Guest Post: The Money Bubble Gets Its Grand Rationalization

Tyler Durden's picture

Submitted by John Rubino of the Dollar Collapse blog,

Late in the life of every financial bubble, when things have gotten so out of hand that the old ways of judging value or ethics or whatever can no longer be honestly applied, a new idea emerges that, if true, would let the bubble keep inflating forever. During the tech bubble of the late 1990s it was the “infinite Internet.” Soon, we were told, China and India’s billions would enter cyberspace. And after they were happily on-line, the Internet would morph into versions 2.0 and 3.0 and so on, growing and evolving without end. So don’t worry about earnings; this is a land rush and “eyeballs” are the way to measure virtual real estate. Earnings will come later, when the dot-com visionaries cash out and hand the reins to boring professional managers.

During the housing bubble the rationalization for the soaring value of inert lumps of wood and Formica was a model of circular logic: Home prices would keep going up because “home prices always go up.”

Now the current bubble – call it the Money Bubble or the sovereign debt bubble or the fiat currency bubble, they all fit – has finally reached the point where no one operating within a historical or commonsensical framework can accept its validity, and so for it to continue a new lens is needed. And right on schedule, here it comes: Governments with printing presses can create as much currency as they want and use it to hold down interest rates for as long as they want. So financial crises are now voluntary. They only happen if a country decides to stop depressing interest rates – and why would they ever do that? Here’s an article out of the UK that expresses this belief perfectly:

Our debt is no Greek tragedy

“The threat of rising interest rates is a Greek tragedy we must avoid.” This was the title of a 2009 Daily Telegraph piece by George Osborne, pushing massive spending cuts as the only solution to a coming debt crisis. It’s tempting to believe anyone who still makes it is either deliberately disingenuous, or hasn’t been paying attention.

The line of reasoning goes as follows: Britain’s high and rising public debt causes investors to take fright and sell government bonds because the UK might default on those bonds.


Interest rates then spike up because as less people want to hold UK debt, the government has to pay them more for the privilege, so that the cost of borrowing becomes more expensive and things become very, very bad for everyone.


This argument didn’t make sense back in 2009, and certainly doesn’t make sense now. Ultimately this whole Britain-as-Greece argument is disturbing because it makes the austerity project of the last three years look deeply duplicitous.


If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.


Why? Because the Bank directly controls the interest rate on short-term government debt, so it can vary it at will in line with any given objective. Interest rates on long-term government debt are governed by what markets expect to happen to short term rates, and so are subject to essentially the same considerations.


It doesn’t matter if investors get scared and dump government bonds because this has no implication for interest rates – it is what the Bank of England wants to happen that counts.


If investors do suddenly decide to flee en masse, the Bank can simply use its various tools to bring interest rates back into line.


The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.


Greece and the other troubled Eurozone countries are in a totally different situation. They don’t have their own currency, and have a single central bank, the ECB, which tries to juggle the needs of 17 different member states. This is a central bank dominated by Germany, which apparently isn’t bothered by letting the interest rates of other nations spiral out of control. Investors, knowing this, made it happen during the financial crisis.


On these grounds, the case of Britain and those of the Eurozone countries are not remotely comparable – and basic intuition suggests steep interest rate rises are only possible in the latter.


Britain was never going to enter a sovereign debt crisis. It has everything to do with an independent central bank, and nothing to do with the size of government debt. How well does this explanation stand up given the events of the last few years? Almost perfectly. The US, Japan and the UK are the three major economies with supposed debt troubles not in the Eurozone.


The UK released a plan in 2010 to cut back a lot of spending and raise a little bit of tax money. The US did nothing meaningful about its debt until 2012, and has spent much of the time before and since pretending to be about to default on its bonds. Japan’s debt patterns are, to put it bluntly, screwed – Japan’s debt passed 200 per cent of GDP earlier this year and is rising fast.


But the data shows that none of this matters for interest rates whatsoever. Rates have been low, stable and near-identical in all three countries regardless of whatever their political leaders’ actions.These countries have had vastly different responses to their debt, and markets don’t care at all.


By the same token, the problems of spiking interest rates inside the Eurozone have nothing to do with the prudence or spending of the governments in charge.


Spain and Ireland both had debt of less than 50 per cent of GDP before the crisis and were still punished by markets. France and the holier-than-thou Germany had far higher debt in 2007, and are fine.


