Growth should be slow and steady, experts point out

NEW YORK (AP) — The next financial bubble could come sooner than you think.

A year after the collapse of home values triggered the financial crisis and Great Recession, another rapid and irrational rise in the price of assets — whether stocks, home values, oil or something else — would seem unlikely. After all, major bubbles through history have been spaced decades, if not centuries, apart.

Today, though, amid the wreckage of the last bubble, the ingredients for the next are still with us. The price of gold spiking to its highest level ever — $1,060 an ounce Thursday — is one warning sign, as is the 66 percent surge since March in the Nasdaq Stock Market index.

One reason is that there’s a sharp rise in the amount of capital sloshing around the world in search of the best returns. Investors are still fixated on short-term gains over long-term performance. And information now travels instantly, fueling a herd mentality and feeding the optimism wired into our brains.

Bubbles feel good when they’re inflating, but even that upside isn’t a replacement for slow-and-steady growth — the type of economy the U.S. mostly had for decades. The problem comes when the music stops and the wreckage spreads far beyond the assets that were inflated.

After the housing bubble popped, we’re lucky to still have a functioning financial system. And because millions of working Americans now depend on 401(k) plans instead of pensions for their retirement savings, they’re more vulnerable when the stock market plunges as it did last fall.

“It’s not a matter of could it happen again; it’s a matter of when,” says Kenneth Rogoff, an economics professor at Harvard University and co-author of a new book on bubbles called “This Time Is Different: Eight Centuries of Financial Folly.”

Reckless day traders and unqualified home buyers got blamed for the Internet stock bubble at the beginning of this decade and the still-deflating housing bubble. But they’re just bit players in the story. The surge of global capital seeking the quickest and most-profitable investments played a larger role.

Today, record-low rates for short-term loans in the U.S. — tied to the Federal Reserve’s cutting its target rate for overnight bank loans close to zero — are also now playing a role. And there’s more incentive for money managers around the globe to use dollar-denominated short-term loans to buy stocks, commodities and other investments that typically deliver higher returns. That’s contributing to the dollar’s 6.5 percent decline in value this year against a basket of six major currencies.