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This Bubble's Got Legs (bloomberg.com)
148 points by petethomas on Sept 9, 2016 | hide | past | web | favorite | 114 comments



According to the OP, we have a global "central-bank-led cash bubble" powered by "an ever flowing money hose."

If you believe interest rates are being kept "artificially low" (whatever that means) by the "money printing" of central banks like the Federal Reserve and the Bank of Japan, then you will agree with the OP. In this view of the world, central banks are contributing to our current economic malaise: by keeping rates artificially low, central banks are causing asset prices to increase, making investment in productive endeavors less profitable for businesses and individuals.

If you believe interest rates are low primarily because businesses and individuals worldwide want to hoard cash (as a way to protect themselves against, say, potential deflation or insufficient aggregate demand), then you will disagree with the OP. In this view of the world, central banks are doing everything they can to motivate businesses and individuals to invest more in productive endeavors. Yet even when rates turn negative, individuals and businesses still want to hoard cash, as evidenced by their demand for negative-interest instruments.[1]

[1] http://foreignpolicy.com/2016/09/07/the-weird-new-normal-of-...


Saying that interest rates are low because of businesses hoarding cash (as opposed to massive expansion of Fed balance sheet which by definition controls interest rates) is absurd. The Fed themselves acknowledge that their policies are why interest rates are low or negative!

The true problem is that QE represents a wealth transfer to the richest among us. New money (which is more powerful at its introduction into the money supply) is funneled directly into equity markets or into foreign markets, creating massive asset bubbles, enriching the rich and robbing the poorest through inflation.

To suggest that massive Fed bond buying is not THE cause of low interest rates is ridiculous.


What inflation?


I believe the root of the problem is creating more money via institutions that don't need it. It would do a whole lot more good to give it to people who do need it and will therefore spend it. Their spending creates profitable business opportunities for others.

People and institutions that already have plenty of money are "hoarding cash" (and real estate) because, after other needs are taken care of, what remains is a concern about security if something unexpected happens. They don't see profitable investment opportunities worth the risk.


Unfortunately, central banks don't have much leeway in choosing where the money goes. Government budgets can distribute money to people through welfare, jobs programs or infrastructure investment. By creating a low interest rate, the central banks are essentially begging governments to take the free money and use it to stimulate the economy. Austerity proponents, deficit hawks and outright political deadlock is making this fail. Basically, "You can lead a horse to water, but can't make it drink."


The problem is banks are soaking up productivity by issuing money ahead of wealth creation. This sees them appropriate gains. It also has a distortion effect because people doing work who are clever see that there is no point working to create wealth as the real gains are to be made in appropriating wealth. Here you get eventually stagnation as all your physics PhDs are working for investment banks trying to arbitrage fiat tokens from .... PhDs in other investment banks.

Growth can and will return when the rentiers are lanced with land value tax, as the primary vector for money creation by banks is lending against land. When this ends growth returns.


whatever that means

I believe the notion of artificially low/high rates actually does have a precise meaning. If banks freely set rates as players in a competitive market based on prevailing inflation rates, demand for money, etc, that would be the "market rate" of money. "Artificially low" rates would be those rates set centrally which are lower than what the market rate would be in a competitive rate market.

Now it very well may be that zero would be the market rate of money, and the Fed is doing a great job of estimating it. But to say the notion of artificial rates has no meaning is a little odd.


> If banks freely set rates as players in a competitive market based on prevailing inflation rates, demand for money, etc, that would be the "market rate" of money.

But, they do.

Of course, "inflation rate" is in large part a product of monetary policy.

> Now it very well may be that zero would be the market rate of money, and the Fed is doing a great job of estimating it.

The Fed sets interest rate targets, and then directly takes action which affect those things which you suggest should be the inputs by which the market sets rates, which the market then actually takes as inputs, and sets the actual interest rates that are levied in practice.

> But to say the notion of artificial rates has no meaning is a little odd.

The notion of artificial rates has no meaning, because the things you suggest should be inputs in "natural" rates are not products of nature, but themselves "artificial" in that they are in many ways influenced by policy, and the first of them is not merely substantially influenced by monetary policy, its one of the two main things (alongside, but usually ahead of, employment) that monetary policy is aimed at controlling.

And, as a consequence, what you describe as the mechanism for "market rates" as opposed to "artificial rates" is the predominant way by which central bank interest rate targets are achieved.


>But, they do.

Exactly. The Fed has very few mechanisms by which to inject money in the economy. Nothing they do dictates interest rates, but they can influence specific rates through open market operations. But you (and the banks) are free to charge whatever rate you want.


As the sibling says, the market rate is set by the banks - that's what LIBOR is. The central bank rate only sets an effective floor by offering a minimum coupon on government debt. This is partly why things get weird around zero.

There's no shortage of money, just a shortage of people and companies willing and able to borrow it.

(There are some subtleties here over things like the central bank "deposit window")


There is no hoarding. Banks create money out of thin air when they lend. Banks are not intermediaries of funds. Go keep your electronic tokens in their server, they can make more in the next row in the database.

https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...

Central banks QE is stopping an implosion. Banks issued money that could not be paid back as one must pay back the original fee and interest. You have to keep issuing more money into the face of this or it collapses. You do this by reducing rates. Then you hit zero and people cannot borrow more. Then central banks have to step in to plug the yawning chasm which is borne of banks saying they were creating wealth whilst in fact they have been appropriating labour and when the apex is reached you get to see the truth.

And you can't get that back. We took fiat tokens and they drank real wine, used real gasoline etc and all in exchange for fiat created ex nihilo.

