December 2, 2008

Many financial analysts forecast the rupture of the U.S.
housing bubble but few with the clarity of Eric Janszen in
his article for Harper's magazine.

Although no one can see the future, Janszen's scenario seems
to be unfolding as he predicted. His vision that I first
reported in June of this year is worth revisiting.

Janszen is no neophyte. As a manger of a venture-capital
firm he had a front row seat to the Internet-stock mania of
the 1990s.

Here is what you need to know:

The American way is the way of the world. Laissez faire
capitalism permeates the globe. Its foundations have been
shaken but it still stands.

The strength of the U.S. economy does not depend on the
value of goods such as steel and automobiles. They stopped
depending on trade of goods a long time ago. "After 1975,
the United States would never again post an annual
merchandise trade surplus," explains Janszen.

The nations of the world play their part in supplying the
U.S. with essentials; Canada supplies oil and gas, China
delivers manufactured goods, Japan invests capital.

The business cycle is dead; replaced by the "bubble cycle."
While fluctuations of the business cycle were considered
normal, the bubble cycle assumes one direction - - and that
is up.

Of course that assumption is wrong but that's part of the
magic of the mass delusion. Eventually the bubble bursts and
trillions of dollars vaporize. But that doesn't stop the
next bubble cycle.

A financial bubble is a "market aberration manufactured by
government, finance, and industry, a shared speculative
hallucination and then a crash, followed by depression."

This is what fuels the U.S. bubble economy: finance,
insurance, and real estate (FIRE). FIRE uses foreign
capital to finance speculative ventures. This result in
massive deficits. But indebtedness is seen as a strength
since the nations of the world dare not let the illusion
evaporate.

The delusion of wealth inflates as the nations of the world
pour money into the bubble. They have no choice but to
suspend disbelief in the improbable scheme; to allow it to
fail would mean a massive loss of their investments.

But fail it will, resulting in a world wide crisis. After
each bubble bursts there are stages of mourning much like
the loss of a loved one; as the one we are now in. "When
trillions of dollars first die and go to money heaven, the
whole economy grieves."

After a few years of grieving, the financial industry grows
back rather like a forest regrows after being devastated.
"Bubbles are to the industries that host them what
clear-cutting is to forest management." Each bubble is
followed by another; not because it's a desirable way of
conducting finance but because that's the way of unregulated
capitalism.

Janszen witnessed the internet-fueled bubble. "I observed
otherwise rational men and women fall under the influence of
fast-flowing and, it was widely believed, risk-free flood of
money. Logic and historical precedent were pushed aside."

Each bubble cycle starts with a good idea or invention. The
internet opened the world to communication. The American
dream of owning homes was available to millions. That dream
turned into a nightmare as the dearth of government
regulation allowed FIRE to spin out of control.

After grieving the death of trillions of dollars, FIRE will
scan its avaricious eye for the next big thing. Look no
further than the field of green technology and alternative
energy, suggests Janszen.

Germany provides a model of a green economy. Fifteen per
cent of Germany's electricity now comes from renewable
energy systems. That country is now a solar-paneled,
windmill-building, job-producing green powerhouse of the
industrialized world as reported by CBC's The Fifth Estate.

Germany had the help of a young Ontario manufacturer of
solar panels whose business was days away from closing.
German authorities offered him tens of millions of dollars
to move to Germany and build a factory there and he has been
very successful.

We could become more than an exporter of raw materials and
home-grown talent but it will take political leadership,
something that has been lacking in Canada.

With events unfolding as Janszen predicted, it's worth
preparing a green path forward.

It's a terrible way of doing business but it's the way we
know. "Given the current state of our economy, the only
thing worse than a new bubble would be its absence," laments
Janszen.
 

David Charbonneau is the owner of Trio Technical.
He can be reached at dcharbonneau13@shaw.ca

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