Is the United States Economy in a Bubble? ?

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Is the United States Economy in a Bubble? ?

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During Monday’s debate, Republican nominee Donald Trump asserted that the U.S. economy is currently operating in a “big, fat, ugly bubble.” Economic bubbles occur when assets, such as housing or financial stocks, are priced artificially high. Bubbles pose a threat to economic stability because they tend to “pop” suddenly. When this happens, prices plummet, investors lose huge sums of money, and the economy goes into disarray. The housing bubble that popped in the late 2000s, for instance, was a primary cause of the last recession.
Hillary Clinton, in Monday’s debate, said the U.S. is “on the precipice” of having a truly sound economy. Clinton’s optimism is rooted in encouraging economic trends that have emerged during the post-2008 recovery, overseen by President Obama. Unemployment is low at 5%, and the stock market is trading at record highs. According to Clinton, these positive trends can be maintained by doubling down on Obama’s recovery policies.

In stark contrast to her opponent, she wants to raise taxes on the wealthy and invest in job-creating projects, such as a new electric grid. Clinton sees the last crisis as largely being caused by a lack of regulations on the super-wealthy, which allowed them too much leeway to amass fortunes at the country’s expense. By imposing strict regulations on Wall Street, Clinton believes the U.S. can safely avoid another bout of economic turmoil.

Donald Trump, on the debate stage, dismissed claims that the U.S. has successfully recovered from the 2008 recession. Trump argues that positive labor statistics are misleading and too much optimism is built on the current strength of the stock market. Trump points to research showing that, upon closer inspection, the recovery is less impressive than any other since the Great Depression.

He attributes the stock market’s performance to the extremely low-interest rates maintained by the Federal Reserve to boost investment and growth. The businessman accuses the central bank of doing this for political reasons: to bolster President Obama and help Clinton become his successor. “The day Obama goes off … when they raise interest rates,” Trump warned, “you’re going to see some very bad things happen.”

James Bullard is the president of the St. Louis Federal Reserve. Bullard disagrees that the U.S. is currently in a bubble, but he believes there is reason to worry the economy is heading in that direction. The St. Louis Fed president says asset prices “are on the high side of fairly valued” and warns that certain sectors could enter into a bubble. Specifically, Bullard has pointed to the tech industry, which caused a bubble in the late 1990s and has seen stock prices soaring in recent years. The previous tech bubble popped at the start of the century, causing a stock market crash and costing investors trillions in losses. The Fed leader says the current tech industry is less susceptible to a bubble than before, however, as the internet business has matured and actual earnings by companies are far higher.
Further Reading: Market Watch / Zero Hedge / New York Times

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