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It’s easy to call fast rising assets “bubbles” and in some cases it is true. But this lacks a deeper look into what is largely behind this surge in asset prices.
Monetary policy has changed drastically post the GFC, with central banks using their balance sheets as policy tools.
Monetary policy has changed drastically post the GFC, with central banks using their balance sheets as policy tools.
This means that central banks expand their balance sheets - mainly by purchasing longer term financial assets such as government bonds and, in the case of the US, agency backed securities at a large scale.
This is equivalent to providing money to agents through govt and banks.
This is equivalent to providing money to agents through govt and banks.
This drives longer-term returns on financial assets down as their prices increase as a response.
In other words, people now have ample liquidity with few “safe” investment options that yield positive real returns.
In other words, people now have ample liquidity with few “safe” investment options that yield positive real returns.
As a response, individuals will use that excess liquidity to spend or invest in riskier assets with larger returns.
We now have a sudden shock of huge inflows chasing those assets, which naturally drives their prices up.
We now have a sudden shock of huge inflows chasing those assets, which naturally drives their prices up.
The question is, are these real assets the “bubble”, or are the currencies in which they are priced a bubble that has been exploding right under our noses for years?
The problem is that this new age of monetary policy is unprecedented & policymakers have no idea how to stop.
The Fed attempted to “normalize” its BS (reduce its size) a few years ago & it led to unexpected disruptions in money markets, supposedly under its control.
The Fed attempted to “normalize” its BS (reduce its size) a few years ago & it led to unexpected disruptions in money markets, supposedly under its control.
Currently, central bank balance sheets are at their largest nominal value historically.
Due to the pandemic, central banks had to go crazy on BS expansion to fund the economic losses caused by lockdowns & uncertainty
This means that we borrowed from the future to fund the present
Due to the pandemic, central banks had to go crazy on BS expansion to fund the economic losses caused by lockdowns & uncertainty
This means that we borrowed from the future to fund the present
Which also means that we technically need to pay at least some of that back. Given the large debt, “some” is pretty huge.
This is either done the old fashioned way, raising taxes and making people pay for it, or the modern way, kick the can down the road & keep expanding debt.
This is either done the old fashioned way, raising taxes and making people pay for it, or the modern way, kick the can down the road & keep expanding debt.
If they go with the old fashioned way, that money which went into the “bubble” assets will have to go back to the government - meaning individuals will have to sell a lot of them just to pay insane taxes, causing a meltdown
No central bank governor would dare allow that to happen
No central bank governor would dare allow that to happen
Instead, they go to option 2. Keep borrowing till it breaks down on its own. Meaning, keep artificially increasing the price of government debt up until people realize it actually has little real value.
Taking all the above into consideration, what do you think is the real bubble?
Real assets (equity, bitcoin, etc.) or the money/debt that they are just naturally absorbing?
To rephrase - are these assets a bubble or an ultimate hedge against one that has implicitly popped?
Real assets (equity, bitcoin, etc.) or the money/debt that they are just naturally absorbing?
To rephrase - are these assets a bubble or an ultimate hedge against one that has implicitly popped?
