What we really need is a vaccine for the financial pandemic!

The Vaccine We Really Need

By Jeff Clark  It's pretty remarkable when you think about it.  In less than one year, scientists came up with a vaccine to battle the most serious pandemic we've faced in our lifetimes.  That just goes to show what can be done when the right amount of money and motivation are thrown at a problem. And, it got me thinking… Why haven't we come up with a vaccine to prevent financial pandemics? As devastating as COVID-19 has been, and as crass as it is to compare loss of money to loss of life, the global financial crisis of 2008 arguably caused just as much grief and despair.  Yet, nobody is doing anything to prevent that sort of pandemic from happening again. We all changed our behaviors to battle COVID-19. We locked down. We masked up. We stood six feet apart from one another. We work, eat, and play in plexiglass cages.  The Wuhan Applebee's reported that orders of bat soup are way down. And now we have a vaccine. Yet, when it comes to our money, we're still doing the same darn thing that has caused every financial crisis – ever. We're using borrowed money to buy expensive assets. Think about it… The Tulip Mania of 1637, the South Sea Bubble of 1720, and the stock market crash of 1929 were all caused by speculative leverage. In our lifetimes, we can look at the 1987 crash, the Asian currency crisis of 1997, the dot-com bubble of 2000, and the global financial crisis of 2008. Be assured, the next financial catastrophe will be caused by speculative leverage as well. And, by the look of things, that catastrophe may not be too far away. The New York Stock Exchange recently reported that margin debt levels – the amount of money borrowed to buy stocks – reached an all-time high in March. That means that as the stock market averages are trading at their highest levels ever, investors are borrowing more money than ever to put in the stock market. At the end of March, the total margin debt was over $822 billion. That's 70% higher than where it was just one year ago. It's nearly 120% higher than in July of 2007 – just a few months before the start of the global financial crisis. And this is just the money that has been borrowed to buy stocks. It doesn't count the leveraged purchases of high-yield bonds, non-fungible tokens, Miami real estate, or cryptocurrencies named after a dog. This isn't going to end well. The Federal Open Market Committee meets this week to talk about the economy, and the appropriate target level for interest rates. No doubt, Chairman Powell will reiterate the need to keep near zero percent until the end of 2023. The economy needs the easy money. He'll do his best to squash any fears of inflation, or the falling dollar, or the massive speculative activity in the financial markets. "Don't worry," he'll say. "We have everything under control." For some reason, I suspect there was a scientist in a Wuhan laboratory that said the exact same thing about a year ago.