pessimistic about the long term

Before the current recession, I used to tell people that I was optimistic about the US economy over the short term, pessimistic medium-term, and optimistic long-term. The short-term optimism was due to immediate economic news being less bad than portrayed. The medium-term pessimism was due to the US trade and federal deficits. The long-term optimism was due to demographics (the young and immigrant US population) and culture (the US tradition of entrepreneurism and strong top universities).

Now, I am pessimistic about the long term. The reason is that there has been a succession of bubbles, each one leading to the next. After each bubble, the authorities have stimulated the next one, because that has seemed easier than dealing in a direct way with the imbalances caused by the previous bubble.

The first bubble was the irrational exuberance of the 1990s that culminated in the dot-com boom. This bubble popped in March of 2000. Greenspan allowed the exuberance to continue too long, and then responded too aggressively. This contributed to a combined housing and banking bubble. The housing bubble started bursting in mid 2005, and the banking bubble in mid 2007. Now, in mid 2009, bubble number three is underway. The administration is propping up consumption by inflating the federal spending bubble. For every two dollars the federal government spends, it collects one dollar in taxes and borrows one dollar.

What all these bubbles have in common is that they have permitted excess US consumption. Essentially, the US buys more stuff than it makes. Americans have felt comfortable doing this because they have felt wealthy: that their tech stocks or houses were worth a lot, or now, that their government has good credit.

The next bubble is coming: it will be inflation. People around the world, including wealthy Americans, are lending massive sums to the US government. The government is spending these in ways that support employment short-term, but are not very productive long-term. The lenders have already started worrying about how the US will repay them. There is only one way the US can make repayments without a huge increase in tax revenue: inflation. This will be the next bubble.