What Happens When Rampant Asset Inflation Ends?

Tyler Durden's picture

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

The collapse of asset inflation will implode all the fiscal and financial promises based on ever-inflating assets.

Yesterday I explained why Revealing the Real Rate of Inflation Would Crash the System. If asset inflation ceases, the net result would be the same: systemic collapse. Why is this so?

In effect, central banks and states have masked the devastating stagnation of real income by encouraging households to take on debt to augment declining income and by inflating assets via quantitative easing and lowering interest rates and bond yields to near-zero (or more recently, less than zero).

The "wealth" created by asset inflation generates a "wealth effect" in which credulous investors, pension fund managers, the financial media, etc. start believing the flood of new "wealth" is permanent and can be counted on to pay future incomes and claims.

Asset inflation is visible in stocks, bonds and real estate:

The sources of asset inflation are highly visible: soaring central bank balance sheets, credit expansion that far outpaces GDP growth and ZIRP (zero interest rate policy):

Destroying the return on cash with ZIRP and NIRP (negative interest rate policy) has forced capital to chase any asset that offers any hope of a positive yield. As asset inflation takes off, the capital gains attract more capital (never mind if yields are low--we'll make a killing from capital gains as the asset inflates further) which creates a self-reinforcing feedback: the more assets inflate, the more attractive they become to capital seeking any kind of return.

In effect, gambling on additional future asset inflation is the only game in town. Institutional money managers are buying bonds that yield less than zero not because they're pleased to lose money, but because they anticipate rates dropping further.

As bond yields decline, the value of existing bonds paying higher interest rises. As crazy as it sounds, buying a bond paying -0.01% will be a highly profitable trade if the yield on future bonds drops to -0.1%.

With the cost of borrowing less than zero once the loss of purchasing power (i.e. consumer price inflation) is factored in, it makes sense to borrow money to increase speculative asset purchases to leverage up any gains from future asset inflation.

Look at how margin borrowing and stock prices move in lockstep:

The question that few ask is: what happens to pension funds that need 7.5% annual returns to remain quasi-solvent when asset inflation turns into asset deflation, i.e. assets decline in value? Take a look at the S&P 500's rise to the stratosphere and ponder the monumental losses that would accrue to any institution that thought asset inflation was a permanent feature of modern life:

There are only two ways to keep asset inflation alive: one is for central banks and states to buy up major chunks of all asset classes, i.e. hitting every higher bid regardless of the risks of such a strategy, and the second is to pay households to borrow money to chase future asset inflation, for example, paying households to buy a house with a mortgage:

The insanity of these two strategies is no hindrance to their implementation. The collapse of asset inflation will implode all the fiscal and financial promises based on ever-inflating assets and reveal the unsustainability of the status quo's strategy of substituting debt and asset bubbles for stagnating real income.

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SomethingSomethingDarkSide's picture

A giant abandoned tuna can kweff

froze25's picture

Massive deflation will happen when it ends. Best thing for us to get out of this rut.

JRobby's picture

See if you can print fast enough to keep up with the deflation.

Like driving a car into a bridge abutment at 120

Lady Jessica's picture

Just like Aubrey McClendon

StackShinyStuff's picture

Nothing happens.  It's different this time. 

MalteseFalcon's picture

The last crash got reflated by China.

They issued $ zillions in debt.

No China this time around.

Someone said "India".

I said "LOLOL."

Itinerant's picture

Ponzi is the normal word for this scheme.

We will either die from no income (what kind of asset is it if you are not buying an income stream -- may as well own a chunk of Saturn), or rates will rise (crushing the viability of outstanding debt) as the institutions see all their past total return gains melt like ice cubes at the beach.

wildbad's picture

or asked another way..what happens when fiat is worthless?

Cognitive Dissonance's picture

I still have checks in my checkbook. So that means I still have money......right?


mtl4's picture

Meat and veggies aren't grown at the grocery store in case those rubber checks aren't working........believe it or not there actually used to be a barter system in days gone by.

diogi23's picture

Still around for those of us that grow our own.........

GunnerySgtHartman's picture

The barter system is going to see a big comeback when the house of cards collapses.

RaceToTheBottom's picture

Need a new check book?  Banks can print more....

JRobby's picture

Nominal $42 service charge.

We can put you on the auto pay plan that assumes you will run out of checks every other day.

Sound Good? "YES SIR"

GunnerySgtHartman's picture

what happens when fiat is worthless?

My PMs look really good. :-)

ejmoosa's picture

Non-asset inflation achieves orbit....

LawsofPhysics's picture

Simple, when fraud is the status quo possession becomes the only "law" that matters!!!!!!


