The Trouble With Asset Bubbles: If You Stop Pumping, They Pop

Authored by Charles Hugh Smith via OfTwoMinds blog,

The idea that authorities can massage their pumping to keep asset bubbles inflated at a permanently high plateau is currently being tested.

The trouble with inflating asset bubbles is that you have to keep inflating them or they pop. Unfortunately for the bubble-blowing central banks, asset bubbles are a double-bind: you cannot inflate assets forever. At some unpredictable point, the risk and moral hazard that are part and parcel of all asset bubbles trigger an avalanche of selling that pops the bubble.

This is another facet of The Fed's Double-Bind: if you stop pumping asset bubbles, they pop as participants realize the music has stopped, and if you keep pumping them, they expand to super-nova criticality and implode.

There are several dynamics at play in this double-bind.

1. The process of inflating a bubble (for example, the current bubbles in stocks and real estate) requires pushing investors and speculators alike into risky asset classes. This puts the market at increasing risk as everyone is pushed to one side of the boat.

2. Those on the other side of the boat (i.e. shorts) are slowly but surely eradicated as the pumping keeps inflating the bubble. When the bubble finally bursts, there are no shorts left to cover, i.e. buy stocks at lower prices to reap their profits.

3. As the bubble continues to expand, the money available to enter the market and keep prices rising declines. The very success of the pumping process strips the markets of new sources of new money, leading to a point where normal selling exceeds new-money buying and the bubble collapses.

4. Money pumping by central banks and governments follows a curve of diminishing return. One analogy is insulin insensitivity: as the systemic distortions build, markets become increasingly insensitive to money pumping. Authorities respond to this intrinsic process of increasing insensitivity by pumping even more money into the system.

But as with insulin insensitivity, at some point the system loses all sensitivity to money pumping: no matter how much money central authorities inject, the markets refuse to go higher. At this point, the stick-slip nature of bubbles manifests and modest selling triggers a collapse as participants all rush for the exits. Buyers have vanished and there is no longer a bid at any price.

5. Having pumped the assets higher with ever-greater injections of speculative risk and pumping, central banks and states have exhausted their ability to re-inflate assets as they collapse.

This growing insensitivity to money pumping is visible in the stock market's response to each new QE program: each market advance is of shorter duration, and each rise is less robust than the last one.

This degradation of response to pumping has forced the Fed to pursue a policy of infinite QE, with no time or pumping limits.

The idea that authorities can massage their pumping to keep asset bubbles inflated at a permanently high plateau is currently being tested. The Fed is implicitly suggesting that it can adjust the expectations/policy dials with such control that it can keep the bubble inflating essentially for years to come.

Systems cannot be controlled once risk and moral hazard have been raised to levels where instability is an intrinsic feature of the system. Those who actually believe the Fed can keep asset bubbles inflated at a permanently high plateau will discover their error in dramatic fashion, as the bigger the bubble, the more violent the implosion.

This is the super-nova nature of asset bubbles: if you try to deflate the bubble slowly, it implodes, but if you keep inflating the bubble it eventually implodes from its internal extremes.

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Last of the Mi… Tue, 09/05/2017 - 08:10 Permalink

The Trouble With Asset Bubbles: If You Stop Pumping, They Pop Wow, imagine if someone had made this one simple statement in '08 how far ahead we'd be now. Oh, I forget the Fed was well aware of it at the time. Never confuse a Fed economy with a freely competitive economy. Two entirely different things.

PT Paul Kersey Tue, 09/05/2017 - 08:28 Permalink

You don't have to stop pumping.  You just have to slow the pumping down.Try it.  Get a piece of paper, draw a graph with two exponential* curves on it.  Call the steepest one "Assets" and the shallower one "Debt".  Pick a point on "Assets".  From that point draw an exponential function that is shallower than "Debt".  Looky.  A bit further along it intersects the "Debt" curve even though it is still going up.  That's your last chance to break even.  Then you are upside down.  The people-who-must-be-repaid start getting upset with you even though they knew it was going to happen all along.  Remember that last little detail.*If you're bad at maths, bad at drawing or bad with fancy words, then you can do the same thing with straight lines.  If anyone complains then simply tell them that it is a graph with a log scale.

In reply to by Paul Kersey

Dame Ednas Possum Kprime Tue, 09/05/2017 - 10:03 Permalink

Speaking of bubbles, I just had a pop-up ad. on this page stating: "Buy ethereum with your IRA"  Hell, the word doesn't even exist in the spelling prompt. (How appropriate... it doesn't exist). The financial masters of our universe are utter scum. Perverse predators. The future for many will be abject misery.  

In reply to by Kprime

NickyGall Tue, 09/05/2017 - 08:11 Permalink

As shown in this article, even the Federal Reserve is growing increasingly concerned about the asset bubbles that it is creating:…
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The Fed is proving to be its own worst enemy.

