Who Pumped Up This Bubble Economy?

(Mike Maharrey, Money Metals News Service) The American economy is a bubble. The thing about bubbles is that they eventually pop.

All they need is a pin.

Tariff policy might be the pin that pops this bubble, but even if it isn’t, there is a pin out there with this bubble’s name on it.

I’ve been calling this a “debt-riddled, bubble economy” for months (years, really), but this isn’t a term you often hear bandied about in the mainstream media. So, I was surprised to run across a Reuters article last week headlined, “There’s no easy escape from the U.S. bubble economy.”

As with most mainstream economic analysis, the article focused on Trump administration policies, calling them “an existential threat to the American bubble economy.”

The article did a good job describing a bubble economy.

“A bubble economy is one in which the financial sector crowds out the real economy. Asset prices become severely inflated and detached from their underlying fundamentals. Companies are managed to maximize financial returns rather than market share. As asset prices rise, capital gains replace genuine savings. A bubble economy is sustained by continuously rising debt, which is mostly used for financial purposes rather than investment. Credit growth also boosts corporate profits.”

This is the U.S. economy in one paragraph.

There is little question that the stock market is extremely overvalued. In December, CurrentMarketValuation.com called the S&P 500 “strongly overvalued” based on the price-earnings ratio.

We also see the overvaluation in the historically high Dow-to-gold ratio.

On the debt side of the equation, we find government, consumer, and corporate debt at record levels. Last year, total debt (private, public, and financial) exceeded $100 trillion. That represents more than three times the U.S. national income.

We see the bubble in the foundation of the economy as well. Reuters pointed out, the contribution of the financial and insurance sector to GDP growth has doubled since 1945, even as manufacturing declined by more than half.

Make no mistake – bubbles benefit a lot of people, especially those in the financial sector. The problem is they’re not sustainable. As the Reuters article succinctly put it, “The bubble economy is inherently fragile.”

It goes on to assert that the Trump team is trying to pop the bubble on purpose.

“Neither Trump nor his economic advisers explicitly acknowledge that they are trying to pop the bubble economy. But that’s what their actions amount to.”

The idea is supposedly to flip the script and bring prosperity to Main Street. As MacroStrategy Partnership analyst Julian Garran put it in a recent note, “If Trump is serious about unwinding the long-running squeeze on blue-collar workers, this means unwinding decades of policies that have been super-friendly to financial capital.”

Whether it’s intentional or not, a lot of people are worried about the air coming out of the bubble. According to a recent survey of more than 300 CEOs, over 60 percent said they expect a recession or economic downturn within the next six months. Meanwhile, the Atlanta Fed GDPNow forecast calls for -2.4 percent GDP growth in Q1.

What Blew Up the Bubbles?

The central bank pumps air into the bubble economy in the form of easy money.

Simply put, without money creation, there is no bubble.

The Fed injects money into the economy directly through quantitative easing (QE) and indirectly by keeping interest rates artificially low and incentivizing debt. This is, by definition, inflation, and this inflation of the money supply blows up bubbles.

When we talk about inflation, most people immediately think of rising consumer prices. But inflation typically manifests in the financial sector first. It blows up asset bubbles in stocks, real estate, art, and other sectors. That’s what happened during the easy money era of the Great Recession. It wasn’t until the central bank doubled down on the easy money drug during the pandemic that inflation began to spill over into consumer prices.

Consider the amount of inflation the Fed has created since the 2008 financial crisis. It pumped over $9 trillion into the economy through QE alone. On top of that, it suppressed interest rates for well over a decade.

That’s a lot of inflation, and it blew up some mighty big bubbles.

This isn’t the first time the Fed has gotten into the bubble-blowing business. It pumped up the dot-com bubble in the 90s. It pumped up a real estate bubble in the early ’00s.

What happened to those bubbles?

They popped.

In the wake of the 2008 Financial Crisis, the Fed went to work reinflating the bubble yet again. The air started to come out in 2018 after the central bank made a half-hearted effort to normalize monetary policy. You might remember the stock market crash that fall. And what did the central bank do? It cut interest rates and relaunched quantitative easing. Keep in mind, this was before COVID-19 reared its ugly head.

The pandemic gave the Fed an excuse to double down and blow the bubble up to an epic proportion.

Here we are today with a massive bubble economy that not even Reuters can ignore.

And there’s no reason to think this one won’t pop, too.

Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.