The evolution of financial markets from natural cycles to central intervention and its far-reaching effects

I. Introduction: The Rise of Market Intervention and the Decline of Natural Forces

The essence of the financial market lies in achieving resource allocation through price signals. However, over the past two decades, the financial systems of developed economies, especially that of the United States, have undergone profound changes: shifting from respecting natural market forces, business cycles, and price discovery mechanisms to continuous central intervention to support asset prices. This intervention aims to avoid the arrival of an economic “winter” and to pursue a “perpetual summer” in the asset markets. However, the deeper the intervention, the more distorted the market becomes, the weaker the price discovery function, and ultimately, it gives rise to asset bubbles. The internet bubble of 2000, the housing bubble of 2008, and the current market referred to as the “Everything Bubble” all stem from the extreme nature of this logic. After the COVID-19 pandemic in 2020, unprecedented fiscal and monetary stimulus pushed this distortion to its limits. Although major global stock indices reached new highs between 2023-2025, the valuation multiples have reached historical extremes, detached from fundamental support.

This article systematically analyzes the process, mechanisms, consequences, and potential risks of this evolution based on the latest macroeconomic data, central bank policy dynamics, consumer behavior indicators, and wealth distribution statistics.

2. The Historical Context and Quantitative Performance of Market Intervention

2.1 From Greenspan to Powell: The Establishment of the Intervention Paradigm

After “Black Monday” in 1987, Federal Reserve Chairman Alan Greenspan first clearly proposed the “Greenspan Put”: the central bank will intervene to support the market during significant downturns. Since then, each round of crisis has been accompanied by more aggressive interventions:

• The Internet Bubble Burst in 2000-2002

The Federal Reserve lowered the federal funds rate from 6.5% to 1%, and the prolonged low interest rates have led to a real estate bubble.

• 2008 Global Financial Crisis

The Federal Reserve's balance sheet expanded from $0.9 trillion to $4.5 trillion, launching QE1-3, and the federal funds rate was lowered to zero.

• Impact of the Pandemic in 2020

The Federal Reserve's balance sheet surged from $4.2 trillion to nearly $9 trillion within 18 months, while the federal funds rate was brought to zero, and unlimited QE and corporate credit tools were introduced. On the fiscal side, the U.S. Congress passed approximately $5.3 trillion in stimulus measures, accounting for about 25% of GDP.

By October 2025, the Federal Reserve's balance sheet is expected to remain around $7.2 trillion, approximately 70% higher than before the pandemic. The European Central Bank and the Bank of Japan are also maintaining ultra-loose policies, with the total assets of global central banks rising from 10% of GDP in 2008 to over 35% in 2025.

2.2 The upgrade of intervention tools and the dulling of market feedback mechanisms

The intervention tools have expanded from traditional interest rate control to:

1. Asset Purchase (QE)

Directly purchase government bonds, MBS, corporate bonds, ETFs. 2. Forward Guidance

Commitment to long-term low interest rates. 3. Macroprudential Policy

Countercyclical capital buffer, stress testing. 4. Fiscal-Monetary Coordination

Like the helicopter money in the U.S. CARES Act.

The market's sensitivity to intervention has significantly decreased. The “Taper Tantrum” in 2013 caused the 10-year U.S. Treasury yield to soar from 1.6% to 3%; however, in 2022, the Federal Reserve raised interest rates by 500 basis points, and the 10-year Treasury yield only rose from 1.5% to a peak of 5% in October 2023 before quickly retreating, indicating that the market has formed the expectation that “central banks will not allow asset crashes.”

3. Evidence of Asset Prices Detaching from Fundamentals

3.1 Historical Percentiles of Valuation Indicators

As of October 31, 2025:

• S&P 500 Index Price-to-Earnings Ratio (TTM)

28.4 times, historical 97th percentile (since 1928).

• CAPE Ratio (Shiller Price-to-Earnings Ratio)

37.8, second only to 44.2 in 1999.

• Dividend Yield

1.22%, historical 8th percentile.

• Buffett Indicator (Total Market Cap/GDP)

195%, historical 99th percentile.

• Nasdaq 100 Index Price-to-Earnings Ratio

35.6 times, the concentration of technology stocks has reached the highest level since 1968.

