Guest Post: A Bubble In Conservatism

Tyler Durden's picture

Submitted by Plan B Economics, (as a reminder none of the guest posts appearing on Zero Hedge necessarily reflect the views of Zero Hedge or its various spokes)

A Bubble in Conservatism

When one thinks of financial and economic bubbles images of reckless
speculation, lavish galas and luxurious consumables are conjured.
Bubbles are tied to euphoria and new economic paradigms. Bubbles grow
out of the expectation of permanent prosperity.

Individuals are drawn into the euphoria with the assurance they won’t
lose money and that ‘everybody’s doing it’. Nobody wants to see his
neighbour work half as hard and spend twice as much, so jealousy can
motivate the average man to become a speculator.

Eventually, in an effort to out-do one another, individuals begin
taking more risk – such as investing on margin (or $0-down adjustable
rate mortgages) – to achieve bigger returns (or to achieve the same
returns when returns on capital inevitably shrink). During a bubble,
recent asset price returns provide comfort to the few that wonder about
the risks.

At the point when the speculators are plenty and margin debt is high,
a small change in the economic winds (usually prompted by businesses
scaling back excess capacity) starts a cascade of financial ruin. While
bubbles can take form in unlevered environments, it is debt that takes
bubbles to ruinous proportions and makes the equity held by individuals
so sensitive to otherwise innocuous economic events.

Given that bubbles are classically associated with the pursuit of
prosperity, is there such a thing as a bubble in conservatism? When
individuals are scared about their prospects they act conservatively by
saving and paying down debt. Can a massive wave of conservatism, such as
the one we’re experiencing today, hit a threshold that forces it to
reverse (i.e. the ‘bubble’ pops)?

While a bubble in risk assets leads to a self-feeding spiral of
leverage, overcapacity and low returns on capital that eventually hits a
threshold causing it to self-correct, a bubble in conservative assets
does not need to self correct. True, after a certain amount of time –
months, years or decades – individuals may feel comfortable about their
personal balance sheets and begin to reduce their savings rates and
increase their use of credit. (If starting from a sound base, this
transition can fuel a secular bull market.) But there are no financial
constraints forcing such a change in behaviour.

Let’s take this to the micro level. If you make $10,000 a year and
feel euphoric about the economy you can increase your consumption – by
spending all your earnings, plus borrowing – to a certain threshold.
Once a threshold is hit and the bank starts calling in your line of
credit, your behaviour must change.

On the other hand, if you make $10,000 a year and feel wary about the
economy you can save half your earnings each year. In this case, there
is no threshold that is hit that forces you to start spending again.
Conservative behaviour can continue indefinitely, and has done so in
numerous countries with high savings rates.

Today, many are saying that US Treasuries are in a bubble. I’m not
arguing that the US government doesn’t have fiscal challenges, but I am
arguing that the supply of funds to finance those challenges can continue flowing for a very long time.
The flow of investor (individual, banks, corporate) cash into US
Treasuries is driven by conservatism and not by the misguided pursuit of
wealth. Individuals are not eying their neighbour’s new Porsche with
envy, running to their broker to borrow $100k to invest in government
bonds. Quite the opposite: investors are looking at their unemployed
neighbour, their decimated 401k and their looming ‘retirement’ (whatever
that may look like) and focusing on capital preservation. Wealth
accumulation was so 2000s (or dare I say so 1990s).

The new frugality, the liquidity trap and risk aversion are
funding the US Treasury…and this ‘bubble’ is being driven by cold hard
cash (as opposed to leverage). This is why the flow of funds into US
Treasuries can continue for a very long time.

Perhaps bonds are expensive. Perhaps the US Treasury needs to borrow a
lot of money. Someday (could be sooner, could be later) the US Treasury
trade won’t be a good one. I agree that the US is borrowing extreme
amounts of money and Treasuries may not be a good ‘buy and hold’
long-term investment. I also agree that the US may one day implicitly
default via inflation, and Treasuries may eventually fall in value. So
this is not a commentary on the merits of US Treasuries as an investment
(I’ll leave that to experts like Gary Shilling and David Rosenberg who
both forecast double-digit returns for long bonds). This is a commentary
on the characteristics of a ‘bubble’ – I believe that strong demand for
funds does not necessarily characterize a ‘bubble’.

