Anyone who dares to criticise the fragile financial system is called a fool or is accused of being envious; you just don’t understand and are simply jealous. But I believe that I understand perfectly well. And basic economic laws still apply.

Let’s start with a few facts. Statistics Netherlands (CBS) recently published an overview of the assets of Dutch households. This shows that in the past decade the net assets of these households have increased by 46%. This increase is in particular due to higher property prices but is accompanied by more debt. That means a more leveraged balance sheet. Households become more vulnerable to falling house or equity prices because debt stays the same while the asset side of the balance sheet deteriorates. But it is not just households that have become more vulnerable. It is a systemic thing. Because during this period, net assets have also grown 25% faster than the economy. In other words: 25% of these assets bear no relation with real economic activity.

This disconnection between economic growth and net assets also fits with the international trend. According to a report by McKinsey, since the turn of the century the increase in private assets in the ten biggest countries has outpaced GDP growth by over 50%.

Think tulips, think dotcom. To say that ‘this time it is different,’ is to deny the validity of economic laws

We can of course argue that this is the ‘new normal’. That sky high valuations for property, equities or crypto currencies can be attributed to this new reality and that the pull of economic gravity has become a little weaker. That valuations can go sky-high, detached from economic reality. It would not be the first time that the world believes this fairytale. Think tulips, think dotcom. However, to say that ‘this time it is different’, is to deny the validity of basic economic principles.

The real story is monetary policy. Low interest rates are shoring up house prices and price/earnings ratios. Low interest rates allow people to borrow more, while investments do not need to generate such high returns to be profitable.

Another part of the story is of course overconfidence. A young generation that has never experienced that investments can also result in losses. That house prices can come down. That central banks may not always put their shoulders under the financial markets. And all this finds its culmination in crypto currencies. Anything new is blown up to a bubble, without really knowing what use it is (or what risks it entails).

Where will this end? We have learned in the past that these types of imbalances can persist for a long time. With every new person stepping in, the Ponzi scheme is prolonged. The main question now is who will turn out to be the biggest fool: he who is the last one to enter the market and insists that extreme overvaluation is normal, or he who gets out of the game because it is completely disconnected from the underlying real values? I fear that for now the biggest fool is me.

This is a translation of Hans Stegeman's column in Het Financieele Dagblad, published December 7th, 2021.

Read Hans’ previous column ‘Spirits of trust’.