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How Much of Your ‘Wealth’ Is Hostage to Bubbles

Summary:
All asset “wealth” in credit-asset bubble dependent economies is contingent and ephemeral. A funny thing happens to “wealth” in a bubble economy: it only remains “wealth” if the owner sells at the top of the bubble and invests the proceeds in an asset which isn’t losing purchasing power. Transferring “wealth” to another asset bubble that is also deflating doesn’t preserve the “wealth” from evaporation. All the ironclad promises made in bubble economies ultimately depend on credit-asset bubbles never popping–but sadly, all credit-asset bubbles pop. So all the promises–which are of course politically impossible to revoke–will be broken as all the credit-asset bubbles that created the “wealth” that was to be redistributed–pensions,

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All asset “wealth” in credit-asset bubble dependent economies is contingent and ephemeral.

A funny thing happens to “wealth” in a bubble economy: it only remains “wealth” if the owner sells at the top of the bubble and invests the proceeds in an asset which isn’t losing purchasing power.

Transferring “wealth” to another asset bubble that is also deflating doesn’t preserve the “wealth” from evaporation.

All the ironclad promises made in bubble economies ultimately depend on credit-asset bubbles never popping–but sadly, all credit-asset bubbles pop. So all the promises–which are of course politically impossible to revoke–will be broken as all the credit-asset bubbles that created the “wealth” that was to be redistributed–pensions, retirement benefits, etc.–deflate.

Consider the Case-Shiller housing index chart below. Housing is an asset that has reached the apex of a second bubble. (Stocks are reaching the apex of a third bubble.)

It is widely viewed as “impossible” for the housing market to lose 50% to 75% of its value. It is equally widely viewed as “impossible” for the stock market to lose 50% to 75% of its value.

Yet all credit-asset bubbles pop and lose 50% to 75% of their value–or even more. What’s “impossible” isn’t the bubbles popping–what’s impossible is for bubbles to inflate forever and never pop.

Yet this impossibility is the foundation of all pensions and other promises: the pensions are only payable if all the credit-asset bubbles keep on expanding and never pop. They’re also equally dependent on marginal borrowers never defaulting, marginal companies never going belly-up, and marginal speculations never going bust.

But this is precisely what marginal borrowers, companies and speculative ventures do–they blow up and default, delivering neutron-bomb like losses to the lenders: the physical assets remain, but the “wealth” has been utterly destroyed.

Meanwhile, back at the government ranch, the vast majority of tax revenues are also dependent on credit-asset bubbles never popping. Most of the capital gains taxes reaped in bubbles dry up and blow away, high-earners who pay most of the income taxes lose their jobs or bonuses, and absurdly overvalued real estate that generated outlandish property taxes loses half its value, slashing property tax valuations.

Charles Hugh Smith
Charles Hugh Smith is an American writer and blogger. He is the chief writer for the site "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites. His commentary is featured on a number of sites including: Zerohedge.com., The American Conservative and Peak Prosperity. He graduated from the University of Hawaii, Manoa in Honolulu. Charles Hugh Smith currently resides in Berkeley, California and Hilo, Hawaii.

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