Bubbles, Bubbles Everywhere

Is there any doubt that we are living in a bubble economy?  At this moment in the United States we are simultaneously experiencing a stock market bubble, a government debt bubble, a corporate bond bubble, a bubble in San Francisco real estate, a farmland bubble, aderivatives bubble and a student loan debt bubble.  And of course similar things could be said about most of the rest of the planet as well.  In fact, the total amount of government debt around the world has risen by about 40 percent just since the last recession.  But it is never sustainable when asset prices and debt levels increase much faster than the overall level of economic growth.  History has shown us that all financial bubbles eventually burst.  And when these current financial bubbles in America burst, the pain is going to be absolutely enormous.

You know that things are getting perilous when even the New York Times starts pointing out financial bubbles everywhere.  The following is a short excerpt from a recent NotQuant article

The New York Times points out that just about everything on Earth is expensive by historical standards.   And then asks the seemingly obvious question:  Does that make it a bubble?

Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

Quite possibly?”  We’re not sure what definition of the word “bubble” they’re using.   But in our book when the price of literally everything blasts upwards, obliterating the previous ceilings of historical benchmarks, it’s a pretty good indication that you’re in a bubble.

Of course when most people think of financial bubbles the very first thing they think of is the stock market.  And without a doubt we are in a stock market bubble right now.  The Dow has risen more than 10,000 points since the depths of the last recession.  And it is nearly 3,000 points higher than it was at the peak of the last stock market bubble in 2007 when our economy was far stronger than it is now…

Dow Jones Industrial Average 2014

But of course these stock prices do not reflect economic reality in any way whatsoever.  Our economy has not even come close to recovering to the level it was at prior to the last financial crisis, and yet thanks to massive Federal Reserve money printing stock prices have soared to unprecedented heights.

At some point a massive correction is coming.  No stock market bubble lasts forever.  For a whole bunch of technical reasons why serious market turmoil is on the horizon, please see a recent Forbes article entitled “These 23 Charts Prove That Stocks Are Heading For A Devastating Crash“.

The bubbles in the financial markets have become so glaring that even the central bankers are starting to warn us about them.  For example, just consider what the Bank for International Settlements is saying

The Bank for International Settlements has warnedthat “euphoric” financial markets have become detached from the reality of a lingering post-crisis malaise, as it called for governments to ditch policies that risk stoking unsustainable asset booms.

While the global economy is struggling to escape the shadow of the crisis of 2007-09, capital markets are “extraordinarily buoyant”, the Basel-based bank said, in part because of the ultra-low monetary policy being pursued around the world. Leading central banks should not fall into the trap of raising rates “too slowly and too late”, the BIS said, calling for policy makers to halt the steady rise in debt burdens around the world and embark on reforms to boost productivity.

In its annual report, the BIS also warned of the risks brewing in emerging markets, setting out early warning indicators of possible banking crises in a number of jurisdictions, including most notably China.

“Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on,” it said.

Sadly, just like in 2007, most people are choosing not to listen to these warnings.

Another very troubling bubble that is brewing is the massive bubble of consumer credit in the United States.  According to the Wall Street Journal, consumer credit in the United States increased at a 7.4 percent annual rate in May…

The Federal Reserve reported Tuesday that consumer credit—consumer loans excluding real estate debt—in May increased at an annual rate of 7.4% to a record $3.195 trillion. Most of that gain came from a 9.3% increase in nonrevolving credit, the bulk of which is accounted for by auto and student loans. Revolving credit, which is primarily credit-card debt, expanded at a more muted 2.5% rate after jumping 12.3% in May.

That might be okay if our paychecks were increasing at a 7.4% annual rate, but that is not the case at all.  In fact, median household income in America has gone down for five years in a row.  As the quality of our jobs goes down the drain, our paychecks are shrinking even as our bills go up.  This is putting an incredible amount of stress on tens of millions of American families.

And when you look at the overall debt bubble in this country, things become even more frightening.

In a previous article, I shared a chart which shows the incredible growth of total debt in the United States.  Over the past 40 years, it has gone from about 2.2 trillion dollars to nearly 60 trillion dollars

Total Debt

Is this sustainable?

Of course not.

