A Tale Of Two Bubbles

In one of his pieces in New York Time’s blog Paul Krugman explores the crucial difference in non-financial debt between the Clinton-era and Bush-era bubbles.

Read the whole thing  below:

One of the educational things about being something of a public figure is that I keep learning new things about how nefarious and dishonest I really am. The latest evilness I’ve learned about in comments and correspondence is that I have a double standard on bubbles — I talk about the Bush housing bubble, but I never said a word about the Clinton stock bubble.

Seth Klarman: Investors Can No Longer Rely On Mean Reversion

Volatility"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More

Except I did. Actually, back then the WSJ editorial page was flogging Dow 36,000 and telling readers that anyone who had doubts about the level of stock prices must hate capitalism.

Beyond that, there are some real differences between the Bush and Clinton bubbles.

One is that Bush presided over only four years of job growth, 2003-2007 — and those were all bubble-driven years. Clinton presided over eight years of job growth, with job growth at roughly equal rates in the first and second halves of that eight-year period, and the internet bubble inflated only in the second half.

Another difference, which is really crucial, involves the debt implications. Here’s non financial debt, public plus private, as a percentage of GDP (I explain here why I don’t think intra-financial system debt belongs in the calculation):

Yes, dotcoms went to ridiculous levels — but people weren’t borrowing vast amounts to buy them, so there wasn’t a deleveraging crisis when the bubble burst.

The point here is that while there was irrational exuberance in the 1990s, the Clinton-era expansion wasn’t fundamentally unsound the way the expansion of 2003-2007 — the “Bush boom” — was.