Economy Bubble?

Entrr · Apr 30, 2013

His advice these days to tycoons and small investors alike is simple and direct. For heaven's sake, seek safety. Preserve your capital. "Keep what you have."

To Grant, the central banks' money printing has distorted the financial universe beyond any sensible dimensions.

The Federal Reserve alone is churning out $85 billion a month, or just over a $1 trillion a year. The combined balance sheets (which reflect created money) for the European Central Bank and the 17 individual banks of the eurozone stand at $3.45 trillion.

The Bank of England, the most energetic money printer in the world relative to the size of the economy it serves, has printed £375 billion (roughly $576 billion US), and is probably going to print more. The Bank of Japan has just launched an aggressive money-printing program of its own, planning to double the size of its balance sheet within two years.
The surge in 'new money' on central bank balance sheets since 2008.The surge in 'new money' on central bank balance sheets since 2008. (International Monetary Fund)

In all, at the end of 2012, the balance sheets of the world's largest central banks, those of the G20 nations and the eurozone, including Sweden and Switzerland, totalled $17.4 trillion US, according to Bank of Canada calculations from publicly available data.

That is nearly a quarter of global GDP, and slightly more than double the $8.5 trillion these same institutions were holding at the end of 2007, before the financial crisis hit.

The idea behind all this central bank largesse is to reflate the world's money supply after the disastrous meltdown of 2008 and, at the same time, push interest rates down as far as possible in an attempt to get people — and companies — borrowing and spending again.

To date, however, the results have been mixed. The U.S. economy has been inching forward, while Britain's is teetering on a triple dip into recession. Much of Europe is also deep in recession and sinking under the weight of high unemployment.

Whether the massive money-printing program known as quantitative easing has prevented an even worse situation is debatable. But this much is certain: It's simply impossible to unleash such economic forces without serious consequences, intended and unintended.
Bubble economies

Just about everyone agrees the Dow Jones industrial average — the measure of blue-chip America — did not reach an all-time high recently because of vibrant economic growth or fabulous performance by the companies listed in that index.

Markets are where they are principally because the Federal Reserve has been gobbling up U.S. treasury bills, the safest investment on Earth, in a deliberate attempt to force private investors into riskier assets, like stocks.

It's a high-stakes form of market engineering.

The Fed has been acting in rare concert with central banks worldwide to encourage borrowing and spending — and risk. And because all the new money being unleashed has to flow somewhere, it's been flowing, among other places, into the equity markets.

At the same time, the super-low interest rates resulting from all this money printing have heated up real estate markets in big cities worldwide — Toronto and Vancouver being perfect examples.

Grant says the markets and governments have developed an addiction to easy, cheap money to finance irresponsible borrowing.

"All this printing of money is creating a market that rests on a fantasy," he says.

For the first time ever, there isn't a single bubble out there, but an "entire world in a bubble. Every asset class, everything you can think of. Everything is in a bubble and something is going to prick it.

"The party," he says with great certainty, "is going to end."
An enormous bet

Think-tank economists, who rely on econometric models and speak a language so encoded as to be incomprehensible to most people, tend to look down their noses at analysts like Grant, referring to them as "the newsletter crowd."
Cheap credit is fuelling stock market runs and new home buying in much of North America. But in places like Spain, bank problems have led to repossessed homes, little construction and huge protests in the streets.Cheap credit is fuelling stock market runs and new home buying in much of North America. But in places like Spain, bank problems have led to repossessed homes, little construction and huge protests in the streets. (Associated Press / Reuters / Reuters)

But Grant has shown prescience. He was among the very first to predict Greece's financial implosion, and he has correctly pointed up the book-cooking and outright fraud in other eurozone economies.

He is also far from the only one contemplating a bad ending.

Recently, the Bank of International Settlement in Basel echoed Grant's concern that markets are developing an easy-money habit; and the International Monetary Fund just published a paper acknowledging the possibility of all this money printing (which it calls "monetary policy plus") creating widespread bubbles and difficult adjustments down the road.

Ros Altmann, a pension manager and a governor of the London School of Economics, compares quantitative easing to treating a sick patient with medication that doesn't work, and then, when the patient gets sicker, administering even more.

"It must stop," she says. "It is hugely dangerous. I think history will judge this period very harshly."

Still, the central bankers have at least as many fans as they do critics.

Don Johnston, the former president of the Treasury Board in the Trudeau government and a former director of the Organization for Economic Co-operation and Development, admires them greatly.

"I think they have more credibility than politicians," he says, "and it's been very fortunate that nearly all central banks are independent of the political arm."

Johnston concedes that the central banks' power at the moment is "immense." But he adds: "We had a big fire, and they absolutely had a critical role to play, and they played it, I think, extremely well."

Still, even Johnston, with his deep experience in government finances, allows that he doesn't fully understand the complexities of today's monetary policy, and the arguments for or against opening the spigots as much as they have been.