Bubbles are determined by the exuberant supply of capital, not by the demand
for capital. And, as previously stated, the supply of capital today can
hardly be considered exuberant, as it is generated prudently from
incomes and portfolio re-allocation (not from leverage or irrational
investor enthusiasm). As long as risk aversion remains dead and
US Treasury issuance remains within a digestible flow, US Treasuries
will have a firm bid from conservative individuals, banks and
corporations looking to park their cash.

Yield and returns for US Treasuries will experience ups and downs –
sometimes violent. But throughout those ups and downs, a strong bid for
US Treasuries will remain as long as current macro-conditions prevail.
To call investor demand for relative safety a bubble is to not
understand the definition of a bubble. For there is no such thing as a
bubble in conservatism.

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ISEEIT's picture

Does this mean that 'Progressives' need 'Conservatives' in order to make their very own bubble?


Thankfully, the FINANREG 'unprecedentedness' has cleared the freedom oversight commities and so prosperity must be right around the old 'proverbial' corner eh?

pan-the-ist's picture

Yeah it does.  Rod should shave his beard.  It makes him look like he takes himself seriously.

Many independent minded people fail to see that stampede of sheep headed toward them until it is too late.

I wonder what percentage of the population is capable of independent thought?


According to the Tavistock Institute about 15%.

greyghost's picture

yep...sounds more like kulturecrap, than anything else.

A Nanny Moose's picture

Indeed. A.D.D, and AI, further empowers the ficke political duopoly.

If we stop voting, will they just go away?

DaveyJones's picture

Wherever there's a bubble, there's always a number of pricks

jeff montanye's picture

using your example and your caveat:  if very many people (a bubble) attempt to save an increased/increasing portion of income that would seem to make your caveat (as long as current macro-conditions prevail) inoperative as consumption would fall, investment would follow and macro conditions, gdp growth, etc. would worsen.

Manbarepig's picture

Exactly, we could continue to spiral into a more isolated economic system that increasingly holds any wealth accumulated and stops spending altogether and becomes self sufficent. If more people chose to live in isolation (think grow own food, build own shelter, generate own energy, etc) then you could easily have a conservative bubble.  Eventually someone would reach beyond their means, since this seems to be human nature, and we'd start to swing back in the other direction, effectively popping the conservative bubble as everyone realizes the economic benefits of interaction.

Mercury's picture

Bad analogy, five yards.

Austerity (conservatism here) isn't the result of excessive speculation, at least not with Americans.

It's more like the Liberal Jesus bubble that's about to pop.

megatoxic's picture

GREAT image.  Love it.

grunion's picture

Right on Mercury...Austerity is the fashion of necessity. As has been said, when people feel they have lots of money, they spend it and when they don't, they won't. This is not difficult...

Blano's picture

I sure picked the wrong day to not keep up on my ZH reading.

traderjoe's picture

Too much internal circular reference type logic. 

First, doesn't acknowledge that much of the demand for Treasuries is occurring through overt and covert QE. Are banks buying Treasuries because they are being conservative, or because of the curve arbitrage and the zero reserve requirements?

And if rates are low due to high supply of capital, and the economy 'improves' and rates go up, how much of that capital is destroyed as the bonds go up in value? ZIRP is a trap. The bond market is manipulated. 

lewy14's picture

Exactly. Treasuries are safe because they are perceived to be safe.

Self-reinforcing conditions underly all stable dis-equalibria (or else they wouldn't be stable.)

So in that sense, contra this article, Treasuries are in a bubble, and the terminology fits precisely.

DosZap's picture

 Treasuries are safe because they are perceived to be safe.

Unfortunately, Perception is reality to most sheeple.

I see all the Foreign moey inflows, and the Americans flocking to the shearing,.and I STILL cannot believe my eyes.

Why would folks not invest their currencies, in Bunds, any Soverign with real strength.

Investing in Bonds, and US Treasuries is a high risk venture.


fearsomepirate's picture

Exactly.  Treasury yields aren't being held low because everyone's investing conservatively.  They're being held low by ZIRP and QE.  From the Austrian perspective, expansionary monetary policy creates bubbles--looks like the bubble's in Treasuries this time.

