I have spent years documenting how pervasive and global this current bubble is. It’s the greatest financial bubble in all of history. It’s in stocks, real estate, bonds, commodities (up until 2008), Bitcoin, yachts, wines, art, collectibles…everything.

The rich are getting richer, especially since this bubble really got going in 1995 with the first tech stock bubble. The top 20% own 88% of the financial assets and control 50% of consumer spending, and the top 1% near 50% and 20%, respectively. So, they have an outsized impact on the economy. They also have to park their newfound riches somewhere, so they are the ones driving up these great financial asset bubbles. And the central banks are feeding this – unintentionally at first, but intentionally now. They’re the ones who’ll lose the most when the bubble bursts.

The point of this article is threefold. To make clear that:

1. The central banks did not intend to create this monstrous financial asset bubble – it was a byproduct of its aggressive and risky stimulus policies and the only thing that actually helped – so they had to keep doubling down, which can only end badly as bubbles always do.

2. There are two ways to create “money.” The traditional way is bank lending to multiply M2 or money supply/bank deposits. That creates immediate GDP and spending growth. The second, more powerful way, is financial assets, which create a wealth effect with a minor impact on short-term spending and a major impact on long-term spending. But such assets can disappear suddenly and dramatically.

3. Stocks were the single biggest financial asset to benefit instead of being the worst to decline in such a winter season – without such massive QE to fight deflation and debt/bubble deleveraging. Hence, the paradox of the greatest stock bubble in the worst economy and recovery in U.S. history – and worst crash since 1929-32, just ahead likely between 2020 and 2022-23.

The problem with financial assets is that when they bubble dramatically – which is rare and hasn’t happened broadly since the 1920s – they lose most of their value (89% for stocks into 1932 back then) and don’t come back for decades. Hence, that form of longer-term wealth only lasts as long as the bubble does (and they always burst). And we are very far into the greatest bubble in history. Hence, a lot of long-term wealth is about to be destroyed for decades, and mostly held by the most affluent.


Both of these forms of money can and do deflate. M2 most rarely, as in the early 1930s, and most likely again in the three to four years ahead. But financial assets deflate more severely, and more often! We’ve already seen three major stock crashes well beyond the 20% maximum corrections in the less volatile spring boom from 1942-68: 40% in 1987, 46% in 2000-02, and 54% in 2007-09. The fourth is ahead at 80+%, by my calculations. Real estate deflated 34% between 2006 and 2012, more than the 26% crash in the Great Depression from 1929-33. The next real estate crash should be 40% to 50%... and recall how much damage the first one did to households and the banks!

I showed in the September 2019 issue of my flagship newsletter, The Leading Edge, how there is always a final bubble in the winter season from government stimulus against the first major bubble crash. The last was the 1932-37 bubble after the 1929-32 crash that saw a higher percentage gain than the 1925-29 super bubble, but did not come close to making new highs as it started from much lower levels. This one is just off-the-charts due to the massiveness of QE and the “should be obvious” impact more on financial assets – as that’s what the central banks are buying with this money created out of thin air. It’s not going into bank lending and money supply expansion. Hence, no consumer price inflation, as the gold bugs expected! Instead, unprecedented financial asset price inflation.


The point: QE especially creates financial asset bubbles due to its unique way of creating money — buying government bonds, and sometimes even stocks (like with Japan) — which puts money directly into the financial markets and inflates prices while artificially lowering interest rates. Normal measures of making reserves more available or lowering short term interest rates are designed to make bank lending more expansive – to create M2 and GDP growth from leveraged lending into investment in productive assets that create more jobs and profits to sustain longer-term growth – until we over-expand, as we did into both 2007 and 1929.

QE was intended to do that but didn’t, because central banks don’t really understand debt and financial asset bubbles. Companies and consumers were already up to their eyeballs in debt and capacity, so they didn’t need to borrow more money. David Stockman aptly calls that “peak debt.” Central banks started doing it and the only positive impact was the wealth effect from the asset bubble. That has been the only thing that actually ended up keeping us out of the next Great Depression – not renewed bank lending… but at the expense of the greatest bubble in history that can only do one thing: burst!

We’ve become addicted to QE like a monetary drug. It makes us high through rising financial assets out of proportion to actual growth and the economy. We’re getting something for nothing. People who are high don’t make good decisions or live in reality. There are only two options for an addict: detox or die. Japan has chosen to slowly die, and they are in the emergency room on life support. I hope we finally choose – or more likely get forced to choose – to detox this unprecedented debt and financial asset bubble, instead of taking ever-more drugs to keep from coming down off the high.

Central Banks Were Just Trying to Save the Banks and Financial System

When the subprime loans started to default, Fed Chair Ben Bernanke didn’t see a big problem. Most economists don’t understand the history of how debt bubbles create financial asset bubbles that then have to deleverage and burst, typically very painfully. They only know they don’t want that pain or apparent failure when it threatens. But a bubble bursting is not failure! It is the system purging itself of toxins (in this case unproductive debt and financial asset bubbles) to get healthy again. That’s a big reason we came screaming out of the Great Depression, not crawling out as we’ve been these last 10 years.

It’s no accident that the Fed was first created in 1913 after several decades of no central bank – and then 20 years later we were at the bottom of the greatest depression in U.S. history following the greatest stock bubble.

Central banks and politicians just want to create a financial nirvana: 3-4%+ growth with 1%-2% inflation… and no recessions, ever. That is such a massive misunderstanding of how our economy and free market capitalism work, that our economists, central bankers and politicians rant like six-year-olds to me, despite their advanced educations… they know nothing! This is childish to presume. They want the same thing every consumer wants and gets in commercials and sales pitches: “a zipline to heaven.”

They don’t understand that recessions help purge the system of unproductive debt and companies and jobs, like the common cold does. You suppress colds as most people do, and you often end up with pneumonia or something more serious, like cancer. You suppress and try to avoid recessions by lowering interest rates and stimulating with government spending and you end up with a depression, not a recession. And depressions almost always follow debt and financial asset bubbles like 1914-29 or 1865-73, or recently 1995-2007.

The only way out of this mess is to do the opposite of what they did in the 2008/9 financial crisis: Let this bubble deflate and only reward banks and financial institutions that write off or write-down debt. That will clean the slate of unproductive debts, companies and banks to let us grow again for the next demographically destined global boom from 2023 to 2036. Let the stronger banks and companies absorb the weaker ones where appropriate. Preventing recession as we did in 2009 forward, is the wrong policy and history will show that.

The investors that get out of risk assets like stocks and real estate will thrive in this great reset. The businesses and financial institutions that hunker down, focus and cut costs will survive and gain massive market share. The ones that don’t see it coming will not be around to talk about it. 2020 – 2023 is the danger zone for the next financial crisis occurring given my demographic, technological and geopolitical cycles converging.   EG