More fool us.

ps looking forward to a hacker news "your submitting too fast (on a topic about finance on a site where VCs lend you fiat and you return your labour)"


> by keeping rates artificially low, central banks are causing asset prices to increase, making investment in productive endeavors less profitable

Central bank cash is agnostic as to whether you invest it in store-of-wealth assets or productive assets, so it's businesses and investors that make the decision to invest in the former instead of the latter. It seems silly for the OP to blame the central banks in this matter.


Odd how you criticize the framing in OP but then to use the pejorative term "hoarding" in lieu of "saving" throughout your post.


I believe this is a generation thing. Generation Y grew up with so many crisis and terror attacks, its just naturally everyone is hording their cash. Also a lot of people want to stay independent and mobile so they are not (yet) settling down.


Uh, historically the last 40 years have been pretty good. Sure it is worse than some of the years before that (but we did not have to go to 'nam so there is that). But historically you can't say Generation Y have had many crisis and terror attacks. Think about people born 1900-1910, they had two world wars to survive!


Honestly, please find me a generation that hasn't had to hear about one crisis after another. First world Gen Y'ers haven't seen nothing when you really look at it.

I think this is easily explained by economics alone: We're "printing money", only for the bulk of it to end up in fewer hands. Gen Y has no sense of future solvency based upon the miserly behavior of their parents and grandparents. Who basically were handed everything and decided really it was all theirs and no one else's. That their offspring should go out and rebuild the world again, while they hang onto all the useful capital. It's theirs, they did it on their own!

It makes sense for Gen Y to hang onto everything, cause really they have very little. At least, much less than their parents did. I don't have the link, but a study recently suggested Gen Y is going to make nearly $100k less over their lives than Gen X.

A ridiculous sense of entitlement is the problem when you're talking about the problems with our economy. Some how providing basic broadband service to everyone is not a right, never mind the real value it would bring to people that need it most (with bullshit arguments about how it's hard to run wires across the country. Was easy enough to build these giant concrete freeways though!). But being wealthy enough to own 7 homes and two dozen exotic cars is. Somehow, releasing a new iPhone every 12 months is a necessity (and all the efforts that make it happen). But the much smaller chore of proper mental health services are not. Somehow releasing a barely improved fleet of modern cars every year is a necessity. Basic healthcare is not.

We keep seeing bubbles because we keep putting tons of effort into ventures that benefit fewer and fewer people. We "fixed" things after the last bubble, but people are still becoming more and more disenfranchised. There's less buy-in, so a new bubble comes along of hype, the economy is getting better.... Oh wait nope cause we're letting too many people fall beside the wayside. They lose interest, quit investing, stop caring. Whatever it is.

The economy as a whole is only going to remain stable once we act more inclusively. Or we'll just keep seeing these financial bubbles, that are, IMO, really caused more by quickly getting buy in and turning things around, only for our shitty attention spans to kick in and realize 5-10 years later things are still shit in the real world.

All this extravagant bullshit we're told will improve us! Staring at this shit is important! Get pissed over headphone jacks! So we keep pushing for these bullshit things, and protecting that pipeline, which I think people are maybe realizing is just a sick joke.


uhh, Generation Y doesn't have cash to hoard


If you're interested in monetary policy and a fundamental analysis of the state of money and banking in the world today, I highly recommend "The End of Alchemy" by Mervyn King [0].

The book starts with a long history of why we have money at all, why it takes the forms it takes, and how banks evolved into their current role. It then goes on to describe why there is so much inherent risk in our banking system and what we could do to reduce or eliminate it.

As someone who follows financial news but has no formal education in finance, I found the book enlightening and extremely readable.

[0] - https://www.amazon.com/End-Alchemy-Banking-Future-Economy/dp...


FYI, Mervyn King was the Governor of the Bank of England for 10 years.


This is a great suggestion - thanks!


The financial problems originated with excess debt, but debts that are so large that they cannot be paid back - will not be paid back.

Inflating assets via QE doesn't really address the real underlying problem.

The only long-term solution I have seen is Debt for Equity swaps. It won't work everywhere, but it does help.

For example, when the Banks were technically insolvent then the opportunity should have been taken to forcibly re-arrange their financial underpinnings rather than shoring up the existing rickety structures by using taxpayer monies to in effect bail out the rich.

https://en.wikipedia.org/wiki/Debt_restructuring#Bondholder_...


Indeed. China who's massive economy growth of the last 20 years is using "debt for equity" swaps for SOEs(state owned enterprises) and it looking at possibly extending this beyond SOEs. It's hard for me to wrap my head around this for a state owned enterprise and not think its a shell game played with balance sheets. This is a good read recent read:

https://www.stratfor.com/analysis/gambling-chinese-debt


Right, I bet it's essentially a stealing of SOEs.


>The financial problems originated with excess debt, but debts that are so large that they cannot be paid back - will not be paid back.

So in other words, you believe that financial problems are caused by too many assets? Because that's how a balance sheet works.


Nice attempt at applying your Econ 101 knowledge, but a balance sheet where the "assets" are made up of meaningless fiat created by debt instruments does not work like that.


>are made up of meaningless fiat created by debt instruments does not work like that

Then the debt is equally meaningless. Maybe you should try applying financial principles, rather than reading Zero Hedge.


The only long-term solution I have seen is Debt for Equity swaps. It won't work everywhere, but it does help.

Note the US Federal government owns so much land in the Western part of the country and Alaska that that alone might allow it to get its fiscal house in order, and could certainly help.