The other big problem is that the author isn't thinking about economic fundamentals--do a little arithmetic and use a little reason.  At 2%, your average small-potatoes American (like me) can't be bothered to notice Treasuries.  Really?  Park ten grand with the government for a year, and they'll give me $200?  Hot damn, that's a whole week's rent!  Where do I sign up?  2%, 3%, it doesn't matter, those interest rates are so low that you can't credibly argue ordinary wage-earners are flocking to them.  (Anecdotally, I don't know a *single* person who's bought a government bond.)

Second economic fundamental--what is a government bond? The single biggest error during housing mania is that people were looking at technicals and talking about investor mood rather than the essence of the security.  Turns out none of that fancy-pants finance jargon matters when the security is based on loaning money to people with no income to pay it back.  So again, what is a bond?  A government bond is just a promise to tax someone in the future.  In the case of the short-term Treasuries, 1 or 2 years from now.  Okay, tax who?  Broke American wage earners?  One-step-ahead-of-bankruptcy corporations?  The economy's not generating the wealth for the government to confiscate to keep on top of its obligations.  It doesn't matter whether the country's in a "conservative" mood or whatever; the whole UST market is predicated on loaning gobs of money at an absurdly low interest rate to an institution that simply is not good for it, because the economy it plunders to pay its debts just plain ain't big enough.  Sound familiar?  

Doesn't matter what people's mood is or how much you can justify it with clever financialese; the math catches up to you sooner or later.  You'd have to be an idiot to loan someone as broke as our government anything, let alone a trillion dollars at virtually no interest, with this kind of economy serving as a tax base.

pre's picture

where there are taxes there are pricks.

snowball777's picture

No, I'm pretty sure women have to pay them too.

TwoShortPlanks's picture

Bubbles are a symptom of leverage. Fiat is a tool of leverage. Remove Fiat, remove note, and we come back to pure trade, where: Energy Expired = Work Done = Product Produced = Balanced Trade. This leaves only environmental issues to deal with.

I previously posted: If War is an extension of Politics by other means and, Politics is an extension of Economics by other means, then, Economics is an extension of Servitude by other means...and we use Slaves to do the work we do not want to do ourselves.

In essence, 'Leverage' is a conduit to which one party may get another party to do work for them.

wcvarones's picture

F*&^ that.


I've got conservatism fever but I wouldn't touch Treasuries with a 10-foot pole.


Paying off debt, buying gold and AUD and CAD.  What kind of "conservatism" is trusting your wealth to Zimbabwe Ben?

Scisco's picture

Lets face it Canadians are slow. Our housing bubble is just beginning to pop. I would be careful with the currency of any country which has not undergone a housing correction. To many the US looked great until housing started to decline. I strongly suspect same holds true for the CAD.

bigkahuna's picture

What is the priority? Buy treasuries, or Deleverage?

TwoShortPlanks's picture

Neither, just go flying.

Go HD and crank the volume...the world's better out there!


Richard Chesler's picture

Oh yeah, I'm in debt up to my eyeballs err..., I mean a conservative.

Definitely a bubble. lol.


Caviar Emptor's picture

Is there a bubble in bubbles? Must all behavior inevitably result in bubbles? 

Bubbles imply danger: the risk of "popping" and making your wealth go "poof!". It is the going "poof!" that defines bubbles and the behavior style that creates and destroys them. In people's minds, popping and going "poof!" is associated with the classic "get rich quick" scam, the "something for nothing deal". And that's what describes the stock market in everyone's mind, even those with the blindest faith in Wall Street. 

Investing conservatively is not considered wild, dangerous or in danger of going "poof"! Lots of people love T Bills because they are the ultimate conservative instrument. Even if inflation hits, the maturity is close enough that people would be happy rolling them to a higher yield. There's only the opportunity cost of missing out on a "get rich quick" scam. We just went through a prolonged period where  the default behavior was 'get rich quick". Now that it's undone, it takes a long time and just the right conditions to tempt most people back. They're cynical. 