3.2 Divergence Between Corporate Earnings and Valuation

The earnings per share of the S&P 500 for the fiscal year 2025 is expected to be $245, an increase of about 40% compared to pre-pandemic levels in 2020, while the index has risen over 150%. The earnings growth is primarily concentrated in the “Magnificent 7”, while the remaining 493 companies only saw a growth of about 15%. Excluding the tech giants, the P/E ratio of the S&P 500 drops to 18 times, close to the long-term average.

3.3 Bond Market Distortion

The actual yield on 10-year U.S. Treasury bonds turned briefly positive in 2022 but is expected to revert to negative (-0.8%) starting in 2024, indicating that investors are willing to accept a real loss in purchasing power in pursuit of nominal safe assets. The credit spread (between high-yield bonds and government bonds) is at its lowest range since 2007, and the default rate on junk bonds is only 3.1%, well below the historical average of 6%.

IV. Structural Amplification of Wealth Inequality

A Huge Gap Between the Mean and the Median 4.1

The Federal Reserve's 2022 Survey of Consumer Finances (SCF) shows that:

• Average balance of retirement accounts for ages 55-64

$537,000.

• Median Balance

$185,000.

• No retirement savings ratio

37% (approximately 48 million).

The 2024 update shows that the median has further dropped to $168,000, with 33% of the population still having no savings.

4.2 Beneficiary Distribution of Asset Price Increase

From 2020 to 2025, the net worth of American households increased from $118 trillion to $165 trillion, a growth of 40%. However, the increase is highly concentrated:

• Top 1% Families

Net assets increased by 55%, accounting for 45% of the total increment.

• Top 10% Households

accounting for 78% of the total increase.

• Bottom 50% households

Net assets grew by only 15%, with less than $30,000 per person.

Stocks and real estate are the main drivers. The top 10% of households hold 92% of stock assets, while the bottom 50% hold only 1%.

Evolutionary risks of the 4.3 K-type recovery towards the I-type economy

The economy shows a K-shaped characteristic after the pandemic: asset holders (the upper part) have seen their wealth surge due to rising stock prices and real estate values; wage dependents (the lower part) are facing the erosion of inflation. If policies continue to favor asset price support, the K-shape may solidify into an I-shape: a very small number of elites (“points”) will be completely disconnected from the vast majority of ordinary people (“lines”), forming a de facto new aristocracy.

5. Real-time Signals of Consumer Financial Pressure

5.1 Retirement account hardship withdrawal surge

401(k) Project Management Agency Vanguard data shows:

• The hardship withdrawal applications in 2024 increased by 42% year-on-year, with a further increase of 28% in the first three quarters of 2025.
• Average withdrawal amount: $12,000, accounting for 15%-20% of the account balance.
• Main reasons: Medical expenses (38%), Preventing eviction/foreclosure (31%), Tuition fees (18%).

5.2 Student Loan Repayment Crisis

After the resumption of student loan repayments in October 2023:

• Total number of borrowers

About 43 million people (the original data of 60-70 million was a miscommunication).

• Overdue Rate

In Q2 2025, it reached 18.3%, a huge increase of 0.5% compared to before the restart.

• 30-day overdue rate

31% (New York Fed data).

• Wage Withholding Case

A year-on-year growth of 380% in the first 9 months before 2025.

Student loans cannot be discharged in bankruptcy, and the government can directly garnish wages, tax refunds, and Social Security benefits, leading to a chain reaction.

5.3 Other consumer credit deterioration

• Credit Card Delinquency Rate (90+ Days)

3.9% in Q2 2025, the highest since 2009.

• Serious Delinquency Rate of Auto Loans

5.2%, the level before the pandemic was 3.8%.

• Mortgage Delinquency Rate

3.1%, though low, has doubled compared to 2023.

The New York Fed Consumer Credit Panel shows that total household debt reached $18.1 trillion in Q2 2025, with a debt-to-disposable income ratio of 98%. Although this is lower than the peak in 2008, interest payments account for 11.5%, the highest since the 1990s.

