1921–1929 All Over Again: Why the Boom Continues—and How the Crash Eventually Arrives (Part 1)

We have consistently argued that the current market cycle closely mirrors the early 1920s—a post-crisis reset marked by real productivity gains, capital deepening, and the emergence of a transformative general-purpose technology. Just as electrification reshaped the economy a century ago, artificial intelligence is driving durable earnings growth and supporting higher asset prices, while tokenization will accelerate markets into a more speculative regime, a thesis we have laid out in detail in earlier publications (link and link). Viewed through that lens, the market’s advance into the latter half of the decade is well underway.

In that context, the market now appears to be entering what historically has been the third leg of a major secular advance, a phase characterized by broadening participation, rising capital investment, and increasing speculative activity layered on top of real growth. If the historical analogue holds, this stage should carry equities materially higher through 2026 and 2027 into 2028, as productivity gains translate into expanding margins and financial conditions remain supportive. Importantly, this phase tends to feel strongest just before underlying imbalances become visible.

However, as the 1920s ultimately demonstrated, even a powerful expansion can unravel when underlying structural imbalances are pushed too far, an outcome that may again define how this cycle eventually ends.

The Hidden Fault Line: China’s Debt System and the Modern Credit Trap

The market’s strength over the past several years is not an illusion. Like the early 1920s, the 2020s are being driven by genuine productivity gains, technological acceleration, and capital deepening. Artificial intelligence is playing a role similar to electrification a century ago by reshaping business models, lifting earnings power, and justifying higher asset prices.

This is why the bull market can plausibly extend into the latter half of the decade. Growth has been real, profits have followed, and balance sheets, particularly in the U.S., remain far healthier than most investors assume.

But history is clear on one point: major market crashes rarely begin where conditions look strongest. They emerge from structural imbalances beneath a successful expansion, often far from equity markets themselves.

In the 1920s, the vulnerability wasn’t Wall Street speculation. It was a fragile global financial system strained by European war debts, gold standard rigidity, and trade imbalances that ultimately snapped under pressure. Today, a comparable fault line is forming, quietly and incrementally, inside China’s debt system.

China Is Not Japan 1990—and That Distinction Matters

For years, China’s slowdown has been compared to Japan’s post-bubble stagnation. The analogy is comforting, because Japan managed to muddle through decades of low growth without triggering a global crisis. But the comparison breaks down under scrutiny.

Japan entered its lost decades with one crucial advantage: wealth. Japanese households held large pools of financial assets, domestic savings were abundant, and the country was a net external creditor. Even as growth slowed, Japan could absorb losses internally without destabilizing the global system.

China’s position today is fundamentally different.

Household wealth in China is overwhelmingly concentrated in real estate, an illiquid asset class that is now in secular decline. Financial assets are comparatively scarce. Capital controls restrict diversification. And unlike Japan, China does not enjoy a large stock of freely deployable external wealth that can cushion internal deleveraging.

This means China’s challenge is not merely slow growth. It is balance-sheet fragility in a system with limited release valves.

The Sovereign–Bank–SOE Doom Loop

At the core of this fragility lies a reinforcing cycle between the state, the banking system, and state-owned enterprises (SOEs).

SOEs remain central to China’s economic and political model. They are maintained not because they maximize returns, but because they preserve employment, social stability, and strategic control. As growth slows and profitability declines, these enterprises require increasing amounts of credit to stay afloat.

Banks, in turn, are compelled explicitly or implicitly, to supply that credit. Loans flow into low-return projects. Net interest margins compress. Capital adequacy erodes, not through sudden defaults, but through years of poor returns.

To stabilize the system, the central government steps in, recapitalizing banks through bond issuance. Those bonds are then purchased, directly or indirectly, by the same banking system using household deposits. The result is a closed loop: state debt replaces corporate losses, banks hold that debt, and households bear the cost through suppressed returns on savings.

This is financial repression, not crisis. And it can persist for a long time. But it comes with a cost: stress is not resolved, only stored.

Why This Is Bigger Than the Property Crash

Much of the focus on China has centered on the collapse of the property sector. That focus, while understandable, understates the problem.

Real estate represents roughly 40–50% of China’s economy when related industries are included. The downturn has been severe. But property is only one channel through which leverage accumulated.

The sovereign–bank–SOE loop is larger. Estimates suggest its effective exposure exceeds 200% of GDP when explicit and implicit liabilities are considered. Unlike property, this system has no clearing price. There is no bankruptcy mechanism that can reset valuations. There is no politically acceptable path to widespread defaults.

Every quarter that growth remains below trend, the system absorbs losses internally. Debt rolls forward. Returns decline. Balance sheets weaken incrementally. The problem compounds quietly.

This is why the system appears stable, until it isn’t.

Capital Flight in a World That Didn’t Exist Before

In the 1990s, Japan’s capital was largely trapped at home. Today, China operates in a vastly different financial environment.

Digital assets, offshore structures, tokenized commodities, and informal capital channels provide avenues, imperfect but meaningful, for wealth to leak out of the system. Capital controls slow these flows, but they no longer stop them.

Paradoxically, the mechanisms designed to preserve stability may shorten the adjustment timeline. As households and firms seek protection from repression, pressure builds on reserves, currency stability, and policy credibility.

The system remains intact, but increasingly rigid. And rigid systems don’t fail gradually.

The Fault Line, Not the Trigger

None of this implies an imminent crisis. In fact, the very ability of China’s system to internalize losses helps explain why the global expansion can continue for several more years. Stress is being absorbed, not released.

But fault lines matter because they determine how a shock propagates when it arrives.

In the next part of this series, we will examine the external forces such as trade, geopolitics, and global capital flows, that could close China’s remaining escape valves and convert stored stress into a global market event.

The crash, when it comes, will not be caused by overvaluation or fading growth. Like 1929, it will be the consequence of a system pushed beyond its capacity to absorb imbalance.