So, here is what I think.

In the mid nineties things got out of control. They knew it was a bubble. It got huge. Really really huge. If you compare the late nineties DJIA with the late eighties Nikkei, it looks the same. A massive, massive bubble. No one should have been buying stocks in the late nineties.

The Japanese dealt with this by attempting to wring the excesses out of their system coercively. The result was 15 years of anemic growth and a stock market that only goes down.

So, instead, we blew a bubble... We blew it at just the right time. As the original bubble fell apart around 2002 the new bubble, based on loose cash, took its place.

Below these bubbles the real economy still grows. In fact, because of the bubble, our real economy grew faster during this decade that it would have if they had just let the post millennial crash occur.

The idea is to run the bubble until the actual size of the economy catches up... They chose the moment to deflate it. They chose to raise the interest rates. They knew what would happen.

If 8,500 is a reasonable value for the DJIA in 2008 after years of bubble assisted growth, imagine how unreasonable it must have been in the late nineties. Imagine how unreasonable Dow 10,000 was.

Do we need another bubble? Maybe we don't. Maybe our valuations are now close enough to reality that we can simply proceed from here.

The only problem that we have right now is that I think the wizards that are running this process have lost control of the deflation. Its not happening as gracefully as they had hoped. This is a very dangerous time.

RE: Remembering a Classic Investing Theory - New York Times