The takeaway is that problems with spiking interest rates amongst advanced countries are entirely restricted to the Eurozone, where there is a single central bank, and have no obvious relation to the state of public finances.


So what we have, then, is a disturbingly mendacious line of reasoning . Back in 2010 the Conservative party made a perhaps superficially plausible argument about national debt that was wrong then and is doubly wrong now. They then – sort of – won a mandate to govern based on this, and used it to radically alter the size of the state. The likelihood that somehow this was all done in good faith beggars belief.


Britain has had a far higher proportion of austerity in the form of spending cuts than tax rises relative to any comparator nation. On this basis austerity is a way of reshaping the state in the Conservative image, flying under the false flag of debt crisis-prevention.


If the British public had knowingly and willingly voted for the major changes made under the coalition in how the government taxes, spends and borrows, this wouldn’t be such a great problem.


Instead, they were essentially conned into it by the ridiculous story of Britain as the next Greece.

Some thoughts
What’s great about the above article is that it doesn’t beat around the bush. Without the slightest hint of irony or historical sense, it lays out the bubble rationale, which is that central banks are all-powerful: “If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.”

So this is the end of history. Interest rates will stay low and stock prices high and governments will keep on piling up debt with impunity – because they control the financial markets and get to decide which things trade at what price. Breathtaking! Why didn’t humanity discover this financial perpetual motion machine earlier? It would have saved thousands of years of turmoil.

At the risk of looking like a bully, let’s consider another peak-bubble gem:

“The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.”

The writer is saying, in effect, that the value of the British pound – and by extension any other fiat currency – can fall without consequence, and that the people who might want to use those currencies in trade or for savings will continue to do so no matter how much the issuer of those pieces of paper owes to others in the market. If holders of pounds decide to switch to dollars or euros or gold, that’s no problem for Britain because it can just buy all the paper thus freed up with new pieces of paper.

This illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy. Governments couldn’t stop tech stocks from imploding or home prices from crashing, and when the time comes, the Bank of England, the US Fed, and the Bank of Japan won’t be able to stop the markets from dumping their currencies. Nor will they be able to stop the price of energy, food, and most of life’s other necessities from soaring when the global markets lose faith in their promises.

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Say What Again's picture

They want us to place all of our savings into speculative assets that they manipulate.

Thank you.

dryam's picture

So is this the plan?....The U.S., Japan, Europe, and UK all monetize all of their debts and then when they own 100% of the bond market they reset the system & wipe away all of the debt?

centerline's picture

Pensions, 401k's, etc. all get wiped out in the process.

They are coming for it.  Count on it.

dasein211's picture

People are going to go to bitcoin/litecoin. Once th digital architecture is in place it will begin to supersede currencies. All currencies derive their ultility from public acceptance period. The IMF/BIS tried to develop this currency through special drawing rights (SDR) but failed. Now it was developed of its own accord. All currency are just public agreements to use that item as a medium of exchange. It's usually criminal/licentious elements that decide which way we go with what technology. VHS vs beta- porn industry decided. Ak-47- war criminals decided. Art, music, food, politics- these things were all at societies fringes at one time and as they became more mainstream they gained value. No difference here.

SilverIsKing's picture

If a world economy explodes in a forest, does it make any sound if everyone is already dead?

bonderøven-farm ass's picture

No way the global economy is going to tank.  Top economists agree that the secret to job creation is currency devaluation!  Whowhaddathunk.......?!?!?!?!?!?

Ham-bone's picture

Trouble with this theory is that even with all the massive QE, the Fed "only" owns 20% of the marketable public medium/long term US debt...and they are already having to jawbone about tapering to avoid the appearance of hyper-monetization of our own debt. 

And domestic holders of debt (ex-Fed) have remained @ $2.5 T since '00...all foreign debt filling the gap so that foreigners own 50% now. 

To get to a majority position of say $5 T or $6 T tof the $10 T note/bond public debt outstanding he Fed's options would be:

- maintain current QE and basically have the US run a balanced budget so all $45 B /mo Fed $'s go to buying rollover...based on this plan, it's about 4yrs + for Fed to get even a simple majority of public debt

- double QE focused on Treasury (maintain MBS amount) so $90 B /mo and maintain $600 B'ish deficit...this path would take about 4yrs...minimum for Fed to get simple majority.

