From one Bubble to the next

Liquidity induced Bubble Watch

After the roaring Twenties took debt to 270% of GDP in an unsustainable way, the collapse of this debt led to the great Depression, WWII, and a distinct distrust of paper assets and debt. Debt levels then returned to a more manageable 150% of GDP before rising again, mostly from the growth of mortgages as the real estate and commodities bubble took hold in the late 1970's. When these real asset bubbles collapsed, much of the funds moved to the Nikkei forming another bubble and pushing the Yen sharply higher in the late 1980's. Once the Japanese bubble collapsed, funds flowed back to US and European markets fueling their rise in the late 1990's, and confirmed by the rising US Dollar. The ensuing US market collapse of 2000 sent the funds back into real assets like Commodities and Real Estate, but this time embracing even more debt and leverage to 350% of GDP. We have phenomenal growth of credit in absolute terms too, with US Treasuries and total credit both expanded 9-10 times since the first bubble formed 27 years ago. Since we are already seeing the first flight away from risky paper, history is likely to repeat itself, and 60% of this debt will be eventually wiped out mostly worthless in the next 5 to 15 years.

Charts courtesy of StockCharts.com


Charts courtesy of StockCharts.com