The long-term budget outlook for the federal government is bleak. What is surprising is that this is considered news.
The forces driving the U.S.’s long-term budget problem have been known for decades. We’ve also known for years that sometime in this decade, the outlook would begin to worsen considerably. And now it has. And no, the deteriorating fiscal situation has little to do with stimulus spending, bank or auto bailouts, or the wars in Iraq and Afghanistan.
Several years ago at a speech in New York, I warned that “a future President Clinton or McCain would face a daunting budget challenge from population aging.” My political forecast was off, but my economic and demographic forecast is unchanged.
In recent weeks, stocks have sold off from their recent highs. It appears that the enthusiasm that drove equity markets higher since last March may have run its course.
I’ve had a hard time deciding which way the economic and investment winds are blowing, so I decided to make a list of the things I think have changed and those that haven’t.
Bubbles. We’ve just been through two of them in relatively short succession: the Internet bubble of the late 1990s, and the recent housing bubble.
Why do bubbles occur? The list of explanations includes shortsightedness, sheer stupidity, and greed. The history of bubbles is a story of excessive enthuasisms—for anything from tulip bulbs to subprime mortgages.
But is there something more fundamental at work? Something more innate and psychological? It seems to me there is. It arises from who we are as humans, and in how we think and behave, individually and as social animals.
