Growing Contradictions Between the Real Economy and Financial Markets the significant gap has emerged between the real economy and financial markets

In recent years, a significant gap has emerged between the real economy and financial markets. This growing discrepancy raises numesignificantrous questions and concerns regarding the stability of the global economy. While stock markets are reaching new all-time highs, many economies—including China, Germany, and the United States—are grappling with substantial structural problems. A closer look at developments in these countries highlights the extent of these contradictions.

China’s Banking Crisis and Government Intervention

For the first time since the 2008 financial crisis, China has announced that it will inject $142 billion into its largest banks. This move underscores the precarious state of the Chinese financial system. Government intervention had artificially inflated China’s real estate market by forcing banks to provide low-interest loans for property purchases. However, this led to a surge in bad loans as many borrowers can no longer service their debt. The state is now forced to intervene once again to prevent the banking system from collapsing—a classic example of the risks associated with an intervention spiral, where one government intervention necessitates further actions to address the consequences of the previous one.

USA: Rate Cut Despite a Strong Economy?

While China is compelled to intervene to stabilize its financial system, the U.S. economy appears to be thriving at first glance. Yet, the Federal Reserve, under Jerome Powell, has surprisingly cut interest rates by 0.5%—a much larger step than anticipated. This move comes despite an officially strong economy, raising concerns about the true stability of the U.S. economy. There is growing fear that this drastic rate cut could lead to a resurgence of inflation in the long term, a concern already reflected in rising market expectations.

Germany: An Economic Dead End

The situation in Germany is particularly dire. Despite an all-time high in the DAX, the German economy is in deep crisis. Exports, especially to China and the U.S., have significantly declined, underscoring Germany’s dependence on these two markets. Additionally, deindustrialization is slowing growth, and large companies like BASF are scaling back their operations to focus on their core businesses. These developments are exacerbating Germany's already strained economic situation.

A “Crack-up Boom””?

Given these contradictory developments, the question arises whether we are in the midst of a so-called “crack-up boom.” This term, coined by the Austrian School of Economics, describes a short-term economic upswing fueled by inflation and excessive monetary policy, before the underlying contradictions in the economy become apparent, leading to a collapse. The current situation, especially the gap between stock markets and the real economy, could be pointing to such a scenario.

Further Developments in the U.S.

In addition to the economic contradictions in the U.S., political tensions are also influencing the markets. According to a new poll from Quinnipiac University, Donald Trump is currently favored to win the "popular vote" in the United States. If Trump is re-elected, it could further exacerbate the already tense situation, as his policies of deregulation and corporate tax cuts may benefit the stock markets in the short term but fail to address the structural problems of the U.S. economy in the long run.

Conclusion: A Dangerous Gap Between Markets and the Economy

The gap between financial markets and the real economy is growing wider. In China, the consequences of government intervention are becoming apparent, while in the U.S., massive rate cuts are being implemented despite a strong economy, raising doubts about long-term stability. Meanwhile, in Germany, the economic crisis is becoming increasingly evident, and the risk of deindustrialization is growing. How these contradictions will unfold in the coming months remains to be seen—one thing is certain, though: markets cannot remain detached from the real economy forever.