If We Get Through This Crisis, We'll Face Another in 5 to 10 Years -- Here's Why

If the bailout passed last week were to have the desired outcome, kick-starting our ailing economy -- and there's no reason to believe it will -- we can expect another painful economic crisis in five to 10 years. It may not be an American crisis, and it might get less attention for that reason, but it will happen.

In the meantime, an enormous bubble of paper wealth will grow -- nobody can say in what sector or which region it will occur -- and some people who get out at the right time will make fortunes. But many more will lose their shirts when it all comes crashing down, and crash down it will.

You don't need prescience to predict this with confidence; those who don't learn from history are doomed to repeat it. We haven't learned a thing from recent history -- it would threaten our underlying economic culture to do so -- so we'll repeat it all over again. Five to 10 years -- mark my words.

In the late 1980s and early 1990s, a huge asset bubble grew up in Asia, as "hot money" -- foreign investment looking to cash in on higher interest rates in those emerging markets -- flooded the region. Japanese housing prices flew through the roof, totally unmoored from the laws of supply and demand. Countries like Thailand, Malaysia, Singapore and South Korea saw growth rates of up to 12 percent, but it wasn't real growth; as Paul Krugman noted in 1994, it was the effect of tons of new capital flowing in, not real increases in productivity, that created what was then known as the "Asian miracle." When it all came crashing down in 1997 -- the "Asian Financial Crisis" -- trillions of dollars in paper wealth were wiped out and poverty rates spiraled.

Between 1995 and 2000, tech stocks were the Next Big Thing -- the way to get rich in a heartbeat. By the end of the 1990s, the bubble was mammoth, and again, prices of IT stocks had little connection to the sector's earnings. When the bubble burst, $7 trillion in paper wealth evaporated.

Similar (but not identical) crises have popped up in countries like Argentina, Sweden and Ecuador over the past two decades.

Now we're facing the consequences of trillions of dollars in overvalued assets in the American real estate market, and we have no idea yet just how much pain that bubble's deflation will ultimately bring to the global economy.

During the past few weeks, America's economic and political elites have been running around like the house is on fire, and after quite a bit of arm-twisting, they passed a mammoth banking bailout in an attempt to stave off a complete crash. But nobody dares discuss why this cycle of growing and popping bubbles continues to happen. There's been some discussion of deregulation, but the simple fact that this pattern is caused by imbalances inherent in our global economic structure has been completely obscured in our mainstream economic discourse.

Only by understanding that some fundamental economic changes that have occurred since the early 1970s have created this cycle of boom and bust can we even hope to prevent the next crisis.

Consider how the following factors play into the investor class's repeated fits of "irrational exuberance":

• A long-term movement of "corporate globalization," beginning in the 1970s and accelerating through the 1990s, created a global economy in which the wealthy world held onto high-value "core" functions, and farmed out a great deal of nuts-and-bolts manufacturing to the developing world. The problem is that only a handful of people are able to earn a good living from those high-value activities, and the wages of working majorities in wealthy countries have stagnated (more so in the United States than in the social democracies where unions still have some clout). This has led to rising income inequality in the advanced economies.
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