The Global Asset Bubble – How Bad Will It Be?

Shanghai economist Any Xie believes that the current “irrational exuberance” surrounding the global economy is the precursor to an inevitable global asset burst. The burst will happen, we just don’t know how serious it will be.

Asset values have been inflating globally for some time, mainly to the easy-credit policy of central banks since the 2008 global financial crisis. Low interest rates were instituted to stimulate growth. Instead, we have ended up with an ever-growing out-of-control global debt. Historically, asset bubbles have preceded the most serious periods of recession, such as the crash of the 1920s and the dot-com bubble during the 90s, followed by the real estate bubble of the early 21stcentury. Asset bubbles happen when prices of commodities rise rapidly without logical market trends and without an equal rising demand. 

When that happens, businesses will fail, unemployment will increase, the price of stocks plummet, and economic panic inevitably ensues. The more inflated the price, the worse the snowball effect.

When the bubble bursts, as it logically must, prices spiral downward. Investors who bought stocks and other commodities at the highest inflated price will suffer the most.

During the 2008 crisis, countries struggled together to deal with the global recession. Following the G7 meeting in Quebec on June 9th, President Donald Trump’s relationship with other world leaders has become increasingly tense. There is reason to doubt that countries will be able to work together again in the near future.

Since 2008, global central banks have practiced a policy known as quantitative easing, whereby the central banks buy up assets and sell them at an artificially driven high price. This has created an inflated asset bubble of $100 trillion, amounting to 1.5 times the global GDP. It is doubtful that this can be sustained much longer.

There is no doubt about the cause and effect of asset bubble and recession. Economists are merely arguing about the intensity of the correlation.

2018 may or may not see the bubble burst, but it will be a decisive year for global economies. When the anticipated economic growth fails to meet expectations, certain high-risk investments, such as tech stocks and high-end real estate, will see their worst struggle since 2008. The Feds will set interest rates higher than the inflation rate.   

China’s effort at tightening its credit has plunged its economy by 20 percent during the first quarter of 2018. China has been responsible for half of the global credit, and its growth may soon come to a screeching halt. How will this affect the global economy as a whole? China is expected to revalue its currency. When the yen appreciates by around 20-30 percent, there is a good chance that such a revaluation will be the needle that causes the global asset bubble to burst. The recession may be worse than the one we experienced in 2008/

The policy makers at the central banks have created policies that have led us to the point of crisis. Governments have bailed out speculators and rewarded poor decision making. Unfortunately, the economy has become dependent on those questionable policies, and the asset bubble continues to grow.

These speculators are today’s money managers, managing money that is not their own. They have every reason to want to stay in the game, even when it is stacked. This dance between central banks and speculators has helped perpetuate the myth of economic solvency.

If the U.S. dollar continues to devalue at its current rate, it could be the final straw. The U.S. dollar is the global reserve currency. Many Asian and Mideastern countries are holding dollars for that very reason. If it should fail, global chaos is the only possible result.

The current precarious global economic situation is the result of failed government policies. Unless these policies are amended, we may be in for a bumpy ride.