I mean, isn't it everyone's dream to have title to a plot of Alaskan tundra ^_^? Obviously it would be very hard to make this work, and impossible for our current ruling class, but the raw numbers just might work out.

Otherwise you're right, it simply won't be paid back. But who knows how long we'll be viewed as a "least worst" place to park your liquid assets?


Government debt, while large, is not the core issue.

Private debt is the issue. Steve Keen has been hammering this for years:

https://www.youtube.com/watch?v=CLplU4WdX9A

https://www.youtube.com/watch?v=ocQWs8EteqI

http://www.debtdeflation.com/blogs/


IMHO the worst form of private debt in our present economy is personal private debt. We are in a severely demand constrained economy, and personal private debt is really what's weighing the economy down and soaking up consumer demand. Also unlike corporations individuals cannot do debt/equity swaps or raise money by issuing shares in themselves, so personal private debt is harder to renegotiate or reorganize into a more manageable form.

Corporate private debt is maybe the next worst, but as I said corporations have many more tools for dealing with it especially if they are otherwise healthy. There's a huge market out there for equity in healthy and especially growing companies.

I have heard the interesting view that government debt and private debt are not even the same thing.

When you think about it: the government prints its own money (or authorizes the entity that does, e.g. the Fed). How can you truly owe a debt in your own sovereign (fiat) currency? How is debt still a meaningful concept there?

It seems to me (and IANAE) that government debt is more like equity in the nation. Owning a bond is like owning stock in the USA, but with the caveat that you are forced to resell this stock at its maturity date. Maybe something closer to a weird kind of convertible note.


How is debt still a meaningful concept there?

I still think debt is a meaningful concept there, in that that that debt is going to be relied on by the holders to provide an income in the future that they are thinking of in terms of a reasonable increase in the general money supply and inflation. It's not a black and white situation as with personal debt and I'm certainly more sympathetic than I used to be to the idea that excess sovereign debt isn't a serious issue (as long as the sovereign controls the underlying currency, looking at you Greece).

On the other hand, I think the same analysis tells us that the sovereign should just print the money and distribute it (via, say, a citizens dividend or Keen's modern debt jubilee) rather than rely on the banks debt-creation mechanism.


Again, I don't see why people are worrying so much about the US government here. It's one of those situations where you don't have to outrun the bear, just the other guys.

It's the countries that can't devalue and print a little to ease their situations (Euro countries other than Germany) that are in trouble. Then there's the countries which are dependent on fossil fuel exports for their budget (Saudi and Russia, but also Brazil and Venezuela among others). Then there's China's economic structure, which has far more pretending in it.

The US is fine unless another Republican Congress decides to blow it up with the debt ceiling.


Even taking the silly assumption, for the sake of this argument, that the federal government's finance is just like a giant household, its debt figures are fine.

It has a debt-to-income ratio of 14.3, the highest possible credit rating, and assets that far exceed debt. Lenders would be tripping over themselves to lend to to such a household, and lo and behold lenders are tripping over themselves to lend to the USG.

This dour anti-debt Puritanism is dumb enough when it comes to individuals, but makes no sense at all when it comes to government.


It isn't "dumb puritanism" when applied at the individual level.

The problem is private debt, particular private debt that doesn't self-liquidate (consumption). See Steve Keen (certainly no puritan on debt) on the distinction between public debt and private debt and its effects on the economy.

https://www.youtube.com/watch?v=CLplU4WdX9A


A didactic video with a talking head and no use of the video medium whatsoever is extremely annoying. What about that video couldn't be done equally well or better in writing?


How much of our current Federal debt is just funding current consumption?

How much of the budget can truly be scored as investments? Perhaps not even the bulk of student higher education loans....


I agree entirely, but the sovereign issuing debt in it's a currency it controls (and let us assume, push come shove, the Treasury will side with the government over the Federal Reserve) is different than an individual taking on debt for consumption.

Keen is very good on this and has convinced me, despite it going against my inherent anti-debt biases.


I'd thought we'd reached, or will in short order, the debt to GDP ratio where, historically, countries sooner or later repudiate their debt one way or another (which of course includes inflation).

Of course the Federal Government isn't a "giant household", it's worse in many respects, with the decision makers generally not thinking past the next election, whereas there's a chance in a household the elders will be thinking of the children's futures (things like Social Security, and the general Zeitgeist that the government won't do stupid things like repudiate the debt, have of course helped to sunder the bonds between generations, something I think a lot of "elders" will heartily regret in due course).



If the government sold all it's land to pay back it's debt, we'd be no better off than we were back in the Robber Barron days. It's not secured debt, so it would be stupid for any entity to give up hard assets. This would almost be equivocal with ceasing to be a sovereign.


If the government doesn't pay back/at least keep current on that debt, it's likely to fall, as in, the whole system of government, as happened the last time it screwed up so badly ("Not worth a Continental." although there were of course other factors). Secured by hard assets or not, a very great deal depends on people continuing to have a degree of faith in it as a whole, and it's hard to see how repudiating the debt would be survivable.

And it would still be just as sovereign as it is now, or are you claiming it's not sovereign over the Eastern part of the country???

Or course, there are many other gambits it could and likely will try, like the already mooted one of seizing people's tax system entangled retirement accounts.


A U.S. Government that staved off bankruptcy by selling such vast, historic and valuable assets, would be on even worse footing that one that maintained the assets and defaulted on the debt.

Hell, while they're at it, why not sell off the exclusive economic zones, permanently sell off bandwidth rather than lease, turn the military into a contracted mercenary force and sell naming rights to the Washington Monument.

