The Mother of All Bubbles Creaks


In an article titled “Sell the Bonds, Sell the Stocks, Sell the House — Dread the Fed!,” David Stockman makes points on which I’ve been touching for the past several years (although he knows the technical words that I tend to colloquialize around). The whole thing is worth reading for evidence, arguments, and charts, but the following paragraphs trace the thread in which I’m interested:

The hard core reality, however, is that the very foundations of the Keynesian full employment model cannot be measured, specified, validated or achieved. For all practical purposes there is no such thing in today’s world as potential GDP, full-employment, a natural rate of Federal funds, NARU (natural rate of unemployment) or quantifiable price stability.

These are all self-serving fictions fabricated by a small community of monetary central planners and their Wall Street henchmen. And they do one big but destructive thing: Namely, they are used to justify endless manipulation and falsification of the single most important set of prices in all of capitalism—-the price of money and financial assets. …

So as [Federal Reserve Chairwoman Janet Yellen] and her posse of money printers attempt to achieve impossible macroeconomic targets embedded in a tinker toy model of economic reality, there is only one implication. That is, look out below!

The only thing they are doing is deforming and inflating the Wall Street casino.  As we have demonstrated so many times, the household credit channel of monetary policy transmission is over and done because we have reached a condition of peak debt. …

Yellen and her cohort have no clue, however, that all of their massive money printing never really left the canyons of Wall Street, but instead inflated the mother of all financial bubbles.

Stockman doesn’t go into fiscal policy, which is part of the culprit, inasmuch as federal debt — increased to accommodate out-of-control spending — has been a significant mechanism to make imaginary money a little more real by withdrawing cash from the future in a way that can’t as easily be wished away.  (Somebody owns those bonds and will be expressing a legal right to collect on them.)

One interesting question is whether the spending has driven the debt or the other way around; it could be that the geniuses attempting to manage our economy determined they needed to pour money into the economy to maintain some semblance of a recovery, so they told the politicians to go wild.  That reverse mandate might provide explanation for the lack of political hay as money has flowed to progressive activist groups (inflating a lunacy bubble, too), because those who might offer some resistance are more focused on the need for debt.  The same considerations may be behind Republicans’ dread of a government shutdown beyond media intimidation; in the short term.

Whatever the case, the bill will come due, and as is usually the case when government, rather than the market, drives a crash, those who gained the most will have the most protection from losses. Plan accordingly.

  • Rhett Hardwick

    ” the Wall Street casino” One of my professors always referred to Wall Street as “a casino without the dancing girls”, I thought I would share it.

    Some thoughts on the quantity of money. I have always wondered about the immeasurable (by me) effect to dual income families. Without the two incomes, current prices generally could not be met. This would seriously restrain rising prices. So, as society has altered itself to meet rising prices, we have facilitated the increase.

    • OceanStateCurrent

      I’ve always thought it pretty obvious that the cultural push to smash gender roles, delay marriage, and put more women in the workforce put downward pressure on salaries while driving up prices.

      It’s a difficult thing to discuss, because too many people are inadequately educated in logic to understand that saying “we went about X the wrong way” or “there were side effects to the way we went about X” is not the same thing as saying “we should not have done X.”

      • Rhett Hardwick

        It would seem to me that we have simply facilitated the “law of supply and demand”. When you approximately double the supply of workers, all other things being equal, you naturally reduce the demand (consequently wages). Remember the temporary popularity of “house husbands”.