6. The Appearance and Substance of GDP Data

Distortion of the Inventory Cycle 6.1

In Q2 2025, GDP will grow by 3.0%, but:

• Inventory Contribution

+1.2 percentage points (Q1 was -0.8).

• Final Sales (Excluding Inventory)

Only 1.8%, lower than expected.

• Personal Consumption Expenditure

Only grew by 1.4%, the weakest since 2023.

Inventory adjustments stem from companies hoarding stock in anticipation of tariffs by the end of 2024, entering the destocking phase in Q2 2025, with GDP data being overestimated.

6.2 Leading Indicator Warning

• Leading Economic Index (LEI)

Falling for 30 consecutive months, marking the longest record since the 1960s.

• OECD Composite Leading Indicators

The US sub-index is 98.2 for September 2025, below 100, indicating a risk of recession.

• Yield Curve

The 10-year minus 3-month U.S. Treasury yield spread will turn positive in September 2024, followed by a brief inversion again in 2025.

7. The Accumulation and Trigger Mechanism of Systemic Risks

7.1 Polarized Market Structure

Intervention causes the market to lose its “grayscale”:

• Prosperity Mode

Risk assets are rising together, and volatility is suppressed (VIX average only 13.5 in 2025).

• Crash Mode

Liquidity suddenly dried up, as seen in March 2020 and September 2022.

In April 2025, after a brief 8% pullback in the US stock market, the Federal Reserve quickly restarted repurchase operations, leading to a market rebound within two days and strengthening the expectation of “central bank support.”

7.2 Potential Trigger Points

1. Inflation Resurges

If the CPI returns to above 4%, the Federal Reserve will be forced to raise interest rates significantly, putting pressure on asset prices. 2. Unsustainable Finance

The U.S. federal debt/GDP ratio has reached 133%, with interest expenditures expected to be $1.2 trillion in the fiscal year 2025, accounting for 25% of fiscal revenue. 3. Geopolitics

China-U.S. technology war, energy crisis. 4. Technical Liquidation

Passive ETFs and CTA trend-following strategies account for more than 40% of trading volume, which can easily trigger flash crashes.

8. Policy Choices and Long-term Consequences

8.1 Let the market clear vs. Continuous intervention

In theory, allowing natural clearance can eliminate “zombie companies,” squeeze out bubbles, and restore price discovery. However, political realities dictate that decision-makers tend to “prolong crises:”

• Short-term pain

The unemployment rate may rise to 15%-20%, and housing prices may fall by 40%-60%.

• Long-term Returns

Capital is being reallocated to productive sectors, and valuations are returning to a reasonable level.

However, no incumbent politician is willing to take on the responsibility of a “Great Depression-style” recession.

8.2 The Necessity of Structural Reform

1. Tax Policy

Increase capital gains tax and inheritance tax to curb the intergenerational solidification of wealth. 2. Education and Skills Training

Expand community college and vocational training subsidies. 3. Housing Supply

Relax zoning regulations to increase affordable housing. 4. Retirement System

Mandatory automatic enrollment 401(k), increase the default contribution rate. 5. Antitrust

Split the super platform and restore market competition.

9. Conclusion: The Alarm of Type I Economy

The current financial system has become highly dependent on central intervention, with a severe disconnection between asset prices and fundamentals, and wealth concentration reaching its highest level since 1929. Consumer financial pressure is manifesting in real-time through indicators such as early withdrawals from retirement accounts, student loan defaults, and credit card delinquencies. The contribution of inventory to GDP growth is masking the weakness in final demand.

If the policy continues to prioritize “stability maintenance,” the K-shaped economy may evolve into an I-shaped economy in the next 10-15 years: a permanent divide between a very small number of protected elites and the vast majority of abandoned ordinary people. This structure is not only economically unsustainable but will also lead to social unrest. The only way to avoid this outcome is to proactively adjust policy direction before a full-scale crisis erupts, restore the natural regulatory capacity of the market, and rebuild pathways for equal opportunity.

Only by facing the cost of intervention and abandoning the illusion of a “perpetual summer” can the financial market return to health and the economic cycle regain its resource allocation function. Otherwise, when the next “winter” arrives, it will no longer be a seasonal adjustment but a systemic collapse.