indeed, economic times have gotten tough, to the point that no one can really ignore the situation. So Harper's in February ran a story called "The Next Bubble-Priming the Markets for Tomorrow's Big Crash," by former venture capitalist Eric Janszen.
According to Janszen, economic bubbles were once quite rare, occurring only every 100 years or so, but they have now become an inescapable part of our economic growth. The Internet bubble. The housing bubble. We've fallen into a pattern that dictates another "bout of insanity" must happen in the not-so-distant future to sustain us.
For a bubble to expand, the forces of government, finance and industry (often hopped up on a new invention or discovery) must meet. And Janszen believes he knows the most likely candidate for the next bubble: alternative energy. The buzz has already started, as have the startupse_SEmDan array of infant companies working in the alternative energy field. Government has climbed aboard as well, passing such legislation as the 2005 Energy Policy Act, which contained provisions guaranteeing loans for alternative-energy businesses.
All of this will result, according to Janszen, in positive developments in both alternative energy and the U.S. infrastructure, developments that, if the U.S. wishes to remain competitive, it can't do without. Moreover, the next bubble must be large enough to recover the losses from the housing bubble collapse. Janszen estimates that the market value of the enterprises needed to create the bubble will be between $2 trillion and $4 trillion, and that the hyperinflated fictitious value could add another $12 trillion. Add another $8 trillion in infrastructure upgrades with contracts going to government contractors, and you've got a total of $20 trillion in speculative wealth, money that inevitably will be used to increase share prices rather than to deliver "energy security," Janszen wrote.
While this sounds like a chilling prophecy given that one day the bubble must burst, Janszen concludes that, with the shape of the current U.S. economy, the only thing worse than a new bubble would be no bubble at all.
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