E Bubblicious Asset Prices, Debt Dependency, Economic Collapse

woman standing outdoor surrounded by bobbles during daytime

Source: Unsplash 

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 the 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 an 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.

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 the 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. The 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 access to unlimited amounts of credit, the world economy would come to a standstill. The situation is precarious.

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Kelsey Williams is the author of two books: Inflation, What it is, What It Isn't, And Who's Responsible For It and  more

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