A Mind-Boggling Data Series

Robert Folsom, editor of Market Watch, a daily commentary published by Elliott Wave International, the Gainesville, Georgie-based forecasting firm started by Robert Prechter, recently highlighted a mind-boggling data series in "A Picture of Paper Assets, Gone Mad."

Yesterday I noted that:

"At the end of 2006, the financial assets of financial institutions surpassed 20% of annual GDP (those assets had never even eclipsed 5% of GDP until the early 1990s)."

Upon further reflection, I realized it would be better to show you what this data actually looks like.

That's what 50 years of stability looks like when it stops being stable. We all understand that the value of "paper assets" is inherently unstable, because that value is subject to very rapid up-and-down swings, a.k.a. bubbles.

So, when paper assets are a relatively small percentage (5% or less of GDP) of national wealth, the economy won't be badly damaged if that small percentage fluctuates widely.

But -- when paper assets rapidly increase to the levels of recent years (20% or more of GDP), well, a bubble that swells... and then deflates... can wreak economic havoc. That scenario is unfolding right now in the real estate market, and among lenders who "spread around the risk" to every corner (and under every rug) in the entire financial system.

Mind you, the information in this chart is NOT new -- it was publicly available when the chart appeared back in January of this year. Alas, instead of seeing the danger for what it was, the media (and Wall Street) threw a party about how great it was to be in a "liquidity boom."