I’ve been stressing several different triggers that could cause the next great crash and depression, after over six years of non-stop stimulus and bubble denial. They are: the faults in southern Europe starting with Greece; the faults in the U.S. fracking and Canadian tar sands industries; rising long-term government debt rates despite continued QE; and municipal defaults including Illinois and Puerto Rico.
But the ultimate trigger would be the bursting of the greatest bubble in modern history – China!
QE works to some degree but less and less overtime, like any drug. I have been looking for something to go wrong that further QE in developed countries like the U.S., Europe, and Japan could not counter. That would be the bubble bursting in China, as it is now the second largest economy in the world and has been the fastest growing by far over the last three decades.
That’s because China has urbanized too fast and overbuilt every facet of its economy 12 to 15 years out to keep the rural migrant workers employed at all cost. As a result, its real estate bubble dwarfs all others. Its debt for an emerging country is off the charts – closer to developed countries that are far more credit worthy.
But the “Big Bang” is that the Chinese save massively and invest their cash disproportionately in real estate. Its stock bubble is finally starting to burst, but the key event is when the already struggling real estate market crashes as well. That will cause an unprecedented implosion of wealth in China and a global real estate bust that reverberates around the world.