'Now it’s a global Bubble, with all the issues of financial fragility, economic maladjustment, and wealth redistribution on an unprecedented scale.''The unprecedented buildup of speculative leverage throughout the twenties boom played an instrumental role in systemic liquidity abundance that fueled both financial distortions and economic maladjustment. Confidence in the Federal Reserve’s capacity to sustain marketplace liquidity was instrumental in bolstering a progressively speculative market environment that culminated in the 1927 to 1929 speculative blow-off.
There are those who believe the Federal Reserve should have acted even more aggressively when subprime cracked in mid-2007. More aggressive stimulus measures (why not QE in 2007?) and a Lehman bailout would have averted the “worst financial crisis since the Great Depression.”
As the late Dr. Kurt Richebacher would often repeat, “the only cure for a Bubble is to not let it inflate.” Certainly, the longer Bubbles expand the greater the underlying fragilities – ensuring timid central bankers unwilling to risk reining in excess. This was the problem in the late-twenties and in 2006/2007. I would argue this has been a fundamental dilemma for central bankers persistently now for going on a decade. Especially after the Bernanke Fed targeted risk assets as the key reflationary mechanism, central banks have been loath to do anything that might risk upsetting the markets. Remember the 2011 “exit strategy” – promptly scrapped in favor of another doubling of the Fed’s balance sheet to $4.5 TN (by 2014).
From my analytical perspective, things have followed the worst-case scenario now for over three decades. Alan Greenspan’s assurances and loose monetary policy after the 1987 crash spurred “decade of greed” excesses that culminated with Bubbles in junk bonds, M&A and coastal real estate. The response to severe early-nineties bank impairment and recession was aggressive monetary stimulus and the active promotion of Wall Street finance (GSEs, MBS, ABS, derivatives, hedge funds, proprietary trading, etc.).
Once the boom in highly speculative market-based Credit took hold, there was no turning back. The 1994 bond bust ensured the Fed was done with the type of rate increases that might actually impinge speculation and tighten financial conditions. The Mexican bailout guaranteed fledgling Bubbles would run wild in Southeast Asia and elsewhere. The LTCM/Russia market “bailout” ensured Bubble Dynamics turned absolutely crazy in technology stocks and U.S. corporate Credit. Things took a turn for the worse following the “tech” Bubble collapse. With Wall Street cheering on, the Federal Reserve fatefully targeted mortgage Credit as the key mechanism for system reflation. A doubling of mortgage debt in just over six years was one of history’s more reckless monetary inflations. The panicked response to the collapsing mortgage finance Bubble fomented by far the greatest monetary inflation the world has ever experienced: China; EM; Japan; Treasury debt; central bank Credit; speculative leverage everywhere…
The “global government finance Bubble” saw egregious excess break out at the foundation of finance – central bank Credit and sovereign debt. It was a “slippery slope”; no turning back. The sordid history of inflationism has been replayed: once monetary inflation commences it becomes virtually impossible to stop. There was barely a pause in the ECB’s $2.6 TN QE program before the electronic “printing presses” were fired up again. The Fed’s balance sheet inflated from less than $1.0 TN pre-crisis to $4.5 TN. After contracting to $3.7 TN this past August, it’s now quickly back above $4.0 TN. The Bank of Japan hasn’t even attempted to rein in QE, with assets at a record $5.3 TN – up from the pre-crisis $1.0 TN.
Believing “THE” Bubble had burst in 2000, the Fed saw no basis for not aggressively “reflating.” The Fed and global central bankers were convinced “THE” Bubble collapsed in 2008. It would be reckless not to proceed with history’s greatest concerted monetary inflation. “Whatever it takes” was necessary to save the euro and European integration. Globally, the scourge of deflation has apparently been lurking around every corner – for a decade. It was imperative for the Bank of Japan to demonstrate absolute resolve.
Things got completely away from Beijing. Having studied the Japanese experience, they failed to grasp the necessity of quashing Bubble excess early. Over time, GDP targets, global power dynamics and the fear of bursting Bubbles took precedence. As it turned out, the greater their Bubble inflated the more heated the U.S./China rivalry. In theory, it seemed reasonable to let air out of the Bubble gently. In reality, powerful Bubbles only scoff. As conspicuous as debt excesses and economic maladjustment became, “structural reform” took a backseat to negotiations with Donald Trump. A key Credit Bubble adage comes to mind: There’s never a convenient time to deflate a Bubble.
..
Evidence and anecdotes continue to support the thesis of unprecedented global leverage having accumulated throughout this most protracted boom cycle. People’s Bank of China liquidity injections stabilized China’s money market. Federal Reserve Credit expanded $293 billion in 12 weeks, pacifying U.S. overnight “repo” funding markets. But there’s a major problem: distorted markets and central bank backstops have afforded blank checkbooks to governments around the world. The U.S. Treasury is poised to run Trillion dollar deficits for as far as the eye can see. And so long as markets are fearing trade wars, recession and deflation, downward pressure on bond yields keeps the game chugging along.
Yet the possibility of a trade agreement, economic expansion and some inflationary pressures could prove problematic. Rising bond yields would put pressure on highly leveraged and vulnerable markets. In all the discussion of “repo” market issues and challenges, the key point is somehow missed: Accommodating and promoting a market that finances speculative leveraging virtually guarantees problematic Bubbles. How could this lesson not have been learned in 2008? Now it’s a global Bubble, with all the issues of financial fragility, economic maladjustment, and wealth redistribution on an unprecedented scale.'
- Doug Noland,
Crazy Extremis, December 7, 2019
ContextAmerica's Great Depression'..the most extreme, pre-collapse yield-seeking bubble in U.S. history! With lower return prospects than Aug 1929!'