- quadruple QE on Treasury (maintain MBS) to $180 B/mo and maintain $600 B'ish the Fed can make some headway and likely have a majority within 2yrs...there may be a little collateral damage though with this policy???

fonzannoon's picture

Ham-bone think about it this way. Instead of focusing on who owns how many treasuries etc. Go with the premise that the fed buys up the entire bond market. They end up owning every last treasury. Why does that mean the U.S automatically has to lose it's reserve currency status?  How exactly does that lead to hyperinflation? 

Bad Lieutenant's picture

How exactly does that lead to hyperinflation? 

Great question -- and a proper exercise to illuminate the driving forces that lurk.  In said scenario, for the Fed to own most (or all) of the US debt, it would imply said USTs would have been sold to the Fed for our beloved non-interest bearing FRNs.  What would the institutional holders do with these proceeds? Certainly, what they *wouldn't* do is have their paper collect zero nominal yield, so it would naturally assume a velocity to seek out yield.  And since the premise of this scenario is that UST paper is all bought up (ie. at near-zero across the 30 year curve), yield chasing could only result in the lowering of non-UST debt, causing the holders or *that* debt to now find a home for their cash proceeds.  So, ultimately, this chain continues until the proceeds that originated from the institutional selling of USTs to the Fed have no other choice but to purchase assets with the intention to retain purchasing power (and capture any asset price appreciation).  

So it's rather clear that a central bank buying up increasing parts of the sovereign debt market is synonymous with high inflation of assets generally regarded as "safe" stores of purchasing power (e.g. PMs, productive land, shares of robust businesses, and likely crypto currencies).

Ham-bone's picture

hmmm...the removal of another $2 T or $3 T or $5 T in US Treasury assets replaced by FRN's that must find a home (likely w/ leverage) and not back in the Treasury notes they came out of...this will @ a minimum create asset bubbles beyond belief (like wringing out a sponge and removing the sponge flows all over)...and since the holders of these non-Treasury assets are pensions, insurers, banks, etc. they cannot be allowed to let these holders of these assets take a loss.  So, massive increase in FRN's funneled into ever fewer assets and no ability / willingness to take allow a "correction" for fear of the unleveraging monster.  Yup, hyperinflation seems bout right!?!

The real question is how long can commodities and other real world products be manipulated (not allowing the FRN's to flow into these zones of the economy)...the longer the manipulation, the less revenue put into exploration, R&D, collection...and the ultimate correction between real supply / demand becomes mamoth.  We are getting pretty far down this road...

JailBank's picture

Well the government does know what is best for me, so I'll go along with them.

ZH Snob's picture

and, this is the MOTHER of all bubbles.  it's eventual pop will be a sonic boom that will make our ears bleed.

my, oh my, how all that old-fashioned PM will be sought after then!  like the ugly and forgotten high school girl who grew up, got some work done and became a movie star.


odatruf's picture

If you don't think the US government can stop an assult on the dollar, you don't understand the purpose of the military. We don't need a good currency, we only need one that is better than everyone else's. A few carrier groups off their shoreline will make all the rest seem unstable.

zapdude's picture

Yes, this fact will allow the US to defy economic physics for a while -- other currencies will get ransacked first, but the dollar's time will come.

And then all currencies will get swirled together into a global currency or basked or SDR's.

Whoopee, the NWO will finally be nakedly exposed for all eyes to see.

SilverIsKing's picture

Individually yes but if China, Russia, and a bunch of others all simultaneously decide to drop the USD, not sure we have enough boats.

odatruf's picture

I agree, but do you really think there is enough trust among the Russians, Chinese and relevant Middle Eastern nations to take that leap of faith hand in hand?


ZH Snob's picture

it's not like the old days where we had 1 malcontent to contend with at a time.  the entire world of commerce will turn their collective backs on us at the same time (and with China's blessings and help).  we can't declare war on the whole world, and we can't bully China like we did Libya and so many others.

RaceToTheBottom's picture

All FEDs are alike

All CB have the same goals.

China and Russia also have the same Goals.  None will be giving up their Fiats so all will act in accorance with that goal. 

Diogenes's picture

Reminds me of the time President Truman threatened to call out the army to prevent a coal miner's strike.

The head of the union said "let your soldiers dig the coal with their bayonnets".

