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I want to start with the first phase—that's healthy debt growth, right? In other words, debt is growing . It provides a return on investment, and that's good. Usually, in a cycle, everything starts with a terrible period, very painful, when everyone is scared and so on . And then central banks have to stimulate credit and so on, and they go through the process of changing interest rates, the yield curve.
I gave an example: lower rates, provide liquidity, launch the process, and even reinforce all of this. And then we move on to the second phase, which is a kind of " bubble" phase. And this "bubble" phase comes when everyone extrapolates the past . They say, "Oh, things will get better, but I'm missing my chance ." And all these arguments about why borrowing at the effective rate is a good thing.
This borrowing could be, say, buying a home, because its prices are rising , and you don't have your own home, and what to do with rent or something like that. It could have been the tech bubble in 2000. In other words, all these new technologies, we're going to buy these stocks, borrow money to buy them, etc., because you're afraid of being left out , or who knows?
Is this a bubble now? So you can see that these elements exist in a "bubble" phase. These are signs of the " bubble" phase. Prices are high relative to traditional indicators. I can go into detail about each of them. I might be able to do this during the Q& A session, but I want to get it out there quickly.
Prices are high relative to traditional indicators. Prices are factoring in a rapid rise in the future from these high levels. By this I mean that you can look at market prices and conclude what picture of the future they paint. In other words, if I look at the ratio of stocks to bond yields, there is an underlying growth rate there.
And if I look at the ratio of inflation-linked bonds to nominal bonds, I can calculate what the market expects in terms of future inflation. So, there is a certain picture of the future, and if the future differs from that picture, this will determine the return on assets. And so sometimes at the peaks you usually see this: end of the cycle, debt has increased significantly, you start to reach your limits, and the market is still extrapolating or pricing in the acceleration.
But how can acceleration happen if you are already at the limit of your capabilities? So that's what I mean by the second point. There is a broader bullish sentiment. In other words, you walk around and everyone says, "Oh, this is great, and it's only going to grow ." Then there are purchases financed with large leverage.
This is obvious: buy with borrowed funds, buy stocks with borrowed money, buy any assets, houses or anything else. Sometimes buyers make extremely long forward purchases. In other words, they accumulate reserves. Because they are worried that the price will go up. I have good supplies. Or they order supplies because they expect growth.
Or perhaps they buy an apartment, speculating that housing prices will rise. And people generally buy these things, expecting such a price increase. In addition, new buyers are appearing. They didn't do this before, but now they are attracted to it because the market is "hot." And you see them coming.
A classic example is tulip mania. He said, okay, I'll come in too. I need tulips, they're a wonderful thing. And you see it. And then you see stimulative monetary policy, which will inflate the bubble. And when you see these things at the same time, you will see a lot of them. You can make a checklist, check off these items, and when you start seeing them, it becomes, to a large extent, unsustainable.
So these graphs are simply averages of the different points in these 48 cases. The first chart shows stock prices, it takes us through the entire cycle. The red box that I want to draw your attention to shows what happens to stock prices during this cycle. And then it also shows the debt and debt service payments , and you see them growing.
And then you can notice here that during the bubble phase, this graph shows the change in debt as a percentage of GDP and the change in debt service . Uh, that's changes in debt minus changes in GDP growth. So, in other words, this is the growth of debt relative to GDP. And you can see if you look at this that that red line is in the 20% range.
Uh, in other words , the debt is growing at a very accelerated pace . And it continues to grow: the change in debt minus GDP is still increasing at a rate of about 10%. So you can start to see these bubbles forming. I see it in different countries: when you see such an accelerated rate of debt growth, it's hard to imagine anything else.
And a little further down I show the short-term interest rate, and you can see that there was no significant tightening of monetary policy during that period to slow this rate of debt growth.
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