The credit bubble surpasses 1929! Stock market capitalization accounts for 225% of GDP, doomsday alarm sounds

Economist Henrik Zeberg warns that the global markets are approaching a dangerous blow-off top phase. The S&P 500 has surged 900% since 2009, with US market capitalization reaching 225% of GDP, surpassing the peaks of 1929 and 2000. This prosperity is built on the credit bubble created by zero interest rates and QE after 2008, with productivity and real growth lagging behind, signaling a severe correction as the post-2008 monetary era comes to an end.

The Illusion of Prosperity Manufactured by the Credit Bubble

(S&P 500 blow-off rally, part of the final wave of a long-term bull market, source: Trading View)

In a December 29 article on Substack, Zeberg bluntly states: “The market is standing on borrowed time, having climbed to dizzying heights. The stock market is hitting new all-time highs, investors cheer for paper gains, and risk assets are soaring in a blow-off phase that seems unstoppable. However, this euphoria is built on an illusion—a mirage of prosperity driven by credit.”

The root of this illusion can be traced back to the policy environment after the 2008 financial crisis. Central banks around the world lowered interest rates to zero and launched massive quantitative easing programs. The flood of cheap credit pushed up asset prices across stocks, bonds, real estate, and later cryptocurrencies, but productivity, wages, and real economic growth lagged behind. This imbalance created a strange world: asset prices soared while the real economy stagnated, wealth increased but purchasing power shrank, market value skyrocketed while employment quality declined.

The essence of the credit bubble is the pre-emptive borrowing against future consumption capacity. When central banks push interest rates to zero or negative, the cost of borrowing becomes almost zero, encouraging corporations and individuals to leverage heavily into asset investments. The problem is, these investments do not generate corresponding productivity or income growth; they rely solely on more credit to sustain rising prices. This Ponzi-like structure depends on continuous new credit expansion; once credit growth halts or reverses, the entire system faces collapse.

The imbalance in the US market is particularly stark. The S&P 500 has risen over 900% from its 2009 lows, far outpacing GDP growth of about 70%. Housing prices have surpassed pre-crisis bubble peaks, and many cities’ price-to-income ratios have reached historic highs. Some speculative tech companies, despite weak profits or ongoing losses, are still valued highly, completely detached from traditional valuation logic. Even more extreme, by 2025, the total US stock market capitalization has climbed above 225% of GDP, exceeding the peaks before the Great Depression of 1929 and the dot-com bubble of 2000.

The Deadly Divergence Between Market and Fundamentals

Zeberg points out that the current rally is increasingly detached from fundamentals: as economic growth slows, stock prices continue to rise—this divergence often signals a potential sharp reversal in history. He describes this rally as the final chapter of a credit-driven bull market, with the market nearly vertical after the 2022 dip, a typical late-cycle surge: buying frenzy, but momentum waning.

This divergence occurs on multiple levels simultaneously. Corporate earnings growth slows but stock prices hit new highs; unemployment rises but the stock market climbs higher; consumer confidence declines while risk assets soar. The traditional correlation between economic indicators and market performance is breaking down, a hallmark of the late stage of a credit bubble. Investors no longer care whether companies are truly profitable, only whether more fools are willing to buy at higher prices.

Even more dangerous is the market’s blind faith in the “rescues” of central banks. Zeberg emphasizes that years of frequent interventions by the Fed and other central banks have fostered complacency, encouraging excessive leverage and speculation, and weakening risk discipline. Every time the market shows signs of correction, investors expect the central bank to step in and save the day. This “moral hazard” has become ingrained. The problem is, central banks’ ammunition is not unlimited; when inflationary pressures rise or fiscal deficits spiral out of control, they may be forced to tighten policies, leaving markets accustomed to easing policies at a loss.

Three Major Crash Triggers

The Chain Reaction of Rate Normalization: If central banks are forced to raise interest rates sharply to combat inflation, the era of cheap credit will end. Refinance costs for companies will skyrocket, zombie firms will go bankrupt en masse, and asset prices will plummet without credit support.

The Domino Effect of Debt Defaults: Global debt-to-GDP ratio has hit record highs. An economic downturn causing income declines will leave corporations and governments unable to service their debts. A freeze in credit markets could trigger a liquidity crisis, reminiscent of the Lehman moment in 2008.

Sudden Collapse of Market Confidence: When investors realize that the prosperity is just a credit illusion, panic selling could wipe out trillions of dollars in market value in a very short time. With stock market cap exceeding 225% of GDP, there is enormous room for a correction, with declines potentially exceeding 50%.

The End of the Post-2008 Monetary Era

Zeberg warns that a significant portion of the “surface wealth” in the system is built on credit, making it highly susceptible to reversal. As business cycles reassert themselves, he predicts that the long-term consequences of excessive monetary easing will suddenly surface, exposing market fragility and setting the stage for a severe correction—potentially marking the end of the post-2008 monetary era.

This end does not mean a systemic collapse, but a fundamental shift in policy paradigms. The zero interest rate and unlimited QE mode of the past 16 years has reached its limit; central banks will be forced to acknowledge the limits of monetary policy. Future developments may include stricter fiscal discipline, higher interest rate centrality, and reduced tolerance for asset bubbles. For investors accustomed to “buy and hold forever rising,” this will be a painful adjustment process.

For ordinary investors, Zeberg’s warning provides clear risk signals. When market cap exceeds GDP peaks of 1929 and 2000, history suggests what might happen next. Wise strategies include reducing exposure to risk assets, increasing cash reserves, and avoiding high leverage. The credit bubble will eventually burst; the only questions are when and how.