Bubble Economics Are Not Sustainable
By Staff News & Analysis - May 24, 2013

Don't fear the bubble …The bubblista side of the argument, at heart, says that the flood of money being poured into the global economy by the world's central banks is driving up asset prices to well beyond fundamental valuations, and that if and when valuations revert to sanity, the unwind (the "burst") could be disastrous in all manner of unpredictable ways. This is a prediction which is very easy to make, not least because it has no time stamp associated with it. Tett, indeed, says that "these distorted conditions will remain in place far longer than most people expect", which is little a bit weird: the whole reason why assets are expensive is precisely because, as Krugman says, "long-term rates are low because people, rightly, expect short-term rates to stay low for a long time." – Reuters

Dominant Social Theme: All this talk about bubbles is self-defeating. Western economies are recovering.

Free-Market Analysis: This Reuters editorial takes the position that bubbles are not destructive because short-term interest rates are the result of people's expectations, not of financial manipulation.

This is untrue and ignores neo-classical economics. Interest rates will inevitably rise as money floods the system and causes price inflation. History and rational economics shows us this clearly.

The argument is circular. Rates won't rise because they haven't risen. That's what this article suggests consumers believe. But do they? Rates certainly rose in the late 1970s and early 1980s and they will again.

Too much money printing is inflationary and leads to price inflation. And then central bankers will be forced to control the money supply. They will do it clumsily, as they always do, and make a bad situation worse.

This opinion piece acknowledges none of that. Here's more:

… There does seem to be consensus here: low interest rates, across the curve, are causing asset prices to rise, around the world. Is that prima facie evidence of a bubble? I'd say clearly not. The first job of financial markets is to be a place where you can convert future cashflows into a present-day lump sum, and that lump sum is naturally going to be higher when interest rates are low.

Similarly, if and when interest rates start to rise, asset prices may well start to fall. But that's just what financial markets do: they go up, and they go down. Not every rise is a bubble, and not ever fall is a bubble bursting. The word "bubble", at least for me, is a loaded term, with a specific meaning.

For one thing, it implies speculation: people buying an asset which is going up in price, just because they think they're going to be able to sell it to a greater fool at a substantial profit. The dot-com bubble was a prime example of that, with investors jumping onto high-flying technology stocks not because they thought the stocks were cheap but just because they thought the stocks were rising, and that they could make money day-trading these things.

Much of the housing bubble looked like that too: you could buy a tract home in Phoenix with no money down, hold on to it for a few months, and then flip it for a substantial payday — even if you never expected to live in it. And certainly the bitcoin bubble fits the bill: pretty much the only reason to buy bitcoins and hold them for more than about 10 minutes is that you think they're going to go up in value and that you'll be able to make money as a result.

The bubble-worriers have something else on their minds — something more moralistic. They see the rich getting a free lunch: central banks dropping money from helicopters, most of which is going directly into the pockets of the top 1%. That isn't fair, and they are sure that there's some kind of cosmic karma which means that wherever there's a party, there's bound to be a hangover.

The view that "we have to pay a price for past sins" is nearly always wrong, and in any event the only real sin being committed here is that the rich aren't sharing their good fortune with everybody else … For the time being, the most likely scenario is that when asset prices start to fall, the main people to be hurt will be the ones owning the assets in question. In other words, the people who can best afford it.

No, no. Financial manipulation does have consequences, certainly in the long term, and morality has nothing to do with the predictions we can make about central bank price fixing of the value and volume of currency.

For instance, the US government owes a tremendous amount of money to creditors. If interest rates go up even a little bit, the costs of carrying this money apparently become untenable. The result is that the Fed must continue to print money at a rapid rate or risk the total unwinding of the US economy from a sovereign standpoint.

And then, of course, we must take into account the volume of money itself. Money-stuff itself has properties just like any other commodity. Too much of it devalues the rest, causing price inflation. Not to acknowledge this is to flee reality, in our humble opinion.

After Thoughts

There is a financial bubble in the West – once again – and it WILL have consequences.

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