“The stock market is a giant bubble being inflated by margin debt, according to economist Steven Keen, author of “Debunking Economics.”
When the level of margin debt begins to fall, the bubble will deflate and investors will be punished, Keen told Yahoo.
“In 500 years’ time people will look back and see this as the biggest debt-financed bubble in human history and ask, ‘why didn’t we realize it,’” Keen said. “But we think it’s normal.”
According to his analysis, there is a relationship between the change in margin debt and the level of asset prices. More specifically, there is a correlation between margin debt acceleration and rising asset prices, Keen said.
Margin debt-to-gross domestic product (GDP) ratios are now 70 percent, meaning a qualified investor with $300,000 can borrow $1 million worth of shares from a broker.
Those levels are close to where they were in 2000 and 2007, Keen said, both of which were followed by serious stock market downturns.
“Nothing can accelerate forever. At some point the acceleration stops, and when it does the market breaks,” Keen told Yahoo.
Keen predicted the U.S. stock market would deflate similar to the way Japan’s did starting in 1989. Japan’s Nikkei averages did not stop falling until 2003.
“I think we’re in a long slow bleed, much longer and slower than the Japanese stock market crash, but there’s similar dynamics,” he said.
Writing in The New York Times, economist Paul Krugman had a simpler interpretation of why the stock market has been rising.
“Stocks are high, in part, because bond yields are so low, and investors have to put their money somewhere,” he said….”
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