[The Age of Bubble] Stocks, Real Estate, Coins, Commodities... Everything Is Rising

Speculative Capital Concentration and Inflation Alarm, but
Central Banks Unable to Take Sharp Measures Amid COVID-19 Uncertainty

[Image source=Getty Images]

[Asia Economy Reporter Eunbyeol Kim] The era of the ‘New Normal of Bubbles’ is unfolding. An unprecedented amount of money has been injected in response to the economic shock caused by COVID-19, flowing through the stock market and real estate, and recently into cryptocurrencies. This recalls the Dutch Tulip Mania of the 1630s, the U.S. railroad bubble of 1873, and the dot-com bubble of the 1990s.

On the 10th (local time), the S&P 500 index closed at 4188.43, marking about a 13% increase compared to the end of last year. West Texas Intermediate (WTI) crude oil for June delivery on the New York Mercantile Exchange (NYMEX) rose more than 36% during the same period, and Bitcoin prices surged 73.8%. Although Bitcoin prices have recently undergone some correction, they jumped from the $32,000 range at the beginning of this year to the $55,000 range. Prices of raw materials such as iron ore and agricultural products like corn are also soaring.

*Bank of Korea Foreign Exchange Operations, Bloomberg

The Foreign Exchange Operations Department of the Bank of Korea recently analyzed in its international financial market report that "the phenomenon of an ‘everything rally market,’ where all prices rise together, is becoming more distinct." Unlike the dot-com bubble era when the bubble was concentrated only in internet-related stocks, this time prices of real assets such as housing and raw materials are also rising together, raising concerns about potential financial instability. The U.S. housing price growth rate recorded 12% year-on-year as of February, the highest increase since February 2006.

It is natural for prices to rise during economic recovery, but the problem lies in the speed. The prevailing assessment is that recent price increases have deviated from normal trends. However, there is no sharp measure to respond. In most past bubble occurrences, central banks raised interest rates at economic peaks to prevent overheating, but currently, with domestic COVID-19 cases exceeding 500 and significant concerns about variant viruses, it is difficult to respond hastily with interest rate hikes.

This is why Jerome Powell, Chair of the U.S. Federal Reserve (Fed), has mentioned bubbles in some asset markets, and the Fed has pointed out the possibility of financial market instability in its financial stability report, yet has not taken significant action. Lee Ju-yeol, Governor of the Bank of Korea, also stated, "It is still too early to consider a policy shift given the considerable uncertainties surrounding the COVID-19 situation and vaccination progress." Park Sung-wook, Senior Research Fellow at the Korea Institute of Finance, said, "While central banks will monitor asset markets, the top priority is economic recovery, so despite side effects, we must wait until recovery is fully confirmed."