The Bubble We Live In

In my previous post, I referenced the dot-com bubble and established how it formed and how it popped. In this blog, I will reference at the bubble we are currently living in.

The first concept to address is the disconnect between household wealth and the underlying economy. Reportedly, since the financial crisis in 2009, household wealth has increased by nearly $46 trillion or roughly 83 percent. The increase in household wealth far exceeded the growth of GDP (or the underlying economy). Economists cite that household wealth should closely track the economy, similar to the 20th century up until the “boom-bust” which started in the mid-to-late 1990 (the time of the dot-com bubble). The reasoning behind this is that when household wealth tracks the growth of the economy, it signals that wealth increase is likely “organic” and sustainable. For that reason, when household wealth outpaces the growth of the underlying economy it often indicates that inflation is artificial and unsustainable. We have seen this household outpace empirically during 1990s dot-com bubble (as well as the mid-2000s housing bubble). In a horrifying manner, some economists cite that the gap between household wealth and the economy is much larger now than during either of the last two bubbles, indicating the reversal may be even more devastating.

Many articles cite the Federal Reserve System as the primary proponent behind the bubble we live in.  During the Global Financial Crisis, household wealth was gouged as stocks, housing prices, and bonds all sank. When the household wealth plunges, consumers, being scared, pull back their spending dramatically, which results in even more economic pain (in a circular kind of way). In order to pull the economy and financial markets out of its bearish behavior, the Federal Reserve lowered interest rates to record low levels and launched emergency monetary stimulus policies known as quantitative easing. Quantitative easing is pretty complicated but it's basically creating new money and using the money to buy securities and bonds with the hope that its influence would indirectly find its way into riskier assets such as stocks.

The obvious consequence of this is that instead of creating organic growth, the intervention will lead to unsustainable bubbles similar to what was seen during previous market crashes. The general trend is that a bubble is formed through risky or artificial investment, this was seen during the dot-com bubble through rapid confident investment and is mirrored now through the government artificially pumping money into the economy.

I find it interesting that the economy has to be in a goldilocks zone else it leads to massive problems. It cannot be too low else the government tries to salvage it artificially and it cannot be too inflated or it will lead to more risky investment.