None of these financial bubbles are.

It is not a question of “if” they will burst.  It is only a question of “when”.

And some believe that we are rapidly approaching that point.  In fact, Marc Faber believes that we are seeing signs that it may be starting to happen already…

It’s the question investors everywhere are wrestling with: Are asset prices in a bubble, or do they simply reflect the fact that the global economy is growing once again?

For Marc Faber, editor of the Gloom, Boom & Doom Report, the answer is clear. In fact, he says the bubble may already be bursting.

“I think it’s a colossal bubble in all asset prices, and eventually it will burst, and maybe it has begun to burst already,” Faber said Tuesday on CNBC’s ‘Futures Now‘ as the S&P 500 lost ground for the second-straight session.

So what do you think?

How much time do you believe that we have before these bubbles start to burst?

Photo: pacensepatoso via photopin cc

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  1. Hey Brezhnev, I never mentioned deflation. And, as predicted, you started yelling anyway. Monetary deflation can be a problem, but price deflation not so much. Or are you still paying $5000 for a television or $2000 for a computer. And the banks create most of the money? What has the Federal Reserve been doing the past few years under the guise of TARP, TALF, bailouts, too big to fails, various QEs, and other money printing schemes? Or was it all a mirage?

  2. I would rather see prices decrease, which I am pretty certain will get me yelled at for being some sort of economic heretic. NOT A HERETIC, JUST IGNORANT OF BASIC ECONOMICS!!! Deflation almost always is the result of serious economic recessions or depressions. AND RECESSIONS OR BOOMING ECONOMIES… DEFLATION OR INFLATION… Government usually has very little to do with either! BANKS AND OTHER PRIVATE FINANCIAL INSTITUTIONS CREATE MOST OF THE MONEY THAT CIRCULATES IN OUR AND MOST ECONOMIC SYSTEMS, AND THUS THEY ARE THE PRIMARY CAUSERS OF INFLATION… or deflation. The FED and other Central Banks simply try to keep a lid on the whole process… AND THEN GET BLAMED FOR ANY ECONOMIC PROBLEMS THAT RESULT… even though that is usually and/or mostly the result of totally private economic activities!!!

  3. Apparently you are not aware that politically fueled inflation is the government’s way of fixing prices and stealing from you to support it’s criminal spending habits. I would rather see prices decrease, which I am pretty certain will get me yelled at for being some sort of economic heretic.

  4. IS IT REALLY A BUBBLE IF THE DOLLARS USED TO INFLATE ALL OF THESE BUBBLES IS BEING INFLATED AS WELL??? If the dollar continues to inflate, then all the bubbles that an inflating dollar is inflating are all really just artifacts of the inflating dollar. And as everyone who looks seriously at this issue knows… moderate inflation BENEFITS almost everyone, and even somewhat immoderate inflation mostly helps everyone but the rich… because the rich own all the bonds and other interest rate sensitive assets,,, and those kind of assets can get hammered due to inflation. SO BUBBLE AWAY, US ECONOMIC SYSTEM… eventually some of all that inflated wealth will trickle down to all the rest of us… RIGHT, REPUBLICANS??? Speaking for the VAST majority of workers… all we need to be happy is for our paychecks to get inflated at least as fast as the dollars that you rich folks are using to inflate all of your bubbles with. FOR THE MOST PART, WE GAIN NO BENEFIT, AND NOT MUCH OF THE RISK, FROM ALL OF THOSE BUBBLES! And now that you have burned millions of us with your housing bubble scam, most of us working folks will avoid THAT scam, and will be much less vulnerable to THAT bubble than we were a few years ago!

  5. Bubbles? There are no bubbles! According to the politicians and bureaucrats all is well in the land of milk and honey. Government debt? Either it doesn’t exist or the liars have a handle on all $17,000,000,000,000, even though a debt this size has never been experienced or paid off. Unemployment? They have quit counting so many unemployed people and apparently will continue to do so until the rate is at 0.00%. Inflation? Supposedly minimal or non-existent, although they had to quit counting food and energy prices to pull that one off? (when was the last time that you went through your day without utilizing food or some form of energy?) Yes, all is well in the land of liars, thieves, and grifters.

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