The recent occurrence of the Covid-19 pandemic has caused countries around the world to create enormous amounts of debt to be used as cashflow and stimulate the domestic economy. It is not just government debt, but also debt of the private sector, personal debt and others who have taken out loans in order to sustain their businesses. According to CNBC report by Andrea Miller, it stated that the debt of giant private companies in the USA has reached up to 10 trillion US dollars, and in addition, the economy is entering a bubble state. As a result, hedge funds have sold off government bonds at a value up to 49 billion US dollars on March 16th, causing the yield on the 10-year US Treasury bond to nearly double compared to 2020 in the same period. This is due to the expectation that inflation will return. Later, the new president, Mr. Joe Biden, has injected over 1.9 trillion USD of cash into the system under the plan to revive the economy of the United States and bring it back to greatness.
What is the large economic bubble sign?
Although there are no signs suggesting that the economic bubble is close to bursting, staying alert would be the best advice for all of us, so at least we will not be trapped in this financial and economic situation. From research on past crises, the first warning signs began small and then grew larger until they were unrepairable. Similar to past circumstances, speculation in assets with prices higher than its basic value and taking out loans at low interest rates to lend at higher interest rates in hopes to make a profit, when these actions spin the economy to the saturation point, the last group of people to take off are the ones to pay. What warning signs of a large economic bubble are there? Let’s take a look.
- Assets that are speculative and there is an excessive rise in price. At present, there is not a person who has not heard of Bitcoin, the most popular digital currency at the moment. Recently, the value has risen to a new high of 61,283.80 US dollars per 1 Bitcoin on March 13, 2021, or about 1.8 million Thai baht, and has not shown when it will be saturated after its initial launch for just 1 US dollar in April 2011.
- The emotions and investments are too much on the positive side. Anything that investors choose to invest in the stock market would always make profits and great returns. This kind of market sentiment usually indulges the newbies and lures them to leap into full speculation activity.
- Borrowing large amounts of money to buy various assets.
- A monetary policy that increases or stimulates the bubble to grow even more.
- The price of some assets already reflects their future value.
Furthermore, we can look at the interest rates that are ready to rise after the forecast has been lowered over a period of more than 7–8 years because the rate hike itself is a warning sign of a bubble burst.
Large economic bubbles which have occurred in the past.
In the past, there had been three large financial and economic crises in the world, each with a different story, but the signs and impacts were similar. For how many times and where they happened each time, let’s have a look.
• The Dutch Tulip Mania Bubble: This occurred in the Netherlands around 1637 A.D., when the tulip price had risen to eight times over a three-year period, until no one bought tulips at the peaked price causing tulip prices to drop more than 10 times within a period of just one month. It had a huge impact on the Dutch economy.
• Asian Financial Crisis: This occurred in 1997 when the mechanism of foreign exchange and deposit interest was distorted. Therefore, people turned to borrow money to be used to speculate on various assets, including houses, condominiums, various preemption, including the stock market. When no investors dared to continue to buy at such high prices, this caused a landslide sale resulting in share prices of houses, land and real estate to drop rapidly. Currency exchange rate went from 25 baht to 1 US dollar to 50 baht to 1 US dollar overnight. For people with debt, suddenly their burden became twice as much, and this sent shockwaves throughout Asia.
• Subprime Mortgage Crisis: This occurred in 2008. It was the largest real estate bubble which created an impact all over the world until the world economy was disrupted because it happened in the USA which was center of global economy, finance and trade. Even giant financial institutions like Lehman Brothers and AIG went bankrupt.
The latest Subprime Mortgage Crisis was a huge turning point for the economy and finance. In particular, the QE measures where major powers were printing out banknotes to stimulate the economy resulted in large public debt waiting to explode. Many are speculating that this upcoming economic bubble will be the largest one the world has ever had, as not only the US has borrowed a lot, but also the European Union and Japan, and others around the world. This does not include the debt of Greece and Italy, which had previously defaulted.