There are worse things than defaulting on debt.


banks issued equity and preferred equity to the tune of many many tens of billions during the crisis. revisionist class warfare stuff i strange (as a first hand participant): the bailout of wall street banks was critical for the economic well-being of EVERYBODY not just "the rich", and it's the main reason obama and democrats (who wanted it as opposed to the republicans who didn't) swept the elections.


Not to mention that equity holders in both Lehman and Bear Stearns were wiped out.


The graphs offered as evidence seem to have very carefully picked axes to fit the story. e.g. looking at the first MSCI graph with the x axis extended back to the 60s[1] it is hard to draw the same conclusions

[1] https://en.wikipedia.org/wiki/MSCI_World#/media/File:MSCI_Wo...


While I don't disagree, the graph you're referring to excludes 2013-2016. (+30%)


I was thinking about that as well, particularly the "complacency index." I have never heard of this composite before, of course I am not an economist but I do follow finance. Can anyone speak to if this is an exotic index?


Banks make up dozens and dozens of these indices for marketing purposes. The idea is that when a client trades with a broker, the broker provides "free" research to the client as a sweetener. That research mostly consists of dodgy trade ideas based on their proprietary "sentiment index" or whatever.

The research tends to be low quality in general. I'd guess that the researchers are treated as a cost center rather than a source of business.


So my vague understanding is that QE and stuff is technically printing money, but the resulting money isn't really being used for anything.

Is a bubble a bubble if the extra bubbly-ness is from stuff that doesn't get used?

EDIT: actually, answered my own question. QE raises asset prices (even if the sellers aren't really doing anything with the money), and at one point people will be like "wait, none of this is worth the price it's at" and then panic (unless QE Infinity).


QE is an anti-deflation programme. Governments are very keen to avoid real deflation because it kills investment stone dead, leading to loss of jobs and a real recession.

The reason why I think a panic is unlikely is that the current bubble is a "search for safety" rather than a "search for return". That's why the Swiss central bank can get away with negative rates - they are charging a premium for asset safety of the CHF. It also compensates Switzerland from the negative effects of its currency appreciating.

Previous asset bubbles burst when the second derivative goes down: when the returns go down, the rush to buy the asset stops and the price collapses.

The rush for safety is different. There's nowhere else to go but other, riskier asset classes. Even trying to hold it as cash has problems when done on that scale.

Negative rates are also I think your leading indicator for the net asset loss that's going to come from global warming. Not just "unburnable" fuel and lost investment in industries that must be transitioned away from, not just the sunken beachfront property, but the requirement to build new renewable infrastructure just to maintain our current standards.

There's a huge investment needed, but since the return it offers is collective and can't easily be captured by the investor it's not going to come from the private sector. Wealth can only be preserved in the context of preserving society, so the wealthy are going to have to take a small haircut in order to preserve the whole.


Yes, i feel the same when I look at houses in San Francisco. The shittiest houses are valued at almost 1mio. I'm just saying, nope, I'm not buying that. ;)


Same here. The QE+low interest rates have delayed our home purchase perhaps indefinitely. We feel a bit like migrants .. can't afford homes in the city we grew up. It used to feel very miserable ... I'm looking at it positively now that I don't have "roots" that take away my job mobility. This also means we just have cash for retirement .. no housing at all. I suspect we'll end up moving to an ultra-low cost location when that time comes , and try to stretch out our savings + social safety net. It is a raw deal people of my generation got .. but I guess it could be a lot worse when we look at history (wars, famine, etc). As an aside, it is just sad that the only popular politician calling out the Fed is Trump :/


Add it being nearly illegal to build a home in the bay area for the last several decades to the list of reasons. The supply is grossly, artificially constricted.


I'd not blame QE+low interest rates for this, because the problem is not national, but limited to very few markets. Almost anyone can afford a house in most US cities. Changes in QE wouldn't magically change demand in SF and NY.

When we look at SF, what we see is a city that has A LOT more people wanting to live there than there are houses: Heck, I'd move there if the prices weren't insane. Investors/speculators are just a sliver of demand, and they only invest there precisely because the real demand to live there is that high. When there's high demand, and no increase in supply, prices go up to the levels we see now.

If the only people that wanted to buy a house in SF were software developers, prices would still be high, and we'd have enough of those that we'd see prices go up so that mortgages are about 50% of household income, just like in every other place, ever, that had high demand. And guess what? that's the current prices already.

So while I am sure the fed would be able to lower prices across the board by doing something that craters the economy, housing prices in desirable places to live are not the problem.

As far as retirement goes, it doesn't really matter if you own a house, or the equivalent in stocks. I can't tell you if you are saving enough, you are living beyond your means, or should just move somewhere else, as I have no details in your situation. All I can say is that it's a wonderful time to be a software developer in the US, economically speaking. It's pretty possible to work remote or at a satellite office of a big tech employer and save crazy amounts of money.


But the wealthy, who are the one's who have really benefitted from this free money will buy these chit boxes, and rent them out at outragious ROI.

And so will the wealthy foreigner--with a lousy phone call.

I've given up on more building. I think we need to open up areas where people can camp without breaking the law. Or, at least allow people to legally sleep in their vehicles. The fines/fees for breaking over stringent municipal laws are just not fair.

(I don't believe lightening up municipal laws will cause the average person to sleep on the sidewalk to save money. Yes, we will always have homelessness. I have known two people who were between rentals, and were ticketed for sleeping in their cars. It's just not--what's the word--the America I thought I was proud of.)


It's really a shame that we've coerced people into earning an income to live, because the means of living that don't require money are largely becoming illegal.

