## Imminent Signs of Financial Crisis: How Asset Bubbles and Wealth Inequality Could Trigger a Storm

The US household balance sheet shows total assets of approximately $150 trillion, but less than $5 trillion in cash and deposits. This startling mismatch is brewing a potential financial storm.

### Why Assets Do Not Equal Wealth

Many people confuse two key concepts: **the fundamental difference between assets and money**. Assets are easy to create, but that doesn't mean they have real value. Only when assets are converted into spendable currency can their value be realized.

For example: a startup founder sells $50 million worth of shares, with the company valued at $1 billion. The founder becomes a billionaire on paper. But this doesn't mean the company's real assets are worth $1 billion — it's just a valuation figure. Similarly, when a stock trades at a certain price, the entire company's shares are priced at that level, forming a circular valuation system; the actual assets may be far below the valuation.

More critically, **assets themselves are not consumable — only money can be**. When converting assets into usable currency, owners must sell assets. This is the fuse that ignites a bubble burst.

### How Bubbles Form and Burst

Since the late 20th century, the driving force behind soaring asset prices has not been real money but **credit expansion**. Banks can easily create credit, but only central banks can create real currency.

The classic mechanism of bubble formation is:
1. Investors buy assets on credit, incurring debt
2. Debt must be repaid, creating future cash flow demands
3. When repayment needs exceed the cash generated by assets, owners are forced to sell
4. Large-scale selling causes prices to fall, triggering debt defaults

This process was clearly visible during the great bubble of 1927-1929. At that time, the stock market soared not due to genuine earnings growth but because of leveraged buying. Eventually, when interest rates rose and credit tightened, asset holders had to sell stocks to repay debts. The large-scale sell-off caused prices to plummet, leading to cascading defaults and the Great Depression of 1929-1933.

### How Wealth Inequality Worsens Crises

When bubbles burst amid huge wealth gaps, the crisis is not just economic but can evolve into social and political upheaval.

Data shows that the top 10% of Americans hold over two-thirds of total assets, control about 90% of stocks, and contribute roughly two-thirds of federal tax revenue. In contrast, the bottom 60% of income earners own only 5% of assets, hold just 5% of stocks, and contribute less than 5% of federal taxes.

This extreme wealth disparity causes political division during economic booms and social unrest during crises. When Roosevelt took office in 1933, it was precisely income inequality that intensified conflicts between the "rich/right-wing" and the "poor/left-wing."

### Lessons from History: 1933 to 1971

In 1933, Roosevelt's government was forced to break the dollar-gold peg, printing money on a large scale, which caused gold prices to rise about 70%. Subsequent policies included sharply increasing the top marginal income tax rate (from 25% in the 1920s to 79%), raising estate and gift taxes, and expanding social welfare programs. These measures alleviated the crisis but also sparked significant domestic and international conflicts.

A similar pattern reoccurred in 1971 when Nixon's administration, like Roosevelt before, broke the dollar-gold link. Since then, US government spending has consistently exceeded tax revenues, and debt has accumulated steadily. Especially after the 2008 global financial crisis and the 2020 pandemic, the ratio of government debt and debt service costs to tax revenue has risen sharply.

### Current Dilemma: The Trap of Democratic Systems

The US and all high-debt democratic countries face a dilemma:

**Unable to increase debt** — demand for debt in free markets has saturated because debt holders already hold too much debt.

**Unable to raise taxes significantly** — taxing the top 1-10% would cause them to relocate (taking tax revenue elsewhere), or politicians would lose their funding support. Raising taxes on the middle class is also politically difficult.

**Unable to cut spending substantially** — reducing welfare and expenditures is politically and morally unacceptable, as it would disproportionately harm the poorest 60%.

The result is political deadlock. In the past five years, the UK and France have replaced four prime ministers, reflecting this dynamic — politicians promise quick solutions but are replaced after failure, with new leaders repeating the same promises and failures.

### AI Accelerates Divisiveness

The current situation is even more complex. Stock markets and wealth are concentrated in a few "superstar" stocks related to artificial intelligence (such as the so-called "Big Seven"), benefiting a small number of ultra-rich individuals. But AI is also replacing human labor, further widening the gap between assets and money, as well as the wealth gap between people.

History repeatedly shows that this dynamic will eventually provoke strong political and social reactions. Distribution patterns are likely to change significantly, and in extreme cases, could even trigger severe social and political instability.

### The Asset Tax Trap

Given that the wealthiest mainly accumulate wealth through asset appreciation rather than labor income, calls for taxing assets are growing. But asset taxes face three serious issues:

1. **Liquidity dilemma**: US households have total assets of $150 trillion, with only $5 trillion in cash. Taxing 1-2% of assets annually would require over $1-2 trillion, far exceeding current cash flows. This would inevitably force large-scale asset sales, directly triggering a bubble burst.

2. **Implementation difficulty**: Wealth can be transferred to jurisdictions with more favorable laws, making effective taxation impossible.

3. **Unrealistic government efficiency assumptions**: This policy assumes the government can effectively use the revenue to increase productivity among the poorest 60%, which is very difficult in practice.

### Future Warnings

When total assets reach extreme levels relative to the money supply, and wealth inequality is vast, any event that triggers asset sales (such as asset taxes, interest rate hikes, or economic shocks) could set off a chain reaction: forced selling → falling prices → debt defaults → tightening credit → recession → political unrest.

History shows this pattern has existed for thousands of years. The key is to recognize this risk and prepare for significant social, political, and economic changes that may follow.