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.Even in today s global econ-omy, I think we can agree that $8 trillion is one serious IOU.And it gets worse.In addition to the sheer astronomical size of our gov-ernment debt, the other troublesome reality concerns towhom, we now owe this mind-boggling tower of debt.Ifthe amount we wanted to borrow had been  smaller  as42c02.qxp 8/8/06 1:39 PM Page 43Bubble Blindin mere billions of dollars the federal government couldhave simply borrowed it from our fellow citizens.But bor-rowing a tower of dollars more than three times the dis-tance to the moon from American citizens would neverhave worked.Such a huge demand for money from U.S.investors would have forced interest rates sky high andslowed the economy to a crawl.That s because interestrates rise and fall, based on supply and demand.Highdemand for money would have pushed interest rates up,putting the brakes on business and personal spending andsignificantly slowing the economy.Nobody wanted that.The other option was simply to print 800,000 milesof money, but that would just drive up inflation, again43© The New Yorker Collection 1989 Robert Weber from cartoonbank.com.All Rights Reserved.c02.qxp 8/8/06 1:39 PM Page 44America s Bubble Economyslowing the economy.Nobody wanted that, either.Wecould also just save enormously, but nobody wanted to dothat either and it would hurt the economy by reducingspending.The solution to this problem turned out to be quiteeffective: Borrow it from foreigners.Borrowing from for-eigners provided all the money our government wanted tospend on things that we really couldn t afford, while keep-ing our interest and inflation rates low.To be fair, the gov-ernment didn t exactly plan it this way; it just sort ofhappened over time.The government wanted to spendmore money without raising taxes, and foreign investorswere becoming increasingly wealthy and increasinglyeager for places to invest.The credit-worthiness of theUnited States was sterling, and our U.S.bonds were prac-tically risk-free.So they lent and we borrowed.It wouldhave been a match made in heaven, if it weren t for.thecatch.The Catch: We Have to Repay Our Big Foreign-Funded Debtwith  Constant Value DollarsHere s where things get dangerous.If we borrow a stack ofdollars that is three times taller than the moon, we have torepay those debts in what economists call constant-valuedollars meaning these dollars must maintain their value,relative to other currencies around the globe.No investorwants to be repaid in dollars that are worth far less thanthe original dollars they lent.Foreign investors wantconstant-value dollars, or better yet, rising-value dollars.Luckily for them and for our entire economyrising-value dollars are exactly what they got.With foreign44c02.qxp 8/8/06 1:39 PM Page 45Bubble Blindinvestors lending and investing so much money in theUnited States, our economy grew like wildfire and thevalue of the dollar shot up.This made everyone very, veryhappy.Foreign investors became very excited, even ecstatic.Not only could they make a profit on our low-risk U.S.Treasury bonds, they could also make an additional profitsimply from the rising value of the dollar.Even withoutthe rise in the dollar, the bonds alone would have been agood deal because the odds of the U.S.government notrepaying its debts was near zero.Huge Foreign-Funded Deficits Boom the EconomyMeanwhile, the rest of the country was quite happy, too.Financing huge government deficits with foreign capitalgreatly stimulated our economy with almost no ill effects.Instead of hurting our nation, big federal deficits were anenormous boost to our economy.Stoked with so muchforeign cash, the nation s economy took off like a convert-ible full of teenagers on Friday night.The tremendousadvantages of borrowing large amounts of money fromforeigners to fund huge government deficits were irre-sistible, and the results have been nothing short of miracu-lous for the U.S.economy since 1982.For starters, the huge supply on foreign money helpeddrive down interest rates and inflation, beginning in 1982,which pushed up the value of many U.S.assets.Falling in-terest rates encouraged the purchase of capital goods, suchas cars and houses, and made credit cards cheaper and eas-ier to obtain, creating a growing pool of capital to buy moreand more goods.Falling interest rates also helped businesses45c02.qxp 8/8/06 1:39 PM Page 46America s Bubble Economyrapidly expand, offering consumers more and more goodsand services to buy with cash or credit.And falling interestrates boosted the value of equity, both public and private, sostock market prices began to rise.Huge deficit spending, made possible by foreignmoney, helped build our military and bought us all sorts ofgoods and services while avoiding tax hikes, further stimu-lating the economy.In turn, the booming economy added fuel to the stockmarket fire as joyful investors began grabbing up stocks athigher and higher prices.For an excellent discussion ofstock market bubble, we highly recommend RobertShiller s groundbreaking book Irrational Exuberance.It issimply the best on the subject.46Source: cartoonstock.comc02.qxp 8/8/06 1:39 PM Page 47Bubble BlindA booming stock market encouraged even more for-eigners and Americans to buy stocks, further driving upthe markets.From 1982 when the borrowing started, to2000, the Dow increased tenfold and the NASDAQ wasup over 25 times.Even after the correction of 2000, boththe Dow and the NASDAQ are still each up almost 10times since 1982.Company earning did not increase at thesame rate during this period, which explains why PE ratios(comparing stock price to company earnings) rose so dra-matically during this period, indicating that stock priceshave inflated faster than earnings (see Figure 2.1).Having a stock market that increased tenfold in 20years has worked like Miracle-Gro on the U.S.economy.Figure 2.1 Growth of the P/E RatioOne traditional and still valuable way to see if the stock market is overvalued is to look at the Price/Earnings Ratio [ Pobierz caÅ‚ość w formacie PDF ]