Keep you fucking FIAT and give me something REAL in exchange for my labor!!!

CarpetShag's picture

When, Chuckie, when?

Lady Jessica's picture

What happens?

Some can pick up assets for pennies on the dollar.

This is what the illusory money as credit system is for.

LawsofPhysics's picture

so long as the fiat is accepted, yes.

Lady Jessica's picture

Right on.

It's illusory.

An illusion.

And in the blink of eye - POOF - the spell is broken, and fiat acceptance is gone.

But we are dealing with masters of mind control.  How much do you value your sanity?

buzzsaw99's picture

i don't care how many bearish charts zh puts up, these days the fear of a stock market crash is nothing when compared with the fear that it won't.

Lady Jessica's picture

that's going to be hard to beat for best comment of the year

cowdiddly's picture

Oh stocks will never come down from orbit. Thats why I laugh at bears being perplexed by this market even though they are essentially right and am one myself. Stock prices went to the MOON in Weimar Germany too.

There is only one teeny tiny lil problem with that...............................................

NihilistZero's picture

I think a Trump Presidency gives them the perfect cover to pop this bubble.  They know the only way out that doesn't completely destroy the system is for them to let the deflationary cycle that they only let half complete from 2008-2011 finish its work.  If shit head Ben had been less concerned about his and Obama's legacy, we'd of had another year or two of deflation and an organic recovery could have followed from the creative destruction they held at bay.  Instead they chose a mega injection of monetary-meth that has the economy flailing about to this day and no investors willing to be the first to make a rush for the exits.

As buzzsaw99 said the thought that this goes on until the BIG crash has to scare the shit out of the FED.  At the very least it should.  Donald would give them all the cover they need as half the country will expect a disaster.  The question is will Donald roll with the punches or use the platform of the presidency to expose the real source of our malaise?  If he does I hope he has someone loyal with access to Hinckley's GPS coordinates at all times...

khaproperty's picture

Asset inflation is simply not common price inflation. To save debtors in states and banks with financial repression (in high price inflation) will cost a very high price in other area like middle class, economy and political institutions. We all see real problems coming.

Houses Depreciate's picture

The problem is in the rear view mirror. Grossly inflated prices are the problem. Falling prices to dramatically lower and more affordable levels accelerating the economy is the solution.

Houses Depreciate's picture

Prices fall. And prices have a long way to fall. A very long way to fall.

conraddobler's picture

All I want to see is headlines that read:

Economic figures surprise to the upside again as the world adjusts to honest money.


Then somewhere down in the story this would be nice.

Central bankers were unavailable for comment.


THE DORK OF CORK's picture

Asset inflation is caused by collateral stealing


Asset inflation will not stop until we see real distribution of property ownership etc etc.


A policy for example of....if you live in it then you own it etc etc


Lady Jessica's picture

"until we see real distribution of property ownership"

You do realize alloidal title is an impossibility for individuals?

Our liberty has long had limits set by our overlords and their mind games.

Just recently we swapped nation state overlords for corporate ones.

Which did you prefer?

THE DORK OF CORK's picture

I am aware that I am owned.

Was against Georgist thinking because of my gut feeling

Thanks for the reminder.

DrBrown's picture

We are so fucked!

conraddobler's picture

It's an interesting race.

Light and dark.

There is a deluge of information so much so that included in the flood is all anyone ever needs to know about ancient ponzi schemes and control memes and with that knowledge they could he banished forever but this is lost in the absolute flood of data.

So insteand of total enlightenment we have people chasing icons on their cell phones.

Maybe we need bankiemon go away?

This is running concurrent with us trying to render humans irrellevant at warps speed using some of the same technology that could free it.

Maybe the robot overlords would offer better dental and health care?

I'm willing to see what they say before I judge :)


financialrealist's picture

The question is how long the duct tape will last...but this will all end in one spectacular firework show....literally. Even if asset prices stay where they are...a zero growth portfolio has very very short shelf life

Batman11's picture

If we say 2008 was a one off “black swan” event we won’t have to take responsibility for it.

Just too appealing for elites, allowing their usual modus operandi.

2008 wasn’t a one off “black swan event”

“Minsky Moments”

1929 – US (margin lending into US stocks)
1989 – Japan (real estate)
2008 – US (real estate bubble leveraged up with derivatives for global contagion)
2010 – Ireland (real estate)
2012 – Spain (real estate)

2015 – China (margin lending into Chinese stock market)

Irving Fisher looked at the debt inflated asset buble after the 1929 crash when ideas that markets reached stable equilibriums were beyond a joke.

Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble.