Where are you allowed to sleep for free in the US? You could perhaps get a wilderness permit and live in a national park for a time, but I'm not sure what the maximum period of validity is on them. Cities will cite you under anti-camping rules. There isn't really a frontier to go to where a person can live off the land, at least so far as I'm aware.

People who do not find the system of "I have to work because I have to have money because I have to pay rent/own a home because I have to have somewhere to sleep" satisfactory no longer have a frontier to which they can escape. This is worrying if you like the idea of preserving liberty, and especially worrying if (as this article suggest) the whole monetary system on which our civilization is built rests on weak foundations.

At least prison's still more or less free.

http://www.alternet.org/civil-liberties/us-laws-criminalizin...


Actually, prison is far from a free shelter for the imprisoned, at least in the US: https://www.brennancenter.org/states-pay-stay-charges


There are plenty of places you can live in a tent or RV if you don't care about being near jobs.

https://www.landcentury.com/under-1000-land-deals/

Though some local governments will go after you for zoning violations, check first.


QE is effectively creating money, which is then used to purchase financial assets in the hope that the person selling it will use the proceeds for something that is economically stimulative. It also reduces borrowing costs along the way.

Most central banks buy government bonds. As a result of this buying, the returns on these bonds are reduced and supposedly less attractive to the investors that previously would have bought them (or did buy them and then sold them to the central bank).

The issue is that an investor that previously would have bought a government bond, doesn't suddenly decide to spend that money in the general economy because government bond returns went down. They instead put it into other financial assets, like corporate bonds, the stock market, or perhaps real estate, thus driving a bubble in these asset classes.

In places like Japan, the central bank buys nearly all bonds issued by the government (effectively financing the government deficit). This distorts markets tremendously. Japan is the most indebted developed government in the world with close to zero GDP growth for 20 years and yet you need to pay them to loan them money for 10 years (i.e. negative return on their bonds).

As an investor, you currently have to pay the governments of most Western European countries to loan them money. In Switzerland for example, if you loan them $100 today, you'll get back $98 in 2 years and no interest. Even Spain and Italy which are in terrible shape fiscally, have a negative return on their 2 year bonds [1].

We now have extremely distorted markets. Heavily indebted governments around the world are borrowing money for free, enabled by their "politically independent" central banks. Some central banks are purchasing equities outright (Bank of Japan announced last month they would double their purchasing of equity ETFs).

There's also a great deal of research indicating that such QE policies increase wealth inequality, by driving up the price of financial assets (which are owned by the rich) and increasing the cost of living for everyone else that needs access to these assets (rent etc.) [2]

To most laymen, the idea that creating money and buying financial assets will somehow stimulate spending and inflation is clearly flawed. Central banks by design however, have few other options.

[1] https://twitter.com/MktOutperform/status/773577673587105792

[2] http://www.bloomberg.com/news/articles/2016-03-10/how-centra...


> The issue is that an investor that previously would have bought a government bond, doesn't suddenly decide to spend that money in the general economy because government bond returns went down. They instead put it into other financial assets, like corporate bonds, the stock market, or perhaps real estate, thus driving a bubble in these asset classes.

What's even scarier is that the ECB has started buying corporate bonds (https://www.ft.com/content/e551c28e-457a-3b62-a8b0-a8e8ca4e5...) directly, which I personally find crazy. I won't even comment on the financial situation in Japan, which I find even more crazy, and where I think that the economic system is partly nationalized "de facto". Under these circumstances the FED policy seems the more rational, which would have been crazy to think that would happen just after 2008.


Even crazier, the criteria for which bonds to buy heavily favor German corporations. At this point the Euro system has become a system to shovel wealth from the periphery to the center at gunpoint.

IMO next step of the ECB will be equity buying, again Central European equity most likely. After that, only People QE is left (which they should have done first), but I don't think their ideology will allow that.


>…Heavily indebted governments around the world are borrowing money for free…

I don't disagree with any of what you say, but this part in particular makes me think that at the end of the day, governments around the world (esp "developed") ones are having a hard time allocating their ability to acquire resources (with their fiat currency effective "infinite money") in a way that will appease their respective populous.

Is this a political failure of us all to hold our governments accountable? Are we witnessing the inability of fiat currency systems to effectively act as a way to distribute physical resources beyond this current threshold to those with a "need" that can't quite be satisfied with current availability of such resources on global markets?

What seems to be the case is that when notional value out paces market value (or price what people are willing or able to buy at, if any buyers at all at any given price points [beyond those who are able to borrow for free at large $ levels) in any given asset classes, there isn't really any good market incentive to correct such (but plenty of bad ones like defaults on contracts). I really don't see things changing soon without drastic changes to how we all consider resource allocation in general.


You raise some interesting points. I would draw a distinction though between fiat currency and the present environment. We've had fiat currency for a long time, but the current level of monetary easing is a recent affair.

I do wonder what the end game is. In the absence of meaningful levels of inflation, central banks are confident in maintaining and increasing QE in the belief that if it's not working, it must be because it's not enough.

The problem is that at some point (perhaps already), governments and corporates wont be able to tolerate higher borrowing costs.

US government debt is double what it was in 2007 (~USD 18 trillion vs 9) and yet the annual interest cost is around the same. The Japanese government would need to spend every dollar of income and corporate tax revenue just to pay the interest if the interest rate on their debt rose to just 4.5%.

QE generally has the bonus effect (and some would say it's the primary motivation) of devaluing your currency. The problem though is that this only works if noone else is doing it. From Kyle Bass:

I had a fascinating out of body experience meeting with one of the world's top central bankers in a private meeting about three years ago. And he said, "You know Kyle, quantitative easing only works when you're the only country doing it."

