How Big?

I read a piece that argues that we are in the third largest stock bubble in US history. I don’t dispute the finding, but I would argues that just looking at the US stock market is an excessively parochial view.

This, in my opinion, is the largest bubble in history because it is global, not only in geography, but in asset classes.

There are bubbles in property (China, Canada, Australia, UK to name a few), commodities (industrial and precious metals, oil), corporate and high-yield bonds, sovereign debt (Japan, Eurozone periphery) – and on and on. These bubbles are maintained by a common belief that economic growth and monetary policy will combine to somehow make their pricing reasonable.

This belief is mistaken. Governments are re-doubling the flow of propaganda as they see confidence in their ability to provide economic growth flagging. They have pulled consumption forward by expansion of debt, but the ability to sustain the debt can only come from supply side growth. The BIS has recently pointed this out in a warning to its owners, central banks around the world.

“The temptation to postpone adjustment can prove irresistible, especially when times are good and financial booms sprinkle the fairy dust of illusory riches. The consequence is a growth model that relies too much on debt, both private and public, and which over time sows the seeds of its own demise.”

The seeds of demise are sown by the suppression of savings and their corollary, investment. The symptoms are already visible in declining productivity and real incomes. The blunt problem is that much of the debt that is outstanding, and still being added to, is doomed to default. The consequence will be a world-wide deflationary depression, not the inflationary boom that Keynesian economists have long promised and which still eludes them. It is tragic, but represents the failure of a flawed concept that debt-financed spending will result in sustained economic growth. The sooner the world adjusts to this reality the better off we will all be. While the debt problem has its roots in the turn to socialism that immediately followed WWII, it is in recent years that the most damage has been done as extraordinarily reckless and experimental monetary and fiscal policies have been followed in order to put off dealing with the problems. Naive and foolish people such as Janet Yellen and Paul Krugman are still accorded credibility and authority despite their obvious lack of even basic knowledge about the operation of the financial system and dismal records of failure in forecasting. Until this changes, things will only get worse.

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