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Bubble Trouble
By John H. Makin
AEI, Economic Outlook, November, 2000-11-09

The American Enterprise Institute for Public Policy Research is dedicated to preserving and strengthening the foundations of freedom - government, private enterprise, vital cultural and political institutions, and a strong foreign policy and national defense – scholarly research, open debate, and publications.
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A stock market bubble exists when the value of stocks has more impact on the economy than the economy has on the value of stocks.

The U.S. stock market bubble is bursting - hot sector by hot sector, starting with the Internet bubble, which has already burst, and continuing with the information technology communications (ITC) sector bubble, which is in the process of bursting.

The collapse of the hot sectors has also pulled down the stocks of brokerage houses and banks that have been cheerleading for and financing those sectors. Finally, the contagion will spread to more basic stocks such as Home Depot, whose shares dropped sharply after announcing an earnings disappointment in mid-October.

The collapse in 2000 of the hottest sectors of the stock market will probably spread to other sectors and could well cause a U.S. recession next year and possibly a global recession.

John H. Makin at AEI

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