The National Interest: The Global Asset Price Bubble Is Preparing to Burst - and No One is Ready

Article by Desmond Lachman in The National Interest

It would seem that world economic policymakers and academic economists have learned little from the 2008 bursting of the U.S. housing and credit market bubble.

Today, at a time that the world is experiencing an “everything” asset price and credit market bubble that is very much more pervasive than was the U.S. housing and credit market bubble of the previous decade, the world’s major central banks are still keeping their pedal to the monetary policy metal.

Today, at a time that the world’s central banks keep adding froth to the world’s asset and credit markets by their ultra-easy monetary policies, there is a deafening silence from the academic community about the risks of another central bank-induced painful boom-bust cycle.

The primary source of today’s global “everything” asset price and credit market bubble is the maintenance of zero policy interest rates and the unprecedentedly aggressive bond-buying activity by the world’s major central banks.

Whereas, in the wake of the September 2008 Lehman bankruptcy, it took Ben Bernanke six years to increase the size of the Federal Reserve’s balance sheet by $4 trillion, in the wake of the coronavirus pandemic it has taken Jerome Powell less than a year to do the same thing.

One way in which the unprecedentedly rapid pace of central bank money printing has manifested itself has been a global equity price bubble. As an example, today U.S. equity valuations, as measured by the Shiller Cyclically Adjusted Price Earnings ratio, are more than double their historic average. They are also at very lofty levels that have been surpassed only once in the past one hundred years.

Another manifestation of rapid money printing has been housing market bubbles around the world. This has included a U.S. housing bubble, where house prices today in real terms are at a level similar to those in 2006 at the peak of the previous housing market cycle.

More disturbing yet for world financial market stability are the pervasive global credit market bubbles that have been spawned by today’s ultra-easy monetary policies.

Meanwhile, in a world flush with liquidity, both U.S. and European corporates with the worst credit quality have been able to continue borrowing at relatively low-interest rate spreads.

The common factor that keeps fueling these asset price and credit market bubbles is ......

To read this article in The National Interest in its entirety, click here.