Bubblicious Asset Prices, Debt Dependency, Economic Collapse

February 12, 2021

The words bubbly and delicious might be more descriptively accurate when talking about champagne. However, it is not too difficult to imagine giddy salivation among the owners of Bitcoin, or Tesla stock.

And, while some might be more stringent in their terms of definition and applicability, investors in stocks, bonds, real estate, etc. – pretty much anything with a $ sign in front of it – might want to rethink the current state of affairs as it pertains to valuation of their financial assets.

According to Merriam-Webster, a bubble is “a state of booming economic activity (as in a stock market) that often ends in a sudden collapse”.

More accurately, though, the bubbles to which we are referring have more to do with price valuations, not economic activity.

The economy of the United States has improved considerably since April 2020; but it hasn’t recovered fully. Nor, has it exceeded its previous level from prior to the pandemic. So, the term bubble probably isn’t applicable to current economic activity.

ALL FINANCIAL ASSETS ARE OVERPRICED

However, in the case of prices for stocks, bonds and other financial assets, those prices are already discounting years of profitability.

Even allowing for a highly generous application of price-to-earnings ratios, current prices far exceed the most favorable expectations for future growth.

The problem is much worse, though, than simple overvaluation of assets. The US and world economy is debt-dependent. The excessive valuations showing in financial asset prices are a result of an abundance of cheap credit.

One example is bond prices, which have risen to excessively high prices as interest rates fall to unsustainable historically low levels. Financial risk appears to be non-existent amidst the clamor to own debt at almost any price.

Economic activity is funded primarily by cheap credit; whether it be mortgages, business activity, even retail consumption. Without the access to unlimited amounts of credit the world economy would come to a standstill. The situation is precarious.

A FRAGILE ECONOMY AND A LOOMING DEPRESSION

The economy is not in a bubble; but it is very fragile and could collapse at any time. We saw how quickly this can happen last March.

Some are too quick to assume that the Fed will step in and take whatever steps are necessary to arrest the hellish descent when it occurs. Of course, they will try. But they likely won’t be successful.

We have advanced too far down the primrose path of money substitutes and cheap credit. And let’s not forget, that whatever the Fed’s intentions are (or were), they caused the Great Depression of the 1930s.

The Next Great Depression will be worse and last longer.

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Kelsey Williams

Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.

Kelsey is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED! 

Kelsey Williams is available for private consultations, public speaking, and interviews at kwilliams@kelseywilliamsgold.com

Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.

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