What follows will read like an indictment on our entire economic system. But underlying my (relatively mild) harangue is an observation that people are ignoring the most obvious bubble out there; that is, the bubble in U.S. government bonds.

Efficiency Market Theory

Let’s face it, markets are inefficient. The efficient market theory, manufactured from the ivory towers of academia, poses perhaps the greatest threat to the stability of our system. Here’s why.

False assumptions produce false conclusions. The efficient market theory posits that bubbles aren’t recognizable before they pop. The natural consequence of this misguided belief is that government officials will never act to preempt bubbles since they are, by definition, impossible to identify. This is one of the reasons why supposedly “efficient” markets are consistently marked by fat tails, outright panics, and “once in a lifetime” events.

The efficient market theory currently extends to U.S. government debt. In a circular manner, the strength of U.S. bonds is justified by low yields, which is evidence of the strength of U.S. bonds. But take a step back and remember that current yields are a product of government intervention. Stability, especially artificial stability, breeds instability. U.S. bonds are a bubble, and it’s pretty damn recognizable at the present time.

Psychology and Cognitive Dissonance

I love incorporating psychology to economics because this dual framework explains the world a whole lot better than pseudo-scientific economic models that are consistently wrong. I’m convinced that one of the biggest barriers to investment success is cognitive dissonance.

To briefly explain, cognitive dissonance is a phenomenon by which people attempt to reconcile two opposing views. When faced with seemingly contradictory facts or opinions, most people will defend their existingframework by explaining away anything that refutes it. To understand why this human tendency is important in the context of a U.S. debt default, we must understand the framework most Americans currently carry.

Most Americans cling to a framework that goes something like this: The U.S. is the biggest economic power the world has ever seen. We are the engine of global growth. We are immune to panics that characterize “less developed” countries. Our debt is rated Triple-A. Therefore, we can never default on our debt.

Any evidence contrary to pre-existing frameworks will be explained away- this is human nature. So when gold goes to record highs, instead of recognizing that it is the free market’s indictment of the monetary system, people will say “gold is a bubble.” When Greece experiences a debt crises engendered by factors indistinguishable from ours, people say “we’re not Greece- we can print our own money.” Utter nonsense.