The “Everything Bubble” Is About to Burst
On Jan. 20, Jeremy Grantham, founder of the asset management firm GMO, warned that a “superbubble”, comprised of stocks, housing and commodities, will soon pop, wiping out $35 trillion in assets. This would be the fourth superbubble collapse in the last one hundred years, he wrote, after the stock bubbles which imploded in 1929 and 2000, and the housing bubble in 2008.
Jeremy Grantham is not a defender of the “common good” against the predators of the City of London and Wall Street: on the contrary, he is an insider among the financial elites who have launched the green bubble as a means for the financial markets to survive the meltdown. Thus, Grantham is advising his customers to invest big in no-carbon assets, which he claims is the future of the economy.
Nevertheless, he is accurate in his description of the impending meltdown – as accurate as an insider can be. Although “we face the largest potential markdown of perceived wealth in U.S. history,” he wrote on his company’s website, no one is listening, because superbubbles “are often the most exhilarating financial experiences of a lifetime”. The U.S. Federal Reserve and other central banks, in his view, do not “seem to recognize the danger”.
As if to prove his point, Bloomberg Business ran as a lead story Jan. 27 headlined “America’s Economy Is Booming”, citing statistics which show a “better-than-expected” growth of GDP in the latest quarter. The article later mentions the decision earlier that day by the Fed Open Market Committee to move ahead with “tapering”, i.e., scaling back the Quantitative Easing program and raising interest rates. It reports ominously, “Traders are bracing for higher borrowing costs, with money markets now expecting almost five interest-rate increases from the Federal Reserve this year and another four from the Bank of England.” This unacknowledged contradiction, of the disconnect between the “good news” of a growing GDP — which measures monetary expansion and not goods production of the real economy — and the fears of the effects of an interest rate spike, demonstrates precisely why the Fed and others refuse to “recognize the danger.”
Backing Grantham’s view are a spate of articles and reports on the unsustainability of various forms of debt, in particular the danger of default among poor, heavily-indebted countries. David Malpass, President of the World Bank, warned that the “risk of disorderly defaults is growing….Countries are facing a resumption of debt payments at precisely the time when they don’t have the resources to be making them.” Larry Elliott, financial correspondent for the Guardian, wrote Jan. 23 that debt payments by developing sector countries have more than doubled since 2010, and will increase more if the Fed raises interest rates. In 2010, 6.8% of government revenues went to debt repayment; in 2021, this rose to 14.3%. There are fifty-four countries in a “debt crisis”, and nearly 50% of that debt is owed to private lenders, that is, banks and investment funds, and another 27% to institutions such as the World Bank and International Monetary Fund.