By acting in concert to push the world in the same direction, the central bankers have made some enormous bets. And, says Johnson, "they'd better be right."

The trouble is, they've been wrong in the recent past.

Central bank economic forecasts in recent years have sometimes been well off the mark, meaning they, too, can be acting on mistaken assumptions.

Also, even someone as seemingly omniscient as Alan Greenspan, the Federal Reserve chief through the Bill Clinton and George W. Bush years, publicly admitted his blunder in refusing to regulate the murky world of credit default swaps, which acted as accelerant in the 2008 disaster.
How to 'unwind'

Conservative economists have predicted for years that expanding the money supply will inevitably lead to inflation, or even hyperinflation. That, of course, has not happened in this instance, mainly because there's been so little economic growth and because the world is awash in the production of consumer goods.
Stability risks

In a recent report, the International Monetary Fund sets out three big "stability risks" it sees in unwinding all this quantitative easing:

That a prolonged period of low-interest rates might affect the solvency, and maybe the level of risk-taking, of banks, pension funds and life insurance companies that require regular yield to keep afloat.
That, conversely, a quick interest rate spike could weaken loan performances and also hurt banks' bottom line.
That unco-ordinated exit plans by the central banks might lead to currency devaluations and trade wars if certain central banks and their governments decide to go their own way.

But the big question, nearly everyone agrees, is whether the central banks can "unwind" the unprecedented situation they've created without massive disruption (not least to their own balance sheets, which are now stuffed with long-term, low-interest bearing bonds as part of the quantitative easing).

It's an impossible question to answer.

The financial markets scrutinize the abbreviated minutes after every meeting of the Federal Reserve committee that authorizes QE, looking for any sign money printing is about to end.

That ending would signal a rise, perhaps even a sharp one, in interest rates, which could hit the housing market hard.

Homeowners with only a small amount of equity and who are already stretched to the limit would be sorely stressed.

Significant interest rate changes could also affect banks, pension funds and insurance companies, as well as small businesses that have been relying on cheap credit to expand payrolls.

And higher interest rates would also slam into government budgets. Politicians have come to rely on cheap money to finance their borrowing and spending.

Of course, the top people at the Bank of England, the Federal Reserve and the Bank of Canada all argue a return to normalcy can be managed.

Just as the central banks have the power to create money, says Canada's Mark Carney, they have the power to pull money out of the system, and will, slowly, as growth returns.

They can begin selling off the assets they've bought with all this new money, and they have the all-important power to set central interest rates. If growth takes off, in fact, they will have to do those things in order to contain inflation.

But no "unwind" will happen soon, says Carney. "The repair is ongoing."
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Source: http://www.cbc.ca/news/politics/story/2013/04/29/f-rfa-macdonald-power-shift-growth.html

Tl;Dr: Due to the mass amount of money printing being done in the world today inflation is occurring and a bubble affect which is causing markets to rise will burst and stocks will plummet.

Discuss. I haven't formed an opinion on this yet as I'm not exactly super educated in the subject just curious on peoples opinions.

Entrr · May 23, 2013

Small dip in markets today. Also bumping this to hopefully get some discussion on this.

S · Jun 22, 2013

Just did my finals in economics on finance on something similar. More so on the issues of short selling securities and how the share market has saturated due to entities using it as an asset enhancer.

I'll write up what I initially wrote during my prac exams shortly.

Plznate · Jun 22, 2013

In my opinion, the market as a whole will inevitably have a significant downward correct. And soon. People sometimes incorrectly correlate "the economy" with the markets, and given that the market in general has outgrown economic recovery at such a rapid pace (DJ and other indices already at pre 2007 highs while the economic conditions are still fairly bleak), I think its only a short matter of time.

Entrr · Jun 22, 2013

SellerMan said: ↑

Just did my finals in economics on finance on something similar. More so on the issues of short selling securities and how the share market has saturated due to entities using it as an asset enhancer.

I'll write up what I initially wrote during my prac exams shortly.
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I look forward to reading this seems like something that may interest me. Hopefully my chemistry brain can understand economics vocabulary.

Plznate said: ↑

In my opinion, the market as a whole will inevitably have a significant downward correct. And soon. People sometimes incorrectly correlate "the economy" with the markets, and given that the market in general has outgrown economic recovery at such a rapid pace (DJ and other indices already at pre 2007 highs while the economic conditions are still fairly bleak), I think its only a short matter of time.
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I agree entirely with markets not gaining and the trend its been setting is a downward one its only a matter of time.

Orenlor · Sep 4, 2013

As you have done your finals in economy, its too good and economy is a very nice subject to know about the market conditions.

Schoolboy Q · Sep 12, 2013

read about economy bubble in canada in my last years geography class just for like a month or two didn't get to much info out of it lol

RustyDamis · Sep 26, 2013

Bumping this to hopefully get some discussion on this.

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