Lord and Master's picture

Im going to have to demur to the consensus among the commenters here and agree with the author on this one.  Treasuries CLEARLY offer relative safety in this environment and the price action in the markets has been reflecting this.  However, ‘there are several other asset classes that investors should not ignore in their flight to safety.  If the author or like-minded investors are interested, i am currently long a number of bridges in the NY metro area which, in spite of their low income stream, offer an opportunity to invest in secure, damn near permanent assets at generally attractive price levels.    Industry experts are generally in agreement that the cyclical bear market in bridges has bottomed out and been base building for a decade now, and that the economic and demographic conditions in the US are very favorable for higher price levels going forward.  Industry insiders as well as the NTSB says bridges are in short supply, or limited supply, and whatever—you know how many people use them.   There was some funky looking bridge in the Bronx area (Hellgate ?) that I sold to this one dude for $45, and he was totally f*cking pumped about it and shit.  I’m looking to unload a few from my Harlem , Bronx Co and Westchester County portfolio to raise cash for a private equity firm im starting., as well as to pay this one bitch’s cellphone bill who apparently is pissing her mother off  by going over her minutes limit for the month, like EVERY FREAKING MONTH THIS SUMMER.



In addition, sidewalks, though a seldom discussed investment these days—having fallen out of favor on Wall Street in the 70s—now have astute investors giving them a second look.  Though perhaps getting similarly crowded in the near-term, these can make an excellent diversification for individuals who are overweight USD/ Treasuries, and would like some exposure to hard assets without the risk and volatility of precious metals, for example.  My firm offers a wide-range of sidewalks and walkways, both domestic and international, suitable for individuals and institutions alike.  Basically $20 and ill spray paint your own name on it--- yours till it hits the curb or wherever its broken by grass or whatever.


DosZap's picture


How can can a paper instrument for the worlds largest Soverign, and the MOST broke one at that, be a SAFE move?

Plus Americans have the added concern of seizure, and having their funds dumped into RETIREMENT scams, I would put it under a mattres before I would give it to the Gv't.

scratch_and_sniff's picture

This is some kookie shit.

williambanzai7's picture

Bubble Shmubble...Dr Ben and Turbo Timmy have FUBARed everything. If you think this is a "Conservative Bubble" go ahead and put your money where your blog post is.





alicea's picture

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Spitzer's picture

Just when the sheeple thought they had this bubble thing figured out along comes the fiat bubble.

I define a bubble as an asset that is STEALTHLY over priced.Period.

chrisina's picture

And how do you know that an asset is STEALTHY over priced? When it's far above its fair value? Who decides what is the fair value? Let me know what you consider is not "over priced" for US treasuries?

Spitzer's picture

it takes wisdom and a knowlege of Austrian economics to know.


chrisina's picture

Great! Just let me know what is the fair price for :

. a US 2 yr Treasury

. a median size US home

. the S&P 500

. an ounce of Gold

(ie at what price are these assets not overpriced)

Kreditanstalt's picture

"There is no such thing as a bubble in conservatism."

But this is not solely conservatism borne out of "parking their cash".  There are many other major investors forced into conservative strategies.  Predicated upon 8% per year returns, they have no alternative now but to hunker down.  Most are still hiding in bonds, money-market accounts, dividend stocks, cash and other low-yielding assets in the forlorn hope that market conditions will soon improve.  They won't.

Like the Illinois Teachers' Retirement System, they should, nay HAVE TO, take on more risk.  Their financial straits dictate this.  The TRS, diving desperately in leveraged derivatives and assorted junk bets, is a harbinger of things to come.

A true contrarian should be looking NOW at stocks - especially miners - with unimpaired fundamentals, because next comes the flight to quality. 


The only question we, as small investors with capital to spare, should have is timing.

centerline's picture

I was going to lead into this in a seperate post below.  I think you made a really great point here K.  Forget those who are parking money at low return.  The problem is those who must seek higher returns via leverage and higher risk.  Mainly, pension funds.

thermroc's picture

yeah, ummm, so you're like saying the bubble is aware of the motivations of the bubble blowers?

"I won't pop, no, my blowers have worthy, low risk intentions."

Get a clue.

Kreditanstalt's picture

Incontestable proof that is IS possible to waste cyberspace!

litoralkey's picture

This original post is slapdash.

If you want a real recent historical comparison to a bubble in fiscal conservatism through a election cycle, read any of the dozens of articles and papers on the elections in Japan in 1994.

