The U.S. Economy: Is it the Next Bubble to Burst?

CAMBRIDGE: There is a reasonable chance that the U.S. economy is living through a speculative bubble of the same kind that has burst for so many other economies this past decade - Japan, Korea, Mexico, to name a few. These financial bubbles were all powered by an underlying myth of economic invisibility. The Japanese thought they had it ten years ago. Hard to believe, but many serious analysts thought Japan was on the verge of conquering the world economy at that time . . . that is, just before the Japanese stock market fell by more than 50 percent. Then Mexico thought that its new free trade arrangements with the U.S. would lead to a surge in economic growth . . . just months before the economy collapsed in the worst crisis in a generation.

Many in the U.S. now think that the U.S. economy is unstoppable, that the Internet revolution underway in the United States is the greatest thing since the industrial revolution itself. Such hyperbole, and the surging U.S. stock market based on these super-bullish views, should immediately give us pause. Is hubris at work here, as it was in earlier bubbles? If the U.S. stock market surge were indeed to end, or to reverse itself, what would be the consequences for the rest of the world?

The U.S. is surely powered by two real strengths - great flexibility of its market system, and great prowess in developing new technologies. The recent U.S. boom is heavily based on enormous investments of U.S. companies in the new information technologies. With its special mix of markets and innovation, the U.S. economy is indeed remaking itself with amazing speed. But financial bubbles are often founded on true economic strengths. A bubble occurs when those very real strengths suddenly take on exaggerated, even mythic, proportions in the eyes of investors, who are then prepared to throw vast amounts of money into the stock market without attention to realistic prospects for future earnings.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.


Log in;
  1. Chris J Ratcliffe/Getty Images

    The Brexit Surrender

    European Union leaders meeting in Brussels have given the go-ahead to talks with Britain on post-Brexit trade relations. But, as European Council President Donald Tusk has said, the most difficult challenge – forging a workable deal that secures broad political support on both sides – still lies ahead.

  2. The Great US Tax Debate

    ROBERT J. BARRO vs. JASON FURMAN & LAWRENCE H. SUMMERS on the impact of the GOP tax  overhaul.

    • Congressional Republicans are finalizing a tax-reform package that will reshape the business environment by lowering the corporate-tax rate and overhauling deductions. 

    • But will the plan's far-reaching changes provide the boost to investment and growth that its backers promise?

    ROBERT J. BARRO | How US Corporate Tax Reform Will Boost Growth

    JASON FURMAN & LAWRENCE H. SUMMERS | Robert Barro's Tax Reform Advocacy: A Response

  3. Murdoch's Last Stand?

    Rupert Murdoch’s sale of 21st Century Fox’s entertainment assets to Disney for $66 billion may mark the end of the media mogul’s career, which will long be remembered for its corrosive effect on democratic discourse on both sides of the Atlantic. 

    From enabling the rise of Donald Trump to hacking the telephone of a murdered British schoolgirl, Murdoch’s media empire has staked its success on stoking populist rage.

  4. Bank of England Leon Neal/Getty Images

    The Dangerous Delusion of Price Stability

    Since the hyperinflation of the 1970s, which central banks were right to combat by whatever means necessary, maintaining positive but low inflation has become a monetary-policy obsession. But, because the world economy has changed dramatically since then, central bankers have started to miss the monetary-policy forest for the trees.

  5. Harvard’s Jeffrey Frankel Measures the GOP’s Tax Plan

    Jeffrey Frankel, a professor at Harvard University’s Kennedy School of Government and a former member of President Bill Clinton’s Council of Economic Advisers, outlines the five criteria he uses to judge the efficacy of tax reform efforts. And in his view, the US Republicans’ most recent offering fails miserably.

  6. A box containing viles of human embryonic Stem Cell cultures Sandy Huffaker/Getty Images

    The Holy Grail of Genetic Engineering

    CRISPR-Cas – a gene-editing technique that is far more precise and efficient than any that has come before it – is poised to change the world. But ensuring that those changes are positive – helping to fight tumors and mosquito-borne illnesses, for example – will require scientists to apply the utmost caution.

  7. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now