Guest Post: Why Central States/Banks Inflate Asset Bubbles, And Why They Implode

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Inflating phantom assets to collateralize expanding debt is failing due to diminishing returns on stimulus, zero-interest rates, money-printing and monetization of Federal debt.

That the policies of central states and banks have led to one disastrous asset bubble after another over the past 15 years is undeniable. This poses the question: is this serial bubble-blowing intentional, or are the bubbles merely unintended consequences of the neoliberal, neofeudal model of financialization that dominates global finance?

The answer boils down to this: inflate assets or die. The only way to support consumption in an era of declining wages is to enable more borrowing, and the only way to enable more borrowing is to:

1. Lower interest rates to near-zero so stagnant income can leverage higher debt

2. Inflate assets to create phantom collateral that can then support additional debt.

Central states live off taxes skimmed from wages and profits. If wages are stagnant, the state needs profits and capital gains to rise to support higher tax revenues.

In other words: inflate assets or die.

The entire scheme of generating GDP with more and more debt now yields diminishing returns.

Unfortunately for the central states and banks, though their unprecedented fiscal stimulus and money-printing has doubled the stock market off its 2009 lows, efforts to reflate housing have been tepid at best.

This matters because only the top 10% own enough stocks and bonds to make a difference in household net worth, while two-thirds of households own a home. Inflating another asset bubble in stocks was nice for the financial Aristocracy and their technocrat-class, but it didn't do much to boost the net worth of the bottom 90% or enable more borrowing.

Let's look at some charts that reflect the failure of massive money-printing and credit expansion to actually boost wages and household borrowing.

First up: real income (adjusted for inflation) has been flat to down since 2000:

Meanwhile, the ratio of household net worth to total credit market debt owed has plummeted, meaning that debt is rising much faster than net worth. This is called debt saturation: adding more debt generates less and less expansion of wealth.

Cheap credit and financialization has boosted stock valuations far above the real economy, as reflected by the GDP. This chart shows just how disconnected stocks have become from the real economy.

We can see this same expansion of asset valuations in global assets, which quadrupled in a mere 17 years (1990 - 2007) of financialization and bubble blowing:

The diminishing return on stimulus and credit expansion is revealed by money velocity, which has fallen off a cliff:

The Fed has gone all-out to lower interest rates to near-zero and mortgage rates to historic lows, as well as monetize Federal borrowing via purchasing Treasury bonds (Chart courtesy of

Despite these unprecedented measures to boost asset valuations and borrowing, household debt expansion remains below zero: debt is declining faster than it is being created, i.e. deleveraging.

The central state has tried to prime the debt pump by taking up the slack left by private-sector deleveraging by ramping up massive public-sector borrowing:

This has created structural deficits as tax revenues--despite the tailwind of highest-ever corporate profits and a stock market that more than doubled in four years-- are far below spending.

Unfortunately for Central Planners, all their unprecedented efforts to reflate the housing bubble's phantom assets are not getting much traction. What did they expect in an economy with 19 million vacant dwellings and declining real income for 90% of households?

Bottom line: inflating phantom assets to collateralize expanding debt is failing due to diminishing returns on stimulus, zero-interest rates, money-printing and monetization of Federal debt. Once debt stops expanding, the house of cards that is dependent on ever-expanding debt collapses.

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buzzsaw99's picture

The current bubble is epic.

Xibalba's picture

Doin all they can to pop the Gold and Silver 'bubble'...But the damn thing won't pop!  How do you pop a shiny rock anyways?  

Chuck Norris's picture

When the debt bubble bursts, will it better to have cash on hand or gold/siver?

Or ammo?

Divided States of America's picture

They do it so Bankers can rape the sheeps on the way up AND on the way down.

Rip van Wrinkle's picture

I might be able to buy some ammo with gold or silver.


I might be able to wipe my arse with cash.

Go Tribe's picture

All three. Cash for immediate needs, gold and silver for medium to longer term needs. Ammo to safeguard it all and supply fellow patriots.

derek_vineyard's picture

1.88% 10 year yield shows how inflated the choices for 'investment' are. 

agent default's picture

Nope.  They are past the occasional gold and silver price hammering.  They are attacking the sentiment in the PM market through constant pressure on the prices.  Someone is getting beyond desperate.

SAT 800's picture

I'm glad you mentioned that; the "great downdraft" at the Comex just failed; the bottom is in in the metals. If the Euro goes down hard this year; Gold could go to $2000 by Thanksgiving.

lasvegaspersona's picture

FOFOA believes the paper market is stuck....can't go up or down or the system will collapse (private communication). Paper 'gold' depends upon entities wanting to hold it for reasons other than systemic collapse. As Santelli pointed out yesterday.....holding paper in a collapse does not do one any good in a collapse and real physical gold does....but the market price of gold is the paper price for now. The problem with the POG lies in the unwillingness of all market forces involved to hold paper 'gold'. There is no problem for those of us holding the metal for it's best and highest use....long term store of value and security...Sooooo...relax, enjoy the lower price and chuckle along as the paper market price folds. 

The real wager I'm wondering about is how low will it go until physical cannot be ANY price.

Bicycle Repairman's picture

The FEDS have more weapons at their disposal besides mere printing of money.  Suppose 2008 was a planned event and they aren't planning anymore such "events".

Xibalba's picture

 FEDS have more weapons.  <---- and cops, and they are above the law

Bicycle Repairman's picture

There is no Freikorps in the USA.

insanelysane's picture

I believe it all has to do with Quid Pro Quo, whatever the hell that means.

SAT 800's picture

Ah, Bastiat. He had a "beautiful mind"; and you can read his works at the Von Mises Institute website for free. A great opportunity.