Who Creates Political Business Cycles?
(Should Central Banks Be Blamed?)
Erik Leertouwer and Philipp Maier∗
Published in European Journal of Political Economy, 17 (3), P. 445-463
Little attention has been paid in most economic studies on political
business cycles to separate the effects of fiscal and monetary policy. We at-
tempt to assess the effect of monetary policy in a panel model for 14 OECD
countries. To answer the question of whether central banks actively create
political business cycles we focus on the short-term interest rate as a proxy
for the use of monetary instruments. Our results indicate that central banks
should not be blamed for creating political business cycles as we do not
find any evidence for cyclical behavior in the short-term interest rate. This
conclusion holds no matter whether central banks are independent or not
or are constrained by the exchange rate system in force.


 Japan's temporary recovery of 1994-96 and the Bank of Japan's "conservative" reaction to increase Funds Rates way too early in the business cycle brought about a severe recession in 1997.... Bernanke and the entire Fed and BIS policy sphere are well aware of this, Bernanke himself gave a prepared speech on the subject in April or May of 2010.

litoralkey's picture

BusinessWeek: May 8, 1995

International Business




UNCONCERNED. Despite such gloomy forecasts, the coalition government of Prime Minister Tomiichi Murayama has so far mounted a relatively modest response. On Apr. 14, the government unveiled its latest emergency spending package. Urging companies to buy back stock to support share prices and giving special attention to helping smaller companies hit by endaka, the plan may come up with $12 billion in aid.

Most economists have scorned the proposal as inadequate. And while market watchers say that some Bank of Japan researchers fear deflation will spin out of control, hammer down land prices even further, and wreak havoc with ailing banks, the prevailing view is still that deflation is not yet a big concern. That's one reason why the central bank waited months before cutting its discount rate by 75 basis points, to 1%, on the day Murayama announced his economic program. Some critics believe this cautious policy is only heightening deflationary pressures. To keep interest rates from falling below its target, for example, the bank has been siphoning massive amounts of liquidity from the Japanese banking system. With money growth barely budging, real long-term interest rates now may be a punishingly high 5%--significantly above those in the U.S.

The Bank of Japan seems blithely unconcerned about what its strategy is doing to financial markets. For example, the slumping Nikkei stock average--off 56% from its 1989 peak--is pummeling banks' and insurers' portfolios. On Apr. 24 alone, 11 Japanese commercial banks disclosed they face $7.4 billion in write-offs because the value of their stock holdings has fallen below what's stated on their books. With commercial property prices down more than 50% since 1991, Japanese companies last year sold an astounding 23.7 million square feet of property to raise cash. The amount of land sold was up 19.3% from 1993, according to real estate data service Tokyo Shoko Research. The sales netted only $7.7 billion, down 9.7% from the year before.

While financiers are selling assets, manufacturers are hunkering down for survival. Take Mazda Motor Corp., which derives 60% of its sales from exports. Stung by the strong yen and languid U.S. car and minivan sales, it announced on Apr. 26 that it would slash output at its Japanese plants by 22% this quarter and take new steps to reduce costs. Even more sweeping reductions are hitting metals producers. Mitsubishi Materials Corp., hard hit by cheap zinc imports, plans to close a smelter in Akita Prefecture that has been losing $1.2 million a year. Sumitomo Metal Industries Ltd., meanwhile, is accelerating job cuts at several steel plants to save $700 million a year. Both companies will assign idled workers to other companies.

grunion's picture

Did not have my glasses and thought the last paragraph read "Japan's temporal recovery of 1994-96 resulted in BOJ's conversive reaction...

Anyway, spit my coffee and roared with laughter. The mind is a terrible thing...

Mentaliusanything's picture

Yes, without doubt.

We operate on the assumption that all is well.

when it is NOT we regress into our perceived "Fort" of safety.

That varies from guns & ammo to "just lie to me please"

Fuck what what was the question???????

Oh I remember - the answer could be 42 but that would be way easy

The true answer was Cashflow- Bitchezes , Bitch, beacheze or Your housing figures suck harder than a former US President on a  (perceived) Cuban cigar.

I have been trying for a junk over six months. None have done it. WTF-man (Or women)  up!

"feeding pearls to pigs is expensive and does not fatten pigs"

Your in a whole lot of shit