It’s been 8 years since the last financial crisis and it seems like we all forgot what happened then, since nothing has change. Toxic CDOs are still being sold, banks are still giving out loans to everyone with an ID on himself, the stock market is at a record high, bankers are getting $millions in bonuses, consumers are buying stuff they don’t really need, on credit of course, houses, cars and almost everyone is getting into college. But what really causes recessions? Well and easy escape would be to say: greed. Greed is a human emotion and emotions can’t cause a massive bubble. Credit on the other hand, can.
There a couple of massive bubbles so let’s start with the stock market.
1st warning sign: It doesn’t take a genius to add 2+2. A quick look at the S&P 500 is all we need to understand that something is wrong here. Usually crisis appear every 10 or so years, sometimes sooner. Well, we are in year 8 already and the S&P is at a record high.
2nd warning: Housing prices are record high again, especially in the big cities, where the economy has recovered the fastest. Subprime mortgages are again given to almost everyone with an ID on him – aided by the low mortgage rates and Dodd-Frank regulations that push banks toward lending to the upper middle class and wealthy.
3rd warning: More scaring this time is that there are massive bubbles in other sectors as well. Car loans at a record high as well, toppling $1 trillion for the first time.
More and more buyers who borrow to purchase used cars may find themselves overextended with a loan that stretches well beyond their fast-depreciating vehicles.
Most of these people consider their cars to be an asset, which it is, but for the BANK, not the car owner. It’s a liability of the owner.
4th warning: I have already wrote about the massive bubble in higher education, but let’s summarize anyway. Outstanding student loans now exceed $1,5 trillion and more than 40% of borrowers are in default or behind on their payment.
This is all thanks to the subsidized government programs that encourage more people to go to college than the real economy needs. So now we have hundreds of thousands of unemployed with the worst kind of debt: Student loans.
This is all encourage by the FED by the way, all three of the bubbles – the federal reserve bank of the U.S., which is nor federal, neither has any reserves. It’s a private entity, which is responsible for creating money (more on this in a separate article). It has set interest rates at almost record low – 1%. This means that banks get cheap money, which furthermore means that they can give out cheap loans to almost everybody.
5th warning: European banks are on the brink of failure. Greece has already defaulted 3 times, however it has been bailed out by the EU, because if Greece collapses, the rest of the Eurozone will follow. The closest to the collapse without any outside help being Italy, Spain, Portugal, France and Ireland. Germany and the U.K. are not in a better shape either as almost every country from the Eurozone has over 100% foreign debt as part of their GDP. This debt can’t be paid. This means only one thing: eventually almost all of the countries in the Eurozone will have to default.
6th warning: There is a massive bubble in Eastern Asia. China’s national and provincial governments have subsidized inefficient state-owned enterprises and exporters with easy credit and propped growth through excessive borrowing for wasteful public work and urbanization projects. This has resulted in massive housing bubble.China new home prices, year on year growth:
Should this bubble burst and the yuan collapse, other Asian developing economies dependent on exports to China will easily become unable to service their debt.
We have all been drunk since the recovery started. All the important indexes are at a record high, everyone is borrowing, everyone is investing in the stock market, all seems great, the best times to be alive right? All these warning signs mean only one thing though – the party is just about to stop. And as after every other great party, there is a massive hangover in the morning, some pieces from the puzzle are missing and you are handed the check for all the fun you had. And don’t get it wrong. Someone will have to pay – I’m gonna take a wild guess and assume that this would be the taxpayers, while the bankers continue to receive those fat bonus checks.