[1] http://finance.yahoo.com/news/thing-top-central-banker-told-...


the problem with the 'wealth' effect, or equality effect, is that the person selling the asset is likely retired or close and won't spend it and the increase in asset prices take an equal amount from the people who need to buy for their retirements but can't because central banks own them all. So those people of working age who might have spent more are poorer and will spend less too.

The question is why central bankers can't figure that out instead of doubling down on what is basically a transfer of wealth from working age to old.


Based on many papers, articles, and interviews by many central bankers I have come to the conclusion that most of them aren't very smart to say the least.

They think of a country as a household, rather than a complex system. Economic orthodoxy is also very irrational atm.


What expertise do you have that makes your judgement of central bankers meaningful? Do you have any understanding of macroeconomics, forecasting, monetary policy?


yeah, a lot of dumb central bankers running around!


Well TARP worked out pretty well, right?

I think there's a logic to QE in scenarios like the credit crunch, since suddenly banks need cash and there's a bunch of illiquid assets on everyone's balance sheets. But I do agree that owners of treasury bonds aren't really going out and spending their proceeds at Wal-Mart for a while.


TARP was a very specific program that had very specific goals. It was strictly intended to prevent the collapse of the banking sector, not to inflate the economy more generally. It may have done that as a side effect, but that was not its primary purpose.


All the same people who fucked stuff up are still in charge and still have all their money. How do you figure it worked, even one iota, except for them?

We have plenty of jails and very few bankers in them, despite widespread fraud. Again, not sure how this is a success.

We need banks, but we don't need the ones we have. Ruthlessly prune them, guaranteeing the people's deposits, and capitalize new ones with stricter rules. Of course, now it's too late. We've printed trillions of dollars, inflating our currency, and given it to the thieves without (meaningfully) changing the system.


If printed money doesn't get used it's as if it was never printed. It is the action of using this money that causes prices to rise.

Nobody will just print money and leave it in a vault.


Some background for those concerned with inflation:

The US dollar is backed first and foremost by the global reserve status of our currency, which it became in 1971, as (probably the most important) part of the Bretton Woods System. As long as nations need US dollars to purchase crude oil, the US dollar will continue to be globally valuable.

Secondly, the US has a powerful military, including hundreds of essentially forward operating bases and air fields, lying in wait, all over the world.

Third, and as a secondary property of our military and economic strength, many countries are owed many billions of US dollars. This is because, due to the strength of the US military, T-bills (essentially bets made on the US dollar) are purchased by many nations. When other countries bet on the US dollar, they're creating a vested interest in the US dollar not collapsing, which increases the US leverage (leading to things like money printing).

None of this is meant to make you more too comfortable, because, despite all of the above, China, Russia, Libya, Iran, Brazil, South Africa, and, at times, India, have been attempting to reduce the US dollar hegemony by creating other means of trading oil.

For instance, Libya's late leader, Muammar Gaddafi, created a gold backed currency for trading oil (this is the reason NATO invaded Libya and killed Gaddafi). Russia and Iran made agreements to trade food (from Russia) for Oil (from Iran), which Russia would then add to its exports, acting as a trade proxy for Iran. This, combined with Iran's efforts to pipe natural gas and oil to China, is the reason for the supposed "Iranian nuclear threat". China has also recently created the Shanghai Gold Exchange, as a means to further commoditize fiat currency (china has very large gold reserves). BRICS has created a competitor to the Western-dominated IMF in the past 24 months, which also threatens the US reserve currency's backup plan, which is called the SDR (Special Drawing Rights). The list goes on; not to mention the calls Xi Jinping has directly made to remove the US dollar as a reserve currency (IOW, this isn't exactly covert, as of about mid 2010).

As you can see, considering our posturing in the South China Sea, and considering what happened to Gaddafi, the US won't acquiesce to losing its reserve status. So, the US dollar is not going to "collapse", lest we find ourselves engaged in total war (with China, et al). So, as long as you don't plan to bail on the US in a total war scenario, you're, in my opinion, safe to invest in USD.


Another reason, possible related to all of the above: if the USD sharply declines in value for some reason, its trade deficits with many export-dependent economies (e.g. China) will also decline and perhaps even become surpluses. Those who run such economies /really/ don't want that to happen.


So, the article says dotcoms caused first bubble in 2000, houses in 2008, but this one is driven by central banks printing money. And there is no way they will stop printing so this is an infinite bubble

There is sooo much wrong with that. As @rtpg says, that s stops not when Fed stops printing money but when market realises that the high asset prices "globally" become obviously unsustainable.

The issue is that when that happens, it happens across the world simultaneously- which is why they article refers to the complacency index. (It is possible the article is more sarcastic than I could read into it)


   >As @rtpg says, that stops not when Fed stops printing money but when market realises that the high asset prices "globally" become obviously unsustainable.
I think it's clear to every investor that certain asset classes (eg. equities) are hugely overvalued. The problem is a lack of alternatives. People in pension funds, hedge funds, asset managers, etc. all try to meet their return targets. As long as national banks keep printing money and buy up all the government issued securities that search for yield is going to continue. Either the national banks stop printing money (or rather reduce their QE programs) and the bubble will burst or expectations for deflation rise so high that holding cash becomes a valid alternative. We've seen some hints at that in Switzerland, where corporations are starting to hold huge amounts in cash at their headquarters to avoid negative interest rates. Still, this rise of deflation is exactly what national banks are trying to avoid and as the article pointed out: Don't bet against them. I think they might even come up with some clever new ways to introduce even more cash into the economy.


