What is a credit bubble?
A credit bubble can arise when there is a lot of liquidity in the financial system. Expansive monetary policy, where central banks around the world cut key interest rates, driving down interest rates, which can ultimately lead to a credit or speculative bubble.
What happens at the historically low interest rates?
If central banks keep interest rates low, such as 0.25 percent currently, it is supposed to make it easier to borrow because banks can get cheap money. The loans should invest and stimulate the economy. The whole thing, however, is a gambling game, because you can overdo it and not find the right time to raise interest rates step by step. The weak monetary policy also has enormous consequences for consumers. It is not worth saving money because it yields virtually no return. The savers look at this for a while and then opt for other forms of investment in which they invest in stocks and other securities or buy real estate (concrete gold) and finance loans at low interest rates. This behavior is only logical, but drives up stock prices and prices for real estate are also rising.
For ordinary consumers, this credit bubble has in principle only negative consequences. His savings slowly but surely lose value because it no longer yields any returns. In principle, many assets have been destroyed for years now.
Anyone who now thinks that these losses can be compensated by purchasing shares, is not fundamentally wrong, but has to bear in mind the risk that every consumer who speculates on the stock market will take into account. Sure you can make profits with stocks. It is also true that the DAX, for example, has developed rapidly in the last year. But no one knows how long that will last. The stock market can also destroy a lot of money. If little savers do not pay attention, they can lose all the money they earn in a crash, and more.
What is currently happening
Almost daily, new highs are celebrated on the stock exchange. This applies to the USA, Europe in general and Germany in particular. Since the outbreak of the financial crisis in 2008, the money for the big commercial banks has become cheaper and cheaper.
So far, the warnings of economists are not taken seriously enough. Stock prices have now largely moved away from their fundamental valuations. A drastic course correction will come, it is only a matter of time. Retail investors are not recommended to jump on the bandwagon now. The markets are already too overheated. The mine pay anyway the little people.
Who benefits from the credit bubble?
Profiteers include the ailing banks, which can delay their bankruptcy in this way further. Profiteers are also the indebted states, which can use the low interest rates to gradually shed their debts.
In southern Europe, as in Spain and Italy, the consequences of a credit bubble can also be seen in the real estate market. When the loans were cheap, many Spaniards have invested in real estate. Today they are unemployed and can not service their mortgages.
The low interest rates are highly dangerous and nobody knows what exactly happens when the bubble bursts.
How can one counteract now?
Economically strong countries like Germany have to spend more money and, for example, raise wages so that both public and private investment increases. Over-indebted countries such as Greece or Spain should get the debts released. In any case, it can not go on unchecked. The policy is required.