Bubble, Bonds, Boils and Troubles

The world’s central banks face increasing problems when it comes to planning fiscal policies in today’s climate of financial uncertainties, lower gross domestic production levels, or GDPs, and artificially high bubbles that seem to be artificially upholding inflated stock values.

Bubble Finance has Gone to New Extremes

Davidstockmanscontracorner.com recently published a report that examines these issues based on more than 30 years of Bubble Finance policies at the U.S. Federal Reserve Bank and similar pie-in-the-sky analyses of the Bubble Finance policies of other central banks worldwide.

Ever-increasing global debt, bigger government and economic interconnectedness have pushed many governments to the brink of bankruptcy. For example, according to the report, Japan has lost 272,000 of its population while delivering very low yields on 40-year bonds in the first half of 2016.

These Japanese bonds have little prospect of being repaid given that the government now carries a debt of 230 percent of its GDP, or one quadrillion yen. Most analysts predict that Japan will be forced to issue stimulus funds or even inject helicopter money directly into the economy, which would increase the debt even further. That’s just one example of the current problem of central banks accepting overvalued asset prices, or financial bubbles, at face value.

Overvalued Stocks and Bonds Skew Central Bank Planning Globally

In 40 years, Japan will need to fund entitlements for more retirees than are in its work force, but the Japanese government continues to deliver high bond yields that can’t be sustained. The stampede to issue more bonds to stimulate economies isn’t just a Japanese problem as is shown by the following situations:

  • Governments are buying debt, which drives prices higher and yields lower.
  • International investors face bidding wars for bonds that are traditional safe havens and universally available..
  • 10-year U.S. Treasury Bonds recently hit record lows.
  • Subzero yields have become realities for about 20 percent of the world’s total global debt.
  • Swiss negative yields are predicted for 48 years.
  • More debt is now owned by the central banks than is owned by ordinary savers.
  • Ireland recently joined the negative-interest club.
  • Bond prices are rising for no apparent reason other than increasing capital gains for panicked bond managers.

Central banks are promising windfall gains based on economic bubbles that are destined to pop because they’re based on nothing but speculation. This strategy reeks of price-fixing and misleading investors. The European Central Bank has guaranteed to buy qualifying bonds at the rate of $90 billion per month until at least March of 2017, which forces hard-pressed bond managers to recommend buying bonds that are essentially worthless.

Bubbles Pop Because They’re Basically Illusions Composed of the Thinnest Substances

Brookings.edu reports that the U.S. central bank, among others, has begun to rely on finance bubbles–especially since December of 2008–to strengthen the financial recovery, stimulate business and prevent deflation. The strategy seemed to work with limited success because neither hyperinflation nor deflation has occurred, but the economy hasn’t recovered as robustly as hoped.

Instead, the price bubbles have continued to dominate the investment markets while classic economic indicators, such as GDP, employment rates and corporate earnings, remain weak. These issues are fundamental to economic stability over the long-term outlook, and low interest rates create even more bubbles. Comparing the situation to a child blowing bubbles comes to mind–the benefits delight the child at first, but eventually, the bubbles pop, the child grows bored or the supply of soapy water runs out.

The risks of financial price bubbles include possible bankruptcies, uncertainties in the European Union, the return of high oil prices, hyperinflation, fewer investments in alternative energies and bankrupted government entitlement programs such as Social Security in the United States and Japan’s retirement program where fewer working people will be forced to support a larger group of retirees.The volatile European bond market and Japan’s bonds that are pegged to small percentages of their face value could easily generate big crises across a range of industries and essential services. Other central banks seem to be following the Pied Piper of Bubble Finance by continuing to maintain low or negative interest rates to keep their respective economies afloat in a sea of bubbles.

The Long-Term Cost of Asset Price Bubbles

At one time, banks routinely ignored asset price bubbles when planning fiscal policies according to a report posted on Weforum.org. The consensus among economists was that these bubbles didn’t matter because they’d soon burst on their own. However, the economic troubles of 2008 and 2009 changed the minds of many economists including Alan Greenspan, former Chairman of the Federal Reserve, who has advocated for stimulus funds, helicopter money and other fixes based on sustained economic bubbles. Whether this approach will work in an increasingly complex and interconnected global market worries many conservative economists and brings to mind 1980 presidential candidate George Bush labeling Reagan’s policies “voodoo economics.” Find out more about bubble finance, collapsing bond markets and negative interest at the PersonalMoneyStore.com.

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