DavidC's picture

Bubble? What bubble? I see no bubble...


SAT 800's picture

Epic, perhaps, but hardly new. The French destroyed their own currency twice in the same century; destroyed as in 50,000,000 whatniks for a gold coin, or whatever. And now their experiment with the Euro is beginning to smell. But it'll probably take awhile longer to fall apart.

swiss chick's picture

Que du bonheur /sarc

Frozen IcQb's picture

Comment les suisses réagissent t-ils a la dévaluation du Franc?

Avez-vous des sites hors-médiatiques similaires à zerohedge que nous puissions lire?


francis_sawyer's picture

Accidental money skimming by well intentioned 'do-gooder' jewish banking academics striving for EQUALITY above all things...


It's GOD'S WORK taken to the next level... 

Divided States of America's picture

It will be even easier now with an all jew US Banking Cartel (Welcome Lack Jew, Bernanke, Blankfein, Fink, Gensler, Yellen, Krugman ......... fuck I could go on for days)

JustObserving's picture

It is inflate or default.

The Fed will never permit default since it will be the end of the Fed.  

Better to have most of the people in poverty than to have the oligarchs lose some of their wealth. It has always been fascism masquerading as democracy.  Drink that fluoridated water, eat the mystery meat,  and enjoy the entertainment.  

SAT 800's picture

Yes, but "masquerade" implies a costume and mask. At this point everyone who is even marginally conscious and willing to face, or think about, the reality of the situation, knows that it's fascism. I prefer to say it's re-named "democracy". Just keep repeating democracy, democracy, democracy, and everyone will roll over and go back to sleep. It's State-Corporatism-Financial-Dictatorshiip, with just the thinest layer of semi-transparent makeup.

Clark Bent's picture

Slavery is the new freedom. 

dbTX's picture

The Fed's ability to continue wiring zero's to the TBTF banks is coming to an end, the exit strategy is non existant.

Weisbrot's picture


Lots of articles about lots of things and yet somehow the Government seems to keep it all together -

kudos to them - ok for us too



francis_sawyer's picture

Really?... 'the Government' is keeping it all together... That's nice...

Bicycle Repairman's picture

Committee to save the world, bro.  Don't get off the boat.  <snark>

francis_sawyer's picture

the only thing that 'the Government' has done right is to have kept the Kardashians & Honey Boo Boo off the drone kill list...


But I have a nagging suspicion that the day they actually decide to pull the plug on the USD, they actually will drone Kim Kardashian [thus putting the collapse of the dollar buried on page 7]...

SAT 800's picture

Isn't it amazing? That's the default opinion created by the mass propaganda machine. Orwell would have been proud. Night is Day and Day is Night. Of course, Reality is a little difficult to face; to wit, The Government is actually a usless and broken machine that existed in the first place to steal from you.

Notarocketscientist's picture

Like a crack whore who is still awake after 48 hours on the pipe who's still suckin any bone that will feed her a line is 'keeping it together'

swissaustrian's picture

Reminds me of comments given by citizens of Eastern Germany to a Western TV reporter when I visited that country in 1988 (one year before the collapse).

They all talked about how great the country was and so on. Problem was that there was a guy from the secret police standing behind the camera. You could see the fear in the eyes of these poor people.

SAT 800's picture

It didn't "collapse"; Gorbachev sold it back to West Germany for dollars he desperately needed to pay off due bond payments. Financial distress is often very significant in modern history; the reason Jefferson was able to buy the Louisianna Purchase from France; is that France was flat stoney-assed broke.

francis_sawyer's picture

They had run out of the "cake" that Marie Antoinette had offered them to eat...

Clark Bent's picture

Or like killing everyone for a decade, using fiat money, and then Napoleon and his activities. Slaughtering the Ancien Regime and the Church had no positive effects on the bottom line. 

francis_sawyer's picture

Napoleon was funded by Rothschild... nuff said...

Sandmann's picture

The GDR was bust in 1972. It depended on West German Loans and cheap Soviet oil to keep going. It sold the oil to the West for Forex and burned lignite to keep the lights on

Mike in GA's picture

France was "stoney-assed broke" because their currency had been printed far beyond the collateral behind it.  Its currency collapsed into nothing just prior to the LPurchase. 

Collateral, if, like me, you have trouble remembering, is an anachronistic banking term referring to value held against obligation.

190 years later there is a new term - fiat - which makes collateral unnecessary and central banking immune to previously held concepts such as value.

Anything in this ancient history that seems to resonate with our daily headlines is purely coincidental as we all know bankers today are waaay too smart to ever let a little thing like money-printing get em into trouble.

darteaus's picture

This economy is together?!

Reminds me of: Guy falls of Empire State Building and says "So far, so good" as he passes each floor on the way down.  Remarks at ground floor remain unknown.

Clark Bent's picture

I think it was Bugs Bunny who said that it's not the fall that gets you, but the sudden stop. 

swissaustrian's picture

Constantino Bresciani Turroni - the economics of inflation:

A great book on the Weimar hyperinflation. It seems like the FED is copying the playbook of the German Reichsbank.

Bicycle Repairman's picture

The FED has many more weapons than an unwanted, alien regime that was trying to govern a nation back from (at that time) the worst defeat handed to a European nation-state.

swissaustrian's picture

No. They only have a printing press, just a more modern version of it that doesn't require physical printing.

If you only got a hammer, everything looks like a nail...

Bicycle Repairman's picture

The US has the world's reserve currency, the most potent military ever, the most extensive empire ever, plenty of natural resources within it's own borders and a ruling class free to do what it wants.

Weimar Germany had none of these things and they matter.

adr's picture

and the USA arguably has the stupidest collective population in the history of the world. Having resources doesn't matter if nobody knows how to use them.