Friday, June 10, 2011

“Trust bubble”: How near to bursting is it?

We’ve had the Dot-Com bubble.  That burst in 2000.  In 2005 we were at the peak of the Housing Bubble.  In 2008 that bubble burst although the pins that punctured it were gathering years earlier.

There is also the mother of all bubbles that is ballooning to historic mega-proportions:  The “Trust Bubble.”

Several decades ago in my college economics classes we were taught that government finance is different than personal finance.  While it is seldom if ever a good idea for individuals to run their households in perpetual and growing debt, it was taught that it is acceptable for our national government to do so.  So much trust has been built up in the viability of our financial system that we no longer required the “gold standard” as the basis for the value of a dollar.  Since the gold standard has been abolished, the value of the dollar has been based on trust.  I’ve often wondered about the logic of a floating dollar based only on “trust” if the dollar is abused by government to the extent that it becomes worthless.

Enter the “trust bubble.”  We are certainly in one now.  The federal government is the speculator every bit as much as housing flippers were speculators.  The money supply and national debt are being run up as extremely as housing prices and mortgage debt were run up.

The big ominous question I see looming is this:  When will the trust bubble burst?  What will trigger its burst?  Will it be a gradual sequence of events over several months, like China divesting itself of US Treasury notes?  Or Moody’s downgrading the US credit rating?  Or will it be a good old fashion run on the banks by millions of Americans who have a grand “ahaa” moment" about the need to use their savings for something more tangible than the dollar?  And then the next morning we wake up and all the banks are closed.

More and more people who understand the economy better than those who taught college economics in the ‘70’s are predicting dire consequences from our out-of-control government spending – which now appears inevitable.  It’s now not just a question of if the trust bubble will ever burst.  It is a question of when.  And it may be sooner than most are willing to admit because we don’t want to even think of the prospect of all hell breaking loose.

No comments: