America's Bubble Economy Is Going To Become An Economic Black Hole

Tyler Durden's picture

Submitted by Michael Snyder of The Economic Collapse blog,

What is going to happen when the greatest economic bubble in the history of the world pops?  The mainstream media never talks about that.  They are much too busy covering the latest dogfights in Washington and what Justin Bieber has been up to.  And most Americans seem to think that if the Dow keeps setting new all-time highs that everything must be okay.  Sadly, that is not the case at all.

Right now, the U.S. economy is exhibiting all of the classic symptoms of a bubble economy.  You can see this when you step back and take a longer-term view of things.  Over the past decade, we have added more than 10 trillion dollars to the national debt.  But most Americans have shown very little concern as the balance on our national credit card has soared from 6 trillion dollars to nearly 17 trillion dollars.

Meanwhile, Wall Street has been transformed into the biggest casino on the planet, and much of the new money that the Federal Reserve has been recklessly printing up has gone into stocks.  But the Dow does not keep setting new records because the underlying economic fundamentals are good.  Rather, the reckless euphoria that we are seeing in the financial markets right now reminds me very much of 1929.  Margin debt is absolutely soaring, and every time that happens a crash rapidly follows.

But this time when a crash happens it could very well be unlike anything that we have ever seen before.  The top 25 U.S. banks have more than 212 trillion dollars of exposure to derivatives combined, and when that house of cards comes crashing down there is no way that anyone will be able to prop it back up.  After all, U.S. GDP for an entire year is only a bit more than 15 trillion dollars.

But most Americans are only focused on the short-term because the mainstream media is only focused on the short-term.  Things are good this week and things were good last week, so there is nothing to worry about, right?

Unfortunately, economic reality is not going to change even if all of us try to ignore it.  Those that are willing to take an honest look at what is coming down the road are very troubled.  For example, Bill Gross of PIMCO says that his firm sees "bubbles everywhere"...

We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions.

And unfortunately, it is not just the United States that has a bubble economy.  In fact, the gigantic financial bubble over in Japan may burst before our own financial bubble does.  The following is from a recent article by Graham Summers...

First and foremost, Japan is the second largest bond market in the world. If Japan’s sovereign bonds continue to fall, pushing rates higher, then there has been a tectonic shift in the global financial system. Remember the impact that Greece had on asset prices? Greece’s bond market is less than 3% of Japan’s in size.


For multiple decades, Japanese bonds have been considered “risk free.” As a result of this, investors have been willing to lend money to Japan at extremely low rates. This has allowed Japan’s economy, the second largest in the world, to putter along marginally.


So if Japanese bonds begin to implode, this means that:

1)   The second largest bond market in the world is entering a bear market (along with commensurate liquidations and redemptions by institutional investors around the globe).

2)   The second largest economy in the world will collapse (along with the impact on global exports).

Both of these are truly epic problems for the financial system.

And of course the entire global financial system is a giant bundle of debt, risk and leverage at this point.  We have never seen anything like this in world history.  When you step back and take a good, hard look at the numbers, they truly are staggering.  The following statistics are from one of my previous articles entitled "Why Is The World Economy Doomed? The Global Financial Pyramid Scheme By The Numbers"...

-$70,000,000,000,000 - The approximate size of total world GDP.

-$190,000,000,000,000 - The approximate size of the total amount of debt in the entire world.  It has nearly doubled in size over the past decade.

-$212,525,587,000,000 - According to the U.S. government, this is the notional value of the derivatives that are being held by the top 25 banks in the United States.  But those banks only have total assets of about 8.9 trillion dollars combined.  In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1.

-$600,000,000,000,000 to $1,500,000,000,000,000 - The estimates of the total notional value of all global derivatives generally fall within this range.  At the high end of the range, the ratio of derivatives to global GDP is more than 21 to 1.

The financial meltdown that happened back in 2008 should have been a wake up call for the nations of the world.  They should have corrected the mistakes that happened so that nothing like that would ever happen again.  Unfortunately, nothing was fixed.  Instead, our politicians and the central bankers became obsessed with reinflating the system.  They piled up even more debt, recklessly printed tons of money and kicked the can down the road for a few years.  In the process, they made our long-term problems even worse.  The following is a recent quote from John Williams of

The economic and systemic solvency crises of the last eight years continue. There never was an actual recovery following the economic downturn that began in 2006 and collapsed into 2008 and 2009. What followed was a protracted period of business stagnation that began to turn down anew in second- and third-quarter 2012. The official recovery seen in GDP has been a statistical illusion generated by the use of understated inflation in calculating key economic series (see Public Comment on Inflation). Nonetheless, given the nature of official reporting, the renewed downturn likely will gain recognition as the second-dip in a double- or multiple-dip recession.


What continues to unfold in the systemic and economic crises is just an ongoing part of the 2008 turmoil. All the extraordinary actions and interventions bought a little time, but they did not resolve the various crises. That the crises continue can be seen in deteriorating economic activity and in the panicked actions by the Federal Reserve, where it proactively is monetizing U.S. Treasury debt at a pace suggestive of a Treasury that is unable to borrow otherwise.

And there are already lots of signs that the next economic downturn is rapidly approaching.

For example, corporate revenues are falling at Wal-Mart, Proctor and Gamble, Starbucks, AT&T, Safeway, American Express and IBM.

Would revenues at Wal-Mart be falling if the economy was getting better?

U.S. jobless claims hit a six week high last week.  We aren't in the danger zone yet, but once they hit 400,000 that will be a major red flag.

And even though we are still in the "good times" relatively speaking, the federal government is already talking about tightening welfare programs.  In fact, there are proposals in Congress right now to make significant cuts to the food stamp program.

If food stamps and other welfare programs get cut, that is going to make a lot of people very, very angry.  And that anger and frustration will get even worse when the next economic downturn strikes and millions of people start losing their jobs and their homes.

What we are witnessing right now is the calm before the storm.  Let us hope that it lasts for as long as possible so that we can have more time to prepare.

Unfortunately, this bubble of false hope will not last forever.  At some point it will end, and then the pain will begin.

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falak pema's picture

beautiful; cos black is beautiful. And holes are exciting. 

Why do we have such awesome titles posted here like we were in the Psycho movie behind that curtain?

max2205's picture

V MA and DFS should be good 90% down shorts when it breaks

James_Cole's picture

They should have corrected the mistakes that happened so that nothing like that would ever happen again.  Unfortunately, nothing was fixed. 

On balance it actually worked out quite well for the banks, what was there to 'fix' in their eyes?

Potentially the next crash could work out even better for them. 

cougar_w's picture

No kidding. They probably can't wait for the next leg down. Hell, with all the Bennie Bux they've got rat-holed away they could buy half the assets of the nation at 5 cents on the dollar in a really bad crash, and end up holding more land and serfs than Louis XIV ever dreamed of. We'll have to call him "Your Worship Master Dimon of Morgan" without vomiting in our mouths. Man that's gonna be tough right there.

ratso's picture

Yea right, the sky is falling.  Get real you guys

narapoiddyslexia's picture

The natural hedger always considers both sides. For example, after-tax corporate profits are higher than their historical norm because corporations pay less in taxes than was historically the case. In 1951, corporations paid almost nearly half of profits in taxes. In 1965, paid more than thirty per cent. Today, they pay twenty per cent. So maybe corporate profits are not in as much of a bubble as thought. Just a suggestion... 

If corporate profits are not in a bubble, then all the knock-on effects are also, maybe, not in a bubble.

Also, most of the S&P is internationals and they get only about half their profits from the US. To this extent, they are buffered from local or even regional variations in economic behavior.

The truth is that ever since Margaret Thatcher, the world has become a place much more favorable for corporations. So maybe this time it really is different. Its worth a hedge, either way, of course.

underman's picture

Bennie & Dimon will be first in line at the gallows. 

Jekyll_n_Hyde_Island's picture

"What we are witnessing right now is the calm before the storm.  Let us hope that it lasts for as long as possible so that we can have more time to prepare."

  C'mon Tylers.  You sound like a Doomsday Prepper, or a bearded camel holding a sign that says "the end is near."


  There are indices and denominators at work that hold all this in place.  A Republican will get in office, boost our GDP to help our balance sheet, start a war with another county who is committing crimes against humanity, and we'll be fine. 

  Don't get me wrong.


  There may be hard times when some of the ceiling collapses -- but we'll rebuild it.  A big part of hedge is protection and insurance, and our country is hedged and insured.  It's why all of you loons who are 100% physical in your investments have IQ's around 110 and know just enough to be sure that smarter people are running things.


mac_daddy's picture

If a Republician could not win the last election, all things considered, there will never be another Republican President; especially when 15 million illigelas that sat the last election out will be elligable to vote.

onewayticket2's picture

he was a Massachusetts republican, too....that's a democrat in 25 States....


it's over for the conservatives and for fiscal sanity.  sorry.  how on earth does sanity rule in an age of free stuff and 15MM new voters who crave it....


game over.

Popo's picture

Precisely right. Until we have a balanced budget amendment to the Constitution which states that we can only spend as much as we raise in taxes in any given year, then democracy and financial responsibility will forever be fundamentally incompatible.

The free-shit-army will always vote for more free shit, regardless of our capacity to afford it.

underman's picture

Still hoping?  No chance for balanced budget, ever.  Reset.

zhandax's picture

All a balanced budget amendment would do today is guarantee your taxes go up.

ultraticum's picture

None of the grass roots would ever vote for a Mass-a-two-shits republican "running to the center".  If republicans put up an alternative, they could win.  If they put up another McCain or Obamney, or any other centrist fascist, they won't.   I will NEVER vote for a constitution-hating centrist Repugnicon - and I think there are a lot of people like me.

roadhazard's picture

Repubicans need to be very careful how you run that mouth. Being assholes 24/7/365 ain't getting it. You have to show that you can produce something beside blaming the other guy for Everything. Can you dig it... no.



zhandax's picture

It works for the douchebag in the White House.....

The Navigator's picture


1 - please change your handle to roadKill

2 - It ain't about RePubs or DemoRats - we are all RoadKill, you, me and every serf of the Empire.

It's set up that we argue about minutae while THEY rush off with our wealth.

Pay no attention to the bullshit minor stories and look at the forest considering all the trees.

Hope to see you on the other side, while hoping to make it to the other side myself.

illyia's picture

It wass the sppellling...

Herodotus's picture

At some point, the Army will make their move.  They will cancel any such elections, put the President and Congress under protective custody, and rule by decree.


NoDebt's picture

"C'mon Tylers.  You sound like a Doomsday Prepper, or a bearded camel holding a sign that says "the end is near.""

You say that like it's a bad thing.

CH1's picture

Reality's been absent for a LONG time round here.

knukles's picture

Meee-shell, my la la la la la la la alhhh la ah la lah lah la

emsolý's picture

Please do not worry.

NotApplicable's picture

Yeah, next thing ya know, people will be quoting Graham Summers and think nothing of it!

epwpixieq-1's picture

Actually, long reality with real knowledge and skills, and short the buble most of the others perceive as reality.

Stuck on Zero's picture

When the system blows reality will set in very quickly.  Unrealistic expectations will vanish.  People will go back to work doing something useful instead of consuming from the productive.  Americans will focus on their kids instead of their BMWs.  Obesity will diminish.  Factories will reopen.  Inequality will diminish.  All good things. 


James_Cole's picture

When the system blows reality will set in very quickly.  Unrealistic expectations will vanish. 

Right, because economic collapses generally lead to people reacting in a rational way and 'accepting reality.' 

n8dawg84's picture

I agree that those are things that will happen eventually and so I look forward to that.  Gotta try to see the silver lining somehow

Zwelgje's picture

Collapse is simply too good to be true.

freewolf7's picture

Reality's been here all along.
It's just illogical and uncomfortable.
And then there's the cruelty factor,
i.e. that those in power allow this.
Recognizing them as purely simple
sociopaths allows you to get them,
but it's still difficult to accept the
ass-raping. And I don't.

thisandthat's picture

Reality is so overrated... plus, what's it got to do with anything, anyway?...

Seeking Aphids's picture

it is that annoying thing between naps......

underman's picture

It's gotten to the point that I say, "It's a cartoon world", at least once a day.

Prince Eugene of Savoy's picture

This is truly Bizarro World. Seriouly.

underman's picture

We think we're losing our minds now?  WW1 and WW2 - they absolutely lost their marbles!  People we're downright cuckoo - couldn't make heads or tails of anything.  What was real or not real!  The art & literature we're outstanding in that age!! 

Flakmeister's picture

It ends when the US cannot buy the oil it wants with the dollars it prints...

Until then you have nothing but fear mongering crap like the above....

spinone's picture

Dollars buy oil because we have the perception of the projection of power in the mideast.  If that perception is undone, then the problems will start.

Flakmeister's picture

No argument from me on this point....

And it is completely consistent with what I said...

espirit's picture

You guys must have a cadre of serial junkers, but for the record I upvoted the above three posts.

Flakmeister's picture

Some people here are simply jealous...

cougar_w's picture

But but -- I thought we were going to become the worlds largest oil exporter!

On related news: Cali refiners are now refusing to back an oil pipeline out of Texas into Los Angeles, and are sticking with railway for oil transport instead. Rail is expensive, but they don't want to get into any 30 years contracts for an oil pipeline when the Texas oil is mostly --- wait for it --- fracked. Yeah, refiners know what the frack is going on and they are not buying it. If they sign a 30 year deal to buy piped oil from Texas, and the fracking industry implodes before then, they are probably on the hook to buy whatever oil the Texans can shove into the pipe at their end at whatever price it takes.

krispkritter's picture

We already have a (dark appearing descriptive here) 'hole' the White House.

I am more equal than others's picture

Fill in the (dark appearing descriptive here) blank?


Black ass

azzhatter's picture

He's a fucking slimy asshole regardless of color

NoDebt's picture

Gotta be with that many people in his administration not telling him about stuff. They know if they did he'd stop that crap in a cold minute.

Milestones's picture

All you fine banker men, you jus sit thair in de shade where it be nice and cool and I go out in the hot sun and I shore go an step n fetchit fo ya. Yes sire ree I shore will. 

Our half breed punk president.            Milestones

aleph0's picture

That $700 Billion was the Key to Pandoras Box.

They should have kept it closed and BK'd all those TBTFs 5 years ago.