The longer a bubble lasts, the louder its burst will be. This is what many in the US now fear, where the country's Federal Reserve (Fed), through extremely loose monetary policy, has created a series of asset bubbles—the Artificial Intelligence Bubble (AI Bubble), the Housing Bubble (HB) 2.0, and the Bond Bubble. Their bursting is very likely to start in 2026. When this happens, it will lead the US economy into an inflationary recession, which may be called "The Greatest Recession." Price inflation will be higher than what America experienced in the stagflationary 1970s (about 15% at its peak), while the shrinkage of GDP will resemble the "Great Depression" of 1929-1946. Despite similarities with the 2008 Global Financial Crisis (GFC) concerning the causes and the Government/Federal Reserve's reaction to the bubbles, the results for the US economy and the dollar are expected to be very different. The dollar is likely to fall significantly not only against gold but also against other currencies.
How we got here
The bubbles mentioned above have been "built" for several years, perhaps over a decade. The fact that the bubbles have grown larger (e.g., HB 2.0 compared to HB 1.0 before 2008), new bubbles (such as the AI and the MAG7) have inflated, and stock markets continue to rise without a significant correction, has reassured investors, who are in a deep sleep, perhaps even a comatose state, regarding risk perception. Franklin D. Roosevelt's famous phrase, "The only thing we have to fear is fear itself," spoken at the height of the "Great Depression" in 1933, may be more relevant to the psychology of American investors today than at any other time in history. However, every objective indicator shows overvalued assets in many sectors, and the currency is on the brink of a sharp decline, given the prevailing fiscal policy. This implies that dollar-denominated investments (stocks, bonds, real estate) are set for an abrupt awakening in the coming years, while the economy itself is heading for a recession that will make the 2008 crisis look like a walk in the park.
I. The Federal Reserve's dual mandate: The arsonist and the firefighter
Let's start with the Federal Reserve, the driving force of monetary inflation, which is a necessary precondition for the creation of asset bubbles. Jim Grant introduced the analogy of the arsonist and the firefighter, explaining how the Fed ignites bubbles through prolonged artificially low interest rates. When the bubbles finally "burst," the Fed rushes to intervene, just as the arsonist calls the fire department. We have seen this cycle repeatedly over the past 35 years. The most notable examples are: i. The easing cycle in the early 1990s, which led to the NASDAQ/dot-com bubble. ii. After the NASDAQ bubble burst in March 2000, the Fed again lowered interest rates to the then-unprecedented 1%, creating the Housing Bubble 1.0. iii. Following the collapse of Lehman Brothers in September 2008, the Fed dropped interest rates to 0% and kept them there for nearly 15 years. Interest rates had never remained so low for such a long period in the 4,000-year history of monetary policy. But interest rates are only part of the story in the current easing cycle. A much more potent form of monetary inflation has occurred through the expansion of the Fed's balance sheet via Quantitative Easing (QE), with which the Fed bought US Treasuries and mortgage-backed securities. The Fed's balance sheet, which was less than $1 trillion during the 2008 crisis, increased more than 6 times over the next 18 years, reaching $6.5 trillion today. The national debt has skyrocketed during the same period. The total US debt up to 2008 was $10 trillion, while over the next 18 years it almost quadrupled, reaching $39 trillion. If the BBB (Big Beautiful Bill) is any indication, we will see the National Debt exceed $50 trillion by the end of Trump's second term in 2028, even without a significant economic crisis.
II. The bubbles meet economic reality
Bubbles are created when excessive money and credit are funneled into specific sectors of the economy. Given the size of the new money and credit created since the 2008 crisis, the US is now sitting on a sea of asset bubbles—HB 2.0, AI Bubble, and Bond Bubble.
II.1 Housing Bubble 2.0 (HB 2.0)
Several factors explain why HB 2.0 is much larger than HB 1.0 of 2008. Some typical indicators include property prices, inflation-adjusted property prices, mortgage payments as a percentage of household income, and others. However, the most reliable indicator that takes all these factors into account is the Home Affordability Index (HAI). The HAI shows that property prices need to fall by over 33% to restore affordability. The existence of two other bubbles, the AI and the Bond Bubble, makes it almost impossible to find a solution with zero interest rates and quantitative easing as after the 2008 crisis. Therefore, property prices will fall far below the levels indicated by household incomes. It is likely we will see a price reduction of around 50% when the HB 2.0 bubble bursts.
II.2 The Artificial Intelligence (AI) bubble
Many indicators demonstrate the AI bubble, such as the market capitalization ratio of MAG7 to GDP, the ratio of the five largest stocks today to those of 2000 as a percentage of the S&P 500, the marginal capex AI as a percentage of GDP growth, and others. The indicator that captures the complete capital reallocation shows that the excessive investment in sectors such as artificial intelligence, cryptocurrencies, NFTs, and real estate surpasses the 2008 bubble.
II.3 The Bond Bubble
Despite the huge overvaluations, there is at least something to show for the money invested in the real estate market and artificial intelligence. In contrast, investments in long-term government bonds are simply paying dollars today to receive pieces of paper 20–30 years later. It is almost certain that US 30-year bonds will become "confetti" if held until maturity.
What will happen in 2026
It is highly likely that the first two bubbles—the HB 2.0 and the AI Bubble—will burst one after the other. For the first time in over 45 years, the US Government and the Federal Reserve will realize unequivocally that they can only print money to get into trouble, not to solve it. Despite the similarities with the 2008 crisis, the main difference is that 2008 was a liquidity crisis, while 2026 will be a solvency crisis. Consequently, the US dollar will rapidly lose its value not only against gold but also against most of its trading partners. The recession is expected to last, and the correction to be deep and proportional to the inflationary boom of the preceding period.
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