Experts float debt-bubble fears

By EAMON JAVERS | 7/22/09 4:38 AM EDT

With the news this week that the national deficit passed the $1 trillion mark in June — and could be heading toward an astonishing $2 trillion by the end of the year — some economists are worried about a potentially devastating new problem for the American economy: a debt bubble.

Most Americans are not used to thinking about the U.S. deficit as an asset that investors can buy. But in many ways, it is. And just like the markets for any other commodity, debt markets can experience bubbles, too.

Financial bubbles happen when investors pour money into a given asset class, driving prices up at an unsustainable rate. The problem with bubbles is they inevitably pop, sending prices spiraling downward and destroying the wealth of investors who are caught with their money in the market at the moment it collapses.

Bubbles are a sign of a kind of financial mania, as investors ignore ever-growing risks in pursuit of ever-higher, and more irrational, profits. They were in full effect in the 1990s, when the Internet stock surge drove the Dow Jones over the 11,000 mark by January 2000. The resulting stock market crash vaporized nearly $8 trillion in wealth.

In the 2000s, the housing market saw an asset price bubble of its own — and the ensuing crash last year took much of the rest of the economy with it, wiping out an astounding $50 trillion in global wealth.

Some think it’s happening all over again, this time in the global debt market, and it could have crippling consequences for the long-term future of the U.S. economy. If the debt bubble bursts, interest rates would soar, with a potentially devastating impact on U.S. productivity, wage growth and employment.

“We’re looking at continuous monstrous issuances of federal debt, and it is only a matter of time before appetites are filled up,â€