What does a financial bubble look like?
There’s been a lot of conflicting talk in the news recently about “a strong economy” vs “are we in a financial bubble”. I believe the latter is true, and here’s why.
In a financial bubble…
…people’s savings are losing purchase power through negative real interest rates. Simply put, when printing money (inflation) with a rate of 2% and an interest rate of -0.5% it means that someone’s savings on the bank is losing 2.5% of purchase power each year. That’s $250 of lost purchase power for someone with $10,000 in a “savings account” (or shall we say “wasting account”).
European central banks (e.g. Switzerland, Sweden, Denmark) had to introduce negative interest rates around 2015-2016 in an attempt to stop the financial system from grinding to a halt. Negative interest rates still remain.
In a financial bubble…
…governments are being paid to borrow money through negative bond yield curves.
One way for governments to borrow money is by issuing bonds. Simply put, that’s when private or institutional investors lend money in return for interest payment (a.k.a bond yield). In a healthy economy investors receive a higher interest for lending money over a longer period. But when investors believe there’s a recession coming, short term loans pay higher interest than long term ones. This is currently happening in the US.
In a financial bubble…
…people are being failed by traditional savings and safe investments such as bonds, so they run to speculation on stocks which results in unsustainable growth on-top of a financial foundation that’s already failing because of the reasons why people ran to stocks in the first place.
Here’s a chart of the growth of the S&P 500 index since 2017. Does this look like a bubble to you?