Good luck trying to force the world to buy dollars by waving guns around.

odatruf's picture

The point isn't to force them to buy dollars.  The point is to bring enough uncertainly that their currency is undermined.


TeamDepends's picture

At the top of the crazy pile is "Hope and Change", the campaign slogan of an unknown with a dubious past, which was swallowed hook, line and sinker by millions.

F.A. Hayek's picture

Some of them dead people, even.

Toolshed's picture

Who wrote that absurd article from the UK that is quoted? Inquiring minds want to know.

Toolshed's picture

Thanks for the link. Now we know to disregard and/or ridicule any tripe emanating from that author and/or site.

Al Gorerhythm's picture

One nutter (Maurice Lyn) supports him with the comment "Highly convincing." The lone supporter posts his location as Oxford University. The janitor I presume.

Diogenes's picture

The janitor is the only one there who has not lost his common sense.

Al Gorerhythm's picture

You are probably correct. Maurice is most likely the head of the economics dept. or at least his protege.

toomuchtom's picture

If i remember Von Havenstein ran an independent central bank!

carbonmutant's picture

This bubble is in desperate need of a pin...

JR's picture

…when the time comes, the Bank of England, the US Fed, and the Bank of Japan won’t be able to stop the markets from dumping their currencies. Nor will they be able to stop the price of energy, food, and most of life’s other necessities from soaring when the global markets lose faith in their promises.—John Rubino

They’re all climbing to a fall.

The economic media’s report today in the US is that there’s almost no inflation. When you have that kind of truth denial and there’s raging expansion of the welfare state, by this time next year there’s going to be 100 million former US policy holders who can’t get health insurance.

Food inflation has hit the US as well as the world. And you can see it… packages just keep getting smaller and smaller. For instance, Iams just downsized its 5.7 lb. bag of dry food for small dogs to 5 lbs. The banker-controlled government is manipulating everything, from economic figures, to BLS figures, to probably housing figures… We are in a sea of lies.

The bill Rep. Darrell Issa has on information technology has bipartisan support and is headed for the full Congress. And the reason it has bipartisan support is that 95 percent of all IT projects that the government does have either have been scraped, wouldn’t work, had to be refunded or are over budget. And now this same government is undertaking health care for 317,104,210 people.

In other words, we’re dealing with a completely failed system.

And when it’s a failed system you don’t get on the other side from here. You don’t say it’s a cycle and we’ll work it out and it will come back round again. It doesn’t come back, it just gets deeper.

ToNYC's picture

How do they "Pull it"  this time?


Peter Pan's picture

The rot is to transform the system without actually collapsing it until the next generation accepts it as a new norm. The previous generation by then will be in its twilight years while the new generation will be in the twilight zone where nothing follows the previous patterns of history until a collapse finally does occur through the sudden onset of war, natural dsasters, disease etc.

NOTaREALmerican's picture

As long as I die before "anything" happens, I'm ok with whatever.

Peter Pan's picture

And that has been the problem with our egocentric economy where it was all about me me me.

Any society that does not function on the basis of what is best for the next generation is bound to eat everything in the silo and therefore destroy tomorrow.

Aknownymouse's picture

FED Failure is leading to stagflation. Yields are moving higher while CPI and PPI moving lower. The FED broke it.

Pseudonymous's picture

When the paper's crumpled up it can't be perfect again.

F.A. Hayek's picture

I will patiently wait to buy the bottom after the great reset. Either that or I will have plenty of kindling to start the fire in the oil drum on the corner of my collective housing authority. Forward! 

Peter Pan's picture

By the bottom after the reset?

With what? And what will you buy? Will there be anything left to buy? Or will we have destroyed everything?

Diogenes's picture

Evidently the writer wasn't around in 1992 when George Soros and others made billions on the fall of the pound.

The government was pursuing the same strategy at the time as is recommended above as foolproof.

But they keep making bigger and better fools.

moneybots's picture

"The illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy."


But while the bubble is inflating, the truth is hidden, which is what they are seeking.  When it bursts, they will just blame the man behind the tree.

esum's picture

china will pull the rug out from under soon with a gold backed currency for international trade

we pissed on the house of saud whose cooperation we need for the petrodollar 

china already buys oil with gold from iran

we have a fucking idiot running the show who cant even set up a web site and lies about it too 

the king has no clothes