> So, the article says dotcoms caused first bubble in 2000, houses in 2008, but this one is driven by central banks printing money. And there is no way they will stop printing so this is an infinite bubble

> There is sooo much wrong with that

Well, for one thing, its not true. In the US, for instance, the Fed stopped QE in 2014, and has not only stopped QE but raised interest rate targets slightly since.

Central bank policy -- like the economic indicators that drive it -- tends to be cyclical, not infinite positive feedback. This has been a long and particularly intense period of loose monetary policy (largely, because governments, especially the USG, have completely been asleep at the switch in terms of fiscal policy response to the economic situation, relying more heavily than is sane on central banks and monetary policy), but there is very little to think that the usual cyclical drivers won't work the way they normally do.

(Of course, that won't actually pop asset prices in general -- though it may result in a shift across asset classes -- since the cyclical drivers of tighter monetary policy are exactly the same things that drive high general asset prices without a loose-money driver.)

> As @rtpg says, that s stops not when Fed stops printing money but when market realises that the high asset prices "globally" become obviously unsustainable.

Which, if those prices were high nominal prices driven by the Fed printing money such that the supply of money vs. that of other assets was ever expanding, would actually require the Fed to stop printing money, because as long as it continued to do that (and as long as people believed it would continue to do that), high asset prices would be sustainable.

(Conversely, if people believed that the Fed would stop, but would only do so because of the existence of some other driver supporting asset value, then even with the money-printing-presses stopped asset values would be maintainable.)


Like you, I wonder about the 'sarcasm quotient'. Coming from Ireland, every time I hear someone say "There's no end of this boom in sight ... it's not going to happen this time", I get scared.

To quote Charles Dickens's Pickwick Papers(1837) "Never say never."


I don't think they say it's an infinite bubble, but one that may continue much longer than non central bank driven bubbles.

I guess the hope is that real economy growth starts improving and QE can be tapered and prices auto correct over time, rather than a sudden pop in inflated asset prices and adverse effects to real economy from that.

Where the growth is supposed to come from (within next 5 years) I'm not sure, so the money creation might continue for quite a while.


What could the economic growth come from other than advanced technological development?

Regardless, I don't see how the dependency on constant growth is sustainable.


Yes, definitely technological development. And there is a lot of poorly allocated of capital (non-productive asset bubbles, corruption, ineffiency etc) that could be put to better use. But I don't think that will change much in 5 years


another way to think about high asset prices is fear of owning currency. it's not irrational given the willingness of central banks to debase money.


If that were the case (central banks debasing money), you'd see high interest rates. You'd also see inflation in goods, not just high prices in financial assets.

When people talk about central banks "debasing" currency because of QE, they miss one thing: Something in the neighborhood of one trillion dollars evaporated in 2008. That's the kind of thing that can lead to a significant deflationary mess. The central banks actually did a pretty good job of maintaining the value of their currencies, in light of the magnitude of the event.

Why is deflation so bad? Well, dollars are rarer, and therefore worth more. But I still owe the same number of dollars on my house, my car, and my student loans. If my income drops due to the deflation, my debts go from "manageable" to "crushing". So many peoples' spendable income drops, so they buy less. In that circumstance, a bunch of people sell their houses for whatever they can get, and a bunch more walk away. So house prices drop. And so it goes, with economic activity declining, prices falling, money becoming scarcer, and those who are in debt getting destroyed.


you don't see high interest rates because the banks are undermining the currency by buying their own debt (lowering their interest rates).

not sure what the rest of your post is addressing. i'm familiar with deflation.


> you don't see high interest rates because the banks are undermining the currency by buying their own debt (lowering their interest rates).

True - or at least, it was true. Currently the Fed is not buying additional debt. The amount that they hold might distort the market, but at least they aren't adding any additional distortion to it.

> not sure what the rest of your post is addressing. i'm familiar with deflation.

It's addressing the term "debase". If a trillion dollars evaporated, creating a new trillion dollars isn't debasing the currency, it's restoring the status quo ante.


>And there is no way they will stop printing

Why would the Central Bank stop printing money? As long as inflation is in control, can you point to the harm?


This is scary as I moved to all cash a couple of years ago. I still don't understand how there can be a bubble in money. All I see around me is house and stock prices going up incredibly. Does a money bubble popping result in high inflation making my money in the bank worthless. Fuck. First I got burned in stocks, then in real estate, and now cash?


See my comment below: https://news.ycombinator.com/item?id=12461647

A "money bubble" caused by too many people wanting to keep assets in cash (rather than make investments) is deflationary. The apparent deflation is caused by the reduction in availability of credit. So the central banks are backfilling, like pumping air into a deflating balloon.

It's not arithmetically possible for everyone to hide from all risk forever. It's got to end up somewhere. Diversify, don't just hold one asset class.


What could happen is your cash becoming more valuable in a deflationary spiral. My take is you're incurring the opportunity cost today on your cash reserves. Your present value is based on a belief that the future will be deflationary over inflationary. You could model this with an estimation of the present value of your cash holdings as a function of how long you hold it and your expected inflation rates.


This is an extremely risky proposition, because under no circumstances will the Fed ever permit long term deflation.

They will literally mail cash to individual households or have cash giveaways before that happens. Or, more simply, they ask Congress to pass a law stating that all cash reserves over a certain amount are heavily taxed or confiscated entirely.

My suggestion:

10% notional gold

10% physical gold & silver

10% Bitcoin

40% equities

30% cash


True and printing money is too easy a thing to bet against. We are truly in weird times.


