Today’s Pets.com And Ninja-Loan Economy

The Nasdaq bubble that existed two decades ago contained a plethora of internet companies, such as Pets.com, that proved in the end to having a non-viable business model. Yet, because they enjoyed access to cheap credit, it allowed them to exist for a long time without generating positive cash flow. This, in turn, created artificial and temporary demand for all kinds of capital goods investments such as, fiber optic cable and routing equipment, which in turn served to provide a significant boost to economic growth. The consumption derived from equity prices that generated huge capital gains also proved to be a temporary and artificial support for GDP.

The same dynamic was true for the Real Estate bubble circa 2008. Subprime home buyers purchased multiple properties with no income, no job, and no assets behind their loans. This caused home prices to soar and propelled owners to extract a massive amount of equity from elevated property values that proved to be fictitious. This employed an army of lawyers, real estate brokers, and construction workers; and at the same time was a boon for the basic materials industry, home furnishing stores, etc.

According to the Center for Economic and Policy Research, residential construction spending alone boosted GDP by more than two percentage points during the height of the housing bubble. Of course, when you include all of the ancillary components surrounding the real estate boom—including consumption from home equity extraction—you can conclude that real GDP would have been closer to zero, rather than the 3.4% average through the peak years of the housing boom.

The same can be said for GDP during the Nasdaq mania of 2000. Instead of growing at the four-year average of 4.5% leading up to tech wreck, real GDP would have been closer to 2%, if not for the massive consumption boost from realized capital gains never mind the spending confidence attained from paper stock gains. Realized capital gains alone increased by $430 billion (270%) from 1995-2000.

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Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book  more

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