Jeremy Warner
On one thing at least, Donald Trump is allowed to boast. The US economy is indeed going through something of a boom, and yes, his own policies – which combine extreme fiscal loosening with sweeping deregulation – are part of the explanation.
“Growth is exploding, productivity is surging, investment is soaring, incomes are rising, inflation has been defeated, the United States is in the midst of the fastest and most dramatic economic turnaround in our country’s history,” he told global elites at the World Economic Forum in Davos last month.
We can question the hyperbole, but he’s broadly correct. Annualised growth in the third quarter of last year was a blistering 4.4 per cent, and driven by surging consumer spending, investment and exports, is projected to be higher still at 5.4 per cent in the final quarter.
Barring a black swan event, this is likely to continue, at least until after the midterms in November. Trump will keep juicing the economy for as long as he thinks necessary to secure his position in Congress.
Trade wars notwithstanding, the rest of the world will inevitably get pulled along in America’s wake. Even the poor old UK economy cannot help but get sucked into Trump’s slipstream. If she gets lucky with growth this year, Chancellor of the Exchequer Rachel Reeves will largely have a rerun of America’s “roaring twenties” to thank for it.
For the UK, the missing ingredient is business confidence, which America has in spades. Continued uncertainty over what fresh fiscal and regulatory horrors the UK government might impose on the nation is holding things back. All the same, at least some part of America’s party mood is bound to rub off.
Sadly, nothing is forever, and for every boom there is inevitably a coming bust. The main elements of the approaching storm are already clearly visible.
In no particular order, the four horsemen of the apocalypse take the form of partially interconnected bubbles in private credit and artificial intelligence, the explosive growth in sovereign debt, and the soaring price of gold, the latter of which is a symptom of financial and geopolitical uncertainty rather than a cause of it.
To these four might be added the “sell America” or “dollar debasement” trade, but that’s a story for another day.
No one can tell you when the clouds will burst, but the excess in financial markets is already everywhere to be seen.
In particular, it is observed in the explosive growth of private credit, a catch-all term for non-bank lending outside public markets. According to HSBC estimates, this has grown from a relatively niche $US40 billion ($57.4 billion) at the turn of the century, to $US1.7 trillion today. Some put it at substantially more.
We must, of course, be careful not to exaggerate the significance of this fast-growing asset class. Compared with the fixed-income market as a whole, worth about $US150 trillion globally, it is still but a pinprick.
But it is also a mecca for the wild west frontier of lending practice, particularly in the US, and almost by definition, it is the sort of credit that the mainstream, highly regulated banking sector will not touch.
Think of it like this: there was a massive, globally orchestrated, regulatory crackdown on banks after the financial crisis of 2008-09 and a “never again” commitment to tame unruly credit markets for good. It was as if a giant rock had been placed in the middle of the stream.
But finance always finds a way, and private credit is one of the conduits through which it has managed to flow around regulatory obstructions since then.
In any case, there’s a reason why many private credit funds are relatively high-yielding; it is because, in many cases, the credit quality is extremely poor. The risk of loss is therefore that much greater.
Increasingly, many of these lending vehicles are based on fantasy valuations which do not properly reflect deterioration in underlying credit quality.
A recent case in point is BlackRock’s TCP Capital Corporation, which last week announced it was marking down its net asset value by nearly 20 per cent after several troubled loans emerged.
This follows a series of similar cases in which asset managers have been slow to admit to the fast-falling quality of their loan portfolios. Come the next downturn, these providers can expect to suffer a disproportionately large share of the resulting losses.
For now, private credit is generally considered not large enough to be systemically important. I wouldn’t be so sure. Much the same thing was said of Collateralised Debt Obligations in the early noughties, only for them to eventually blow up the entire system.
There are similar signs of contagion from private credit into mainstream finance today. Banks have themselves become significant lenders in private credit, providing them with leverage that magnifies losses when loans turn bad.
Private credit has, moreover, been a substantial contributor to the other major bubble in financial markets – the AI investment boom. According to the private equity database Preqin, about $US50 billion of data centre projects were funded by private markets between 2021 and May 2025.
Everyone involved in AI knows it’s a bubble, but like any race for supremacy, it has its own momentum, and if you are not in it, then you may well be out of business altogether in five years’ time.
Sadly, nothing is forever, and for every boom there is inevitably a coming bust.
We don’t yet know who the winners might be, resulting in indiscriminate and excessive investment across all possibilities. It’s very hard to make the numbers add up, even for the superscalers, who will have invested more than $US4 trillion in the technology by the turn of the decade if the present pace of development is maintained.
This is very unlikely to wash its face in terms of return on investment, especially if AI acts as anticipated by substantially cutting employment. In such circumstances, depleted demand would lag far behind abundant supply.
For more evidence of a bubble, just take a look at Mira Murati’s Thinking Machines Lab, which has come from nothing in six months to command a valuation of $US10 billion.
Maybe I’m too much of a dinosaur to properly understand the magical qualities of her product, but to me it looks like pure snake oil.
It’s true that, overall, corporate and household debt relative to gross domestic product has been in steep decline since the financial crisis nearly 18 years ago. But this deleveraging has been more than offset by the growth in sovereign debt, pushing public finances in major economies close to breaking point.
As I say, it is impossible to know when this heady mix of potential negatives might converge into an all-embracing economic collapse, but what we do know is that a boom is always followed by a bust. That’s also what the surging gold price tells us. When other forms of money die, gold still stands.
Telegraph, London
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