> First I got burned in stocks, then in real estate, and now cash?

My advice to you is 1) Diversify 2) Stop trying to outsmart the market.

These things are cyclical in nature and it can be difficult for individual players to 1) buy on the low end of the cycle and 2) sell on the high end.


That is what I thought I was doing. I bought a house in 2010 and sold at the then peak in 2013 :-(.


So exactly how did you get "burned" in real estate? Sounds like you made profit.


I got burned with my 1st house- buying in 06, and did just OK with buying again in 10 and selling in 13, but 'lost' (did not make another) 50% by not holding it long enough.


Why on earth would you ever think it's a good idea to move to all cash?


> Why on earth would you ever think it's a good idea to move to all cash?

It's right there in the comment:

> Fuck. First I got burned in stocks, then in real estate....


There has been substantial asset inflation, the cost of housing, health care, education, child care are all through the roof, and really there is substantial inflation in necessities too. Yet wages are largely stagnant, and people can still buy cheap junk at Walmart, so officially inflation is called low.

Like all bubbles, it will eventually correct. It could be soon, it could be years away. We may be stuck in secular stagnation with high asset inflation for a long time. Who really knows? That there has been so much intervention from central banks, with ZIRP and NIRP policy being the new norm, should make everyone a bit nervous. We are in uncharted waters.


The focus on our current economic climate frequently seems to be on the experimental dovish policies of central banks and its implications on bubbling asset prices, yet nobody seems to be talking about how eerily close this is predicted by the Austrian Business Cycle Theory[0]. I'm confounded by why the theory is considered by mainstream economists as controversial when in instances such as the dot com and housing bubbles popping in the US it was preceeded by the Federal Reserve contracting the money supply after prolonged periods of money printing. I fully expect the next fatal economic downturn to follow the eventual raising of interest rates, if runaway inflation doesn't occur first[1].

0. https://en.wikipedia.org/wiki/Austrian_business_cycle_theory

1. http://www.economist.com/blogs/buttonwood/2010/05/inflation_...


Thank you for sharing this theory. I agree with the theory that low interest rates are meant to incentivize riskier investments and can lead to runaway prices in capital asset classes that eventually must correct because they don't provide consumer value. However, based on this theory, the current actions of corporations and investors are rejecting the incentive to place riskier bets and I can't see run away prices on a capital asset on the macro us or global scale as we saw with housing from 80s to 2008. Perhaps capital allocation managers implicitly agree with the theory and taking cautionary steps to avoid the bust.

But I wonder if this fear of busts is holding back innovation. Society is helpless to progress at a faster rate because God forbid there is another bust and people lose jobs and hope about the future. I think companies are waiting with cash in hand to buy up the good deals in an expecting bust. But I would prefer to have the cash used for risky ventures and I accept the bust outcome.


I am reminded of when I worked on a financial analytics app and we constantly had to remove the Zimbabwe stocks. They'd all gone up 1000's of percent and ruined all the other data on the chart (appearance-wise). Why? As the Zimbabwe currency lost value and became worthless, the stocks denominated in that currency held their real value. I would expect to see some version of this play out in the stock market today.


I have near zero knowledge of finance infrastructure, but shouldn't stock price be normalized by the exchange rate in which said stock is denominated? Say index everything in USD or whatever currency your user prefers. Otherwise, even if you remove Zimbabwe stocks from your charts, any analytics will be fundamentally flawed.


You are right that most carefully presented charts will correct for exchange rate differences over time. However, a database of stocks will often keep performance over different time periods in the native currency as a convenience. For example, this is usually good enough for most screening applications, and on-the-fly charting apps.


Possible interpretation:

Not enough people are trying risky entrepreneurial things; the market is begging us to quit our jobs and try more startups.

In other words, productivity gains are meaning that the world is saving too much money, and we need fewer workers and more explorers.

Alternate: Wages should be raised across the board.


The conclusion makes sense only if every major economy participates. What about China and Russia? Granted, I doubt investors today trust either country without qualification, but if this goes on another 5 or 10 years, who knows?


Out of those two countries, Russia, a country with an economy smaller than that of Spain, is the only one not currently engaged in massive subsidies and stoking artificial demand (metallurgy, construction). China isn't engaging in QE but it is using other methods to prop growth.

I doubt China's position is as tenuous as the Euro zone, but it is engaging in some similar practices.

Russia is wholly dependent on the Euro zone as an export-based economy until it can improve internal consumption. It can't be relied upon to prop up the world economy in the event of an asset value correction.


I keep seeing discussions about high-value neighborhoods full of empty homes. The homes are purchased purely as a way to hold value.

Vancouver and London are examples that I've heard of.

Sounds like a big clue to me!


It's obvious bubbles are all caused by money anyway (printed or not). What is the money being spent on?


Helicopter money has worked, unfortunately all the money has fallen onto 15 Central Park West.


The forrest is dry, just waiting for a black swan. The problem with black swans is they are definitionally unknown unknowns... until they are not any more.


Isn't it always a thing before a bubble pops where everyone says the bubble wont pop.


This is a good read. https://www.amazon.com/Extraordinary-Popular-Delusions-Charl.... Market participants often do know there's a bubble. However, if your neighbor keeps making more and more money selling tulips (that was a thing), then you will be tempted to buy some tulips yourself, knowing full well that you are commanding an absurd price.

Bubbles can be more "musical chairs" than rational pricing.


"It's different this time"


A lot of people called housing a bubble a long time before it popped.



The article lost me at "... given the driver is cash printed by central banks, indications it could pop are scant."




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