Take It From Japan: Bubbles Hurt

[powayseller]

bgates, the data you provided goes only until 2003. Further, while GDP has risen quite a lot, US military spending has taken up the bulk of the new wealth, which could instead have been used for healthcare, education, or research. The US spends half of the Earth’s military budget.

The military budget is 4% of GDP. But “the recent invasions of Iraq and Afghanistan are funded outside the Federal Budget (i.e. are paid for through supplementary spending bills) and are therefore external to the military budget figures.” – Wikipedia

Wars are inflationary, and the effects of these wars will be felt soon enough. Could these wars be partly responsible for the commodity bubble and rising inflation?

[PerryChase]

Can anyone remember the malaise every one felt during and after the Vietnam War? Aside the military spending that was a drain on the prosperous 1960’s, the psychological defeat of the war affected a whole generation.

When Iraq goes to shit (which I think it will), people won’t be very much in any mood to consume or buy houses. That’ll be especially true if housing crashes at the same time.

If you look back at the past few years, you can see that the real estate market tracked exactly the situation Iraq. When Bush declared “mission accomplished” the sky was the limit for American power and real estate prices. Now the situation in Iraq and housing are in supposed “soft landing.” Anyone in the know would say that the situation has taken a turn for the worse (despite the lagging indicators that still point otherwise).

Buying an overpriced house in the last few years was a big mistake just like invading Iraq was. It’s either bail out now to save what’s left or be prepared to stay “invested” for the long haul. Anyone ready for 10 more years?

People who “invested” in overpriced housing will have to take responsibility for their bad decisions. The unfortunate part of Iraq is that we’ll all pay for one misguided leader’s decision.

[davelj]

You have to be careful drawing parallels between our current bubble here in the U.S. and Japan’s bubble of the late-80s. Remember, at the peak of Japan’s bubble, the Nikkei traded at over 100x peak earnings and there was commercial real estate being valued at $150,000/sq.ft. (you read that right). The few square miles around the Imperial Palace in Tokyo were worth more than the entire state of California.

We have a bubble. And the aftermath will be painful. But I wouldn’t bet on real estate or stock market values being lower in 15 years than where they are today, although investors are probably going to be extremely disappointed with returns on these asset classes over that period.

[Carlsbadliving]

PC,

I like the parallel between the housing market and Iraq. It appears that the adiminstration is chasing down the market, so to say. The President “bought” Iraq in 2003 watched it chug along, everthing appeared to be going well (even declaring victory), but now his ARM is resetting and he refuses to believe that the value will ever go down. However, current appraisals of Iraq are showing a rapidly declining market price.

Unfortunatley, this is one foreclosure that will hurt more than all the rest.

[bgates]

Carlsbad: no, the half trillion is not a problem. That’s a pretty good estimate for the total cost of the war, and might even be a little low. $320 billion has been allocated as of June, spread over 3 years, so 100B/year. It gives a better picture to combine that supplementary spending with the Defense Dept budget, which is around $450 B (annually). Bear in mind the federal budget is over $2.5 trillion annually, so the combined 100B supplemental + 450B defense dept is about 20% of the federal budget, which is in turn about 20% of the US GDP.

That means that with or without the supplemental money, defense spending is about 4% of GDP – compared to GDP, direct war cost is rounding error.

Perry, I agree the pyschological effects of losing a war are bad. That’s why I try to convince people like you, PS, and carlsbadliving to not root for defeat.

[sdduuuude]

vrundy – I like your post, but I don’t think #3 will be a real problem. I’m a believer in free markets and the ingenuity of entrepreneurs both in America and abroad. Plus, it is a problem that we see coming. Kind of like the Millenium bug, it could be a big problem if we didn’t realize it is coming, but we see it coming and we’ll be ready when necessary. Entrepreneurs will invent and market things that allow us to live without oil, and people will learn to live without things that require oil. People are remarkably adaptive, I believe.

I also think the “running out of oil” condition is farther off than the next 15 years. This is a pretty neat link that shows, in terms of gold, oil is not really skyrocketing as one would expect in the “end of oil” times.

[sdduuuude]

Furthermore, the price of oil has an upper limit, which is defined by the alternatives available. If it were simply impossible to duplicate the benefits of oil by other means, of course the price of oil would skyrocket out of control until every drop disappeared.

However, there are many substances/technologies which can replace oil even today, with no new innovations – they just cost more.

Once the price of energy created with oil reaches the price of alternative energy sources, some of which are only 2x more expensive, it will simply not go any higher. Even solar – currently the most expensive alternative, and certain to be come less expensive as time goes on – will keep the price of oil under $300 (I think – my wife threw out my National Geographic with relative cost info – darn it!).

My concern with oil is – how do we make plastic? This may drive the price of oil up, once oil is no longer used for energy.

[bgates]

I doubt that’s going to happen. There’s enough shale oil in North America recoverable using current technology to sustain world petroleum consumption for 15 years at least. The only reason it hasn’t been developed is people are gun shy after losing a lot of money in the 70’s thinking peak oil was upon us.

Even without any alternative energy source development – not that I have a great deal of confidence in those – oil isn’t going to deplete fast enough to be ‘prohibitively expensive’ in 10 years.

[carlislematthew]

hopefully iraq is a short term issue.

Yes, I believe it’s in its last throes… Mission accomplished.

🙂

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