Hyman Minsky came up with “financial instability hypothesis” in 1974 and Steve Keen carries on with this work today.

Steve Keen saw the debt bubble inflating in 2005.

There are those that knew and the clueless bankers, central bankers and mainstream economists that didn’t know what hit them.

2008 – “How did that happen?”

After the bubble bursts you enter balance sheet recessions that Japan knows all about after having been in one for 25 years since 1989.

They found out what to do:

You need fiscal stimulus, monetary stimulus doesn’t work and austerity makes them worse.

This is the sequence of events, get ready.

Event 1 – Debt used to inflate asset bubble.

Everything else just follows naturally.   


Herdee's picture

Inflation was pushed by the Fed into the housing rental markets.That's why the average working person has no money to spend,they're all getting ripped off on rent and working mostly service sector jobs.The government tax revenues coming in are not paying the bills on the expenditures.That's why you see Obama running a deficit.Now his contribution to bankrupting the United States is about another $21 Trillion.Obama is a very poor NeoCon manager who is a fascist in sheep's clothing.

See the example from the link on the left hand side of the page on ZeroHedge,that's what big government has done to you,their expenditures are like a drunken sailor spending his paycheck on hookers and alcohol in a foreign port.That's Obama for you...


conraddobler's picture

It needs to be kept real simple in terms people can understand.

Our monetary policy is like a controlling person.

Could be at work, at home ie your spouse, your parents, whatever.

Parents control kids by controlling their house and money maybe they even buy junior a car but it comes with strings.

Extremely controlling parents can go to vast extremes.

Munchausen by proxy is one example that is inflicting harm to then act as a savior for someone, it is a form of control.

It's the control always follow the control.

Controlling people do goofy things and the controlled people often don't even realize they are being controlled but the people around them spot it easily.

Well we're all being controlled by money and credit and it is tough to spot because we are in it and we have no outside frame of reference but actually we do.

See Iceland.


Charles Hugh-Smith is an excellent source of economic logic and this article effectively spells out the Zero Sum end game so that even the retards in the CB can figure it out.


Hugh-Smith ROCKS!



Mr. President's picture
Mr. President (not verified) Aug 4, 2016 9:51 AM


I GOT IT!... let's just get some taller charts...we can keep this goin 4 eva.


the grateful unemployed's picture

on spot, on. yes the fed will be buying hard assets, gold most likely, they already buy crude to put in the SPR, but the SPR is by definition a moveable concept, in the past they referred to it as enterprise storage and it equals (or did when it was defined that way) the SPR in volume, but probably more enterprise storage now. the fed can put a bid under energy, and this amounts to what used to be called NATIONALIZING an industry, banks, energy, what else have you got? those older accurate terms will be replaced by some Orwellian term, government is the primary engine of job creation (Hillary knows this and speaks truth, Trump is running against the trend, speaks in idealistic phrases)

so if you like Bill Gross, 'figure out what the fed is doing, and do it' then you want hard assets. enter the bugaboo of asset deflation, and the fed is buying those deflating assets with your tax dollars. do you really want to catch that falling knife? the fed may run out of ammunition, or the political will to buy consumer products when the makers keep pumping new ones out (i can hear senator Phil A Buster, making a speech, we buy one ford they produce two..) 

huggy_in_london's picture

What Happens When Rampant Asset Inflation Ends? Well, money dies and gold flies

PGR88's picture

 Smith asked the question: "  What Happens When Rampant Asset Inflation Ends?"

But he did not answer it.  His many excellent graphs and charts merely pointed out that there IS definitely asset inflation due to massive debt and central bank money printing.


Seriously - what happens next?

Jack's Raging Bile Duct's picture

It doesn't end, because it cannot end. If there is no global wars, then continued stagflation until we mundanes are pushed into open and violent revolt. Thus, many smaller wars. If global war is used, then we get hyperinflation with price controls. The winners gets to liquidate debt and the loser does not.

Jack's Raging Bile Duct's picture

Why don't they just call it currency depreciation, rather than "asset inflation"? I guess the distinction has to be made since all of this hot money is born of debt. I don't know why everyone keeps claiming deflation, when the currency supply has only grown--even if it has only circulated a small pool of hands. Just because your commoners can't participate doesn't mean prices won't be bid up. What we have is stagflation, which is free money for the rich and usury with higher prices for the rest.

As others have observed, I think this is just the relative "calm" before the crack up boom. The biggest question is whether this ends in global war. That will decide how these trillions in debt and fake money are resolved.

August's picture

>>>Just because your commoners can't participate doesn't mean prices won't be bid up.

Quote of the hour!