A number of experts are predicting that an crash in the American stock market is inevitable in the not too distant future. Stock prices have been rising and rising since just after the beginning of Obama's period in office. During this time America has had policies of loosening liquidity in order to combat the problems brought about the the sub-prime loan crisis. At that time there were a lot of bad debts but a lack of knowledge of which debts were sound and which not. This led to a fall in confidence and a corresponding down-turn in economic activity. To combat this the money supply was increased and interest rates were held low, even going into negative in real terms, at time. These are just about perfect conditions for the production of a bubble and that is what has happened. So far the bubble has not burst, but every day it gets inflated a little more. The old hands are saying, probably correctly, that this cannot go on indefinitely.
At the same time, the American government's debt has been steadily increasing. It is now around 18 trillion dollars. The American government currently runs on an overspend of roughly half a trillion dollars per annum. This overspend is less than it was. At the end of the Bush era and beginning of the Obama presidency it was more like a whole trillion, but it is still a lot. Here too, one feels instinctively, this cannot go on indefinitely.
Furthermore, these two are not unrelated. A government's ability to service debt depends on its income which ultimately depends on the value and profitability of its industry. A crash in either sector could therefore trigger one in the other and both have a long way to fall. The questions that hover are when will it happen and how far down will it go? If Mr Obama gets to the end of his term without some such meltdown occurring he will have been lucky. When it happens the knock on effect for other countries will be considerable.
In the meantime what can one do? Not a lot, it seems. Various people offer suggestions about how the individual investor might protect himself and, as in all crashes, not everything goes down. In general, however, it does seem likely that we are soon to see a disaster that will touch just about everybody. Economists call this kind of thing a "correction". This is an accurate term because it is a return to sanity after a period of inflated ideas. It does seem, however, that once we have got into an inflating sequence it is very difficult to get off. It is like a drug that one cannot stop taking. The public will not tolerate a massive cut back in public spending without there being a major crisis. Investors will not give up the possibility that stocks are going to edge that bit higher. Thus we do not stop inflating the balloon. However, this week, or next week, or maybe next month or next year, but not too long from now, we are going to have another big crisis born in America.
One would think that after the last one, other countries would have taken steps to protect themselves, but I imagine that most are still just as vulnerable as they were when the sub-prime crisis broke, only, this time, the wave is likely to be a bigger one.
Of course, the future is not predictable. It may never happen. Perhaps the American government will get on top of the problem; perhaps American investors will make wiser decisions than people have generally done in the past, but I would not put money on either of these possibilities. Probably things will take their natural course the way they usually do and in a few years time we will be debating how to cope with the fallout, and most of us will be poorer than we currently think we are.