I’ve been warning about the dangers of the credit bubble for a long time now, but more dark clouds are appearing on the horizon. Between Q3 of 2016 and Q3 of 2017, we saw net wealth in the United States increase by $7.786 trillion according to the Fed’s latest Z.1 report. This represents a 9.48% increase in net wealth in a single year! Where did all this wealth come from? Mainly higher stock prices and home valuations. Now everyone is willing to pay more for everything, so everyone believes that they’re richer. We are in a bubble.
It would be great if the Fed had learned from past mistakes, but it seems like the only thing that we’ve learned is how to blow a bigger bubble. Total debt plus equity was 359% of GDP in Q1 of 2000, and it actually went up to 379% by the next top in 2007. After the disaster of 2008 and nearly a decade of sluggish growth, where are we today? Debt plus equity now stands at a record high of 441% of GDP. This isn’t real economic growth, this is a bubble.
Another disturbing trend in the Z.1 report is increasing foreign ownership of US financial assets. Foreign investors owned $5.639 trillion worth of US assets in 1999, but that number rose to $14.705 trillion by the end of 2007. Despite or perhaps because of the bubble in the US stock market, foreign investors now hold a record $26.347 trillion in US assets. That’s actually 35% higher than our total GDP! The more US assets that foreign investors own, the more vulnerable we become to economic shocks. The dollar could even lose its status as a reserve currency. If that ever happens, we’ll finally have to deal with all our problems rather than borrowing our way out of trouble.
If there is a silver lining to the credit bubble, then it is the protection offered by precious metals. The Fed may not have learned from its mistakes, but former Fed Chair Alan Greenspan has been offering investors some very good advice. In 2014, he explained the situation to the Council on Foreign Relations, “Gold is a currency. It is still, by all evidence, the premier currency. No fiat currency, including the dollar, can match it.” What does this mean to you? In 2017, Greenspan offered more direct advice, “Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.” There you have it. There is no Fed put on the stock market to protect us from another crash, but you can protect yourself by buying gold.