Grandad Grumps Tue, 09/05/2017 - 08:13 Permalink

I am not so sure that the base assumption is correct. Now with computer control of price and the banks already controlling the vastr majority of assets directly and through their proxies, asset prices need never come down. Assets may just become increasingle less affordable for the average person. The banks and their proxies have spent all this time and effort trading their fiat "nothing" for all valuable and productive assets. Why would they have any desire to sell anything? Wouldn't they just want to own it all?

Sure, there are bits and pieces they do not have yet (North Korea, Iran, Syria,), but they are very near total control. And it is prophecized that they will get their total control... but it will not matter. They are doomed.

PT Grandad Grumps Tue, 09/05/2017 - 08:45 Permalink

It is all a scam and has been for a while now.  As long as people are dumb enough to borrow and the banksters continue to want to lend, this thing can extend until it intersects Moores' Law.  If the banksters do not ask for repayments to allow any of the debt to be paid down in a finite amount of time, if the people are happy to borrow more every week just to cover their weekly shopping, this thing can keep going until the banksters run out of idiots.  When do the banksters run out of idiots?  Well, they're free to "forgive" bad loans or give 1000 year extentions and if the idiots are stupid enough and desperate enough to agree then the banksters can keep using them against you.  Remember the banks do not need to be repaid.  They have the printing press.  This is not about money.  This is all about theft and enslavement.  They steal your land, your labour, and your descendants' labour and 90% of the population do not notice becoz free markits man!!!!  Not because the free markets were a problem.  They are only a problem when the other guy at the auction has borrowed money that he will never repay and you are trying to compete with earnt money.  TPTB have weaponized idiots and are using them against you.  The game is rigged every step of the way.From here it should be clear to see that we are quickly returning to "Aristocracies" and "Nobilities" - you don't get nice things because you worked for them, you get nice things because the Aristocrats are happy for you to have them.  For now.  And it's "all your fault" becoz you did not work hard enuff to compete at the auction and buy things outright.  The debt slaves bid higher than you.  Either become a debt slave too or you live without.  And by "live without" someday that will mean "starve".

In reply to by Grandad Grumps

0hedgehog Tue, 09/05/2017 - 08:29 Permalink

Same with reverse asset bubbles, (metals), when they stop slamming them, they skyrocket. Seems like every time they're smacked down, they get bought right back up and then some. Imagine when they finally have to let it run!

PT foodstampbarry Tue, 09/05/2017 - 08:52 Permalink

They got fucked over just like everyone else, just in a different way.  TPTB use the baby-boomer-demographics excuse when it suits them and they completely ignore it when it suits them.  Do the BBs have any political clout?  Probably, but TPTB still have the last say.  It doesn't happen unless they want it to happen.  Regardless of demographic grouping, 99% of the population don't give a shit about anything.  They just fuck, whinge and get drunk.  They won't lift a finger to save themselves.  The most with which I can agree with you is to say that Blaming the BBs is as useless as blaming the tides.

In reply to by foodstampbarry

PT PT Tue, 09/05/2017 - 09:18 Permalink

Depending on the law of the land where you lived, the BB's parents paid for, or paid a large portion of, the BB's tertiary expenses.  How could they afford it?  The BB's parents were having between 4 and 12 children, not the 2.3 or 1.9 of today.During the Baby-Boomer's peak earning years, the price of university education went through the roof.  Why?  It was the BB's peak earning years.  Govt would have been bringing in record high tax revenues.  Why did we never hear about what happened to those record high tax revenues?You can answer both of those questions by saying "greedy BBs had all the political clout".  But that has not answered the question of what happened to the windfall tax revenue of the BB's peak earning years.  On top of that, the price of primary and secondary schooling should have plummeted when there became record high adult (tax payer)-to-child ratio.I need you to understand this.  "Oh look, BBs cost too much!"  When they don't, we hear NOTHING.  The narrative is rigged.  You need to think outside the Propaganda.  Half the lies are the things you don't notice because no-one tells you.

In reply to by PT

Fed-up with be… foodstampbarry Tue, 09/05/2017 - 09:47 Permalink

You need to blame someone?   As if a Generation of Boomers had anything to do with what CHS is talking about here. The elites, despite age groups, are inherently to be blamed.   The rest of us, no matter our age group, sit by in amazement at this shit.  We the people are being stampeded.   I am a boomer who worked his ass off and saved diligently, have not bought a new car since 1999 (depreciation aversion), am a lite consumer, saved since then, use little resource and you blame my entire generation. Sheesh, get a bit of reality going, will ya?

In reply to by foodstampbarry

Fed-up with be… Tue, 09/05/2017 - 09:50 Permalink

The big issue with my generation, boomers, is that we are sitting by and not SCREAMING with signs, and in MASSIVE ways, pushing back.   We need to get off it and begin to transform.I am not sure where this will end, but I do know, it seems, that THEY know we will sit here and take this without protesting.

gdpetti Tue, 09/05/2017 - 16:52 Permalink

Same with empires of any kind... when they stop expanding, they start to collapse... with the only question then being a fast or slow collapse of the wave function?