Welcome to the Everything Boom, or Maybe the Everything Bubble

Neil Irwin writes in the NYT here.

21 replies on “Welcome to the Everything Boom, or Maybe the Everything Bubble”

But surely it’ll be OK if interest rates stay at nothing for a decade. What could possibly go wrong?

Paul De Grauwe on Vox today:

‘There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio’

The piece is implicitly a nice argument for large-scale government investment programmes (but in things that we need, not duplicate motorways in programme countries).

Say if interest rates rose suddenly to 100% per annum–how much would asset prices fall?

‘The phenomenon is rooted in two interrelated forces. Worldwide, more money is piling into savings than businesses believe they can use to make productive investments. At the same time, the world’s major central banks have been on a six-year campaign of holding down interest rates and creating more money from thin air to try to stimulate stronger growth in the wake of the financial crisis. ‘

Problem One is the financialisation of the real economy. Big Four audit firms and their CFO cronies are having a laff with corporate governance.
Problem Two is the capture of central banks by the plutocrats. A global central bank bust will be the economic equivalent of a nuclear winter.

Doug Noland has it taped.

‘After five years, the proliferation of all varieties of instruments, products and strategies have combined with Fed policies and market assurances to create the perception of “moneyness” for all types of risk assets. Endless cheap liquidity, inexpensive risk insurance and profound faith in central bank market backstops have evolved into an all-powerful market phenomenon – I would argue history’s greatest mispricing of finance’


Look on the bright side: No matter how much cash and credit central banks issue, as long as the ordinary man on the street struggles to get his hands on it, the value of money will always have a minimum below which it cannot drop. Hyperinflation isn’t possible if people aren’t allowed money in their pockets in the first place.

What we are doing is essentially rendering every price reasonable by dividing by as small a number as is needed and, hey, zero, if necessary.

Everybody knows this and in addition the forward curve has been nicely brought into line as the egos of the inflation hawks have been deflated. Everybody is on for the ride and the music Chuck Prince once referred to is expected to continue for years.

Worth bearing in mind though that systems can be encouraged to become unstable if target metrics are reached by employing ever smaller denominators.

“Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.”

That last line misses an important point. It should read:

“The inverse of that is relatively low returns for NEW investors.”

(Comparatively) ‘old money’ already had its investments made and has at the very least retained the yields it locked in, while making high capital returns. It is this that has made the official attempts to engineer perma-bubbles acceptable amongst ‘people like us’.


‘…That last line misses an important point. It should read:

“The inverse of that is relatively low returns for NEW investors.”…’

Despite the fact that you posted that comment at close to 1 in the morning it makes a point that is rarely made in the mainstream. The insiders are sitting pretty – those faced with the task of securing a return for the long term today are in a very difficult position. If however one refers to the good ship of John P. Hussman then now is not the time.


@ YoB

Even the insiders will have to get out. It’s all about timing.
And growth prospects are very poor for afterwards.

Another point is that if there’s another blowup most Governments haven’t got the bond capacity to mop things up again.

@ PQ

It is hard to see any flaws in the analysis to which you linked.

“The critical lesson is that central bank-induced market excess can over a protracted period transform a marketplace from an effective self-adjusting/correcting mechanism into a dysfunctional speculative Bubble where Excess Begets Excess.”

Maybe someone has a plan although I doubt it! The best that can probably be hoped for is that that the bubble will slowly deflate rather than pop.

What should central banks do if all their cheap money bids up existing assets rather than being used to create new assets?. The initial response is to try and deal with some specific asset markets that are deemed to be ‘bubbly’ with macro-prudential tools ,as in the UK where (limited) controls have been introduced on mortgage lending. The BIS, for one, doesn’t believe these tools will be enough and can’t take the effective place of tighter monetary policy.

Another issue is where we are in the Minsky credit cycle- the article implies we may well be in the euphoria/overtrading phase, at least in some markets, although Yellen and the majority of the Fed seem to believe we are still in the healthy expansion phase. If the former is true liquidation/panic is the next phase but history suggests that ‘irrational exuberance’ can last a long time. That liquidation would also probably require Yellen to change tack and start to tighten policy earlier than expected.

I suspect we are seeing something a little different to a regular Minsky credit cycle here. In Minsky’s framework, asset prices are bid up through private sector leverage in the euphoria/overtrading phase. What we are seeing now looks more like asset prices being bid up indirectly by public sector leverage, with low interest rates mainly acting to restrain private sector deleveraging.

Classic trickle up economics. Print money, to help avert disaster, give it to those that have it, dispense in a fashion directly proportional to how little they contribute to society, if they are harmful, better still.

They use it to bid up asset prices but not add to inflation significantly cos the little guy is still shopping in the €2 store due to his pay decrease for ‘competitiveness’ reasons and tax increase to pay for the last crisis (that the guys with the money caused).

Though, of course, his rent is going up because someone has to pay a return to the guys buying the assets with the free money and anyway ‘competitiveness’ only applies to driving down wages and working conditions.

@John Foody

“Print money, to help avert disaster, give it to those that have it, dispense in a fashion directly proportional to how little they contribute to society..”

Great description of QE as currently practised. It’s like a golden Aladdin’s carpet for the wealthy. They can’t lose. A investor’s pawn shop that gives 100% + value of investments.


Greenspan reduced interest rates after the DotCom bubble with a view to inflating a superior bubble that would make speculators whole again. Big miscalculation there. Today the QE program is attempting to inflate the dollar to the point where debt in dollars evaporates and the banks are sustained. The unintended consequences from this policy will be; the demise of the dollar and the end of US hegemony. Or perhaps that has been the plan all along? Maybe we should be cheering?

Ireland unfortunately will sink like a stone.

Leverage is only possible in speculation phases as a result of fractional reserve banking counterfeiting processes. Minsky did not seem to accept the Austrian thesis that all speculative bubbles are solely driven by this Central bank issuance of more counterfeit currency. All Keynesian’s are wrong on this. Who doubts this now?

Regulation may have a dampening effect on speculation somewhat, but sound money policies and real interest rates do the trick better.

@Foody +1

We are a frightful place at present. Debt is still escalating off the charts. We should be feverishly pursuing a crypto-currency based solution. In effect individuals are by-passing the banking system/government anyway. Bitcoin is our only real hope it seems to me.

Comments are closed.