From Doug Noland’s Credit Bubble Bulletin:
Following 1999’s manic blow-off excess, I thought the Bubble had burst in 2000. I had to reverse course in 2002, warning that Fed reflationary policies were unleashing a “mortgage finance Bubble”. The “Moneyness of Credit” – the transformation of Trillions of risky loans into perceived safe and liquid AAA securities – was instrumental in, at the time, unparalleled Credit and risk-intermediation excesses.
I thought the bubble had burst in 2008. I reversed course (again) in 2009, warning of an unfolding “global government finance Bubble” – the “Granddaddy of all Bubbles.” The so-called “Great Financial Crisis” (GFC) gave cover to a perilous – and fateful – escalation of government inflationism.
I feared QE – the wholesale inflation of central bank Credit – would prove a slippery slope. In the markets, Bernanke’s coercion of savers into the risk markets created a dynamic whereby the markets would become only more integral to system financial conditions, perceived wealth and economic performance. I worried about a “moneyness of risk assets” dynamic that would see the Fed entrapped in market liquidity and price backstopping operations, crystallizing the already dangerous market misperception that securities entail minimal risk. Stock prices always rise over time, with occasional downdrafts sure to induce Federal Reserve reflationary measures.
While memories have faded, mortgage finance Bubble consequences were horrible, levying a steep cost on our social wellbeing. From my analytical perspective, the global government finance Bubble created a whole new level of risk. For one, it unleashed capricious inflationary forces globally. Importantly, the custodian of the world’s reverse currency succumbing to rank inflationism (central bank Credit and government debt) freed nations everywhere to do the same.
Post-GFC reflationary measures opened the monetary floodgates. I don’t see how China’s incredible Bubble is sustained without U.S. QE, massive federal deficits, and ongoing Bubble excess. China’s international reserve holdings inflated from about $200 billion to $1.5 TN during the mortgage finance Bubble period, only to then rise parabolically to a high of $4.0 TN in 2014 (as the Fed ratcheted up QE2). Massive reserves, with enormous and unending trade surpluses with the U.S., empowered China to recklessly inflate Credit without the traditional risk of currency instability.
During a Bubble’s upswing, perceptions hold that the pie is getting bigger. The forces of cooperation, coordination and integration hold sway. But eventually, the reality of wealth inequities is unmasked. Stagnation and fear of a shriveling pie foment animosity, disintegration and conflict.
China doesn’t become so powerful – financially, economically, militarily, geopolitically – without the protracted U.S. (and then global) Bubble. For today’s heated rivals, the days of cooperation are over. The enemy of my enemy is my friend. Hostile to a U.S. global order it views as deeply unjust and contra to its interests, Russia is jubilant over the opportunity to partner closely with a likeminded Beijing. Russia gains the security of a vast market for its energy resources outside of U.S. influence, while a military alliance creates the most powerful opposition to U.S. global dominance in decades. Without his harmonious partnership with Xi, Putin doesn’t take the risk of such a confrontational approach with Ukraine, the U.S. and NATO. Might the U.S. and its allies being bogged down with a war in Europe embolden Beijing’s Taiwan aspirations?
President Biden believes Putin has “Made the Decision” to invade Ukraine. The situation in eastern Ukraine is rapidly deteriorating. A car explosion at a government building. Gas pipelines bombed. Satellite imagery showing aggressive Russian military positioning along the Ukraine border – in Russia, Belarus and Crimea. Russian-supported separatists announcing plans to evacuate women and children to Russia. Aggressive cyberattacks.
While the administration stresses it’s not too late for diplomacy, the situation appears increasingly dire. U.S. intelligence believes Russia is now executing its plan of “false flag” attacks and provocations (i.e. accusations of Ukrainian genocide) that it will use as justification for an invasion. “Nearly half of Russian forces surrounding Ukraine are in attack position.” Defense Secretary Lloyd Austin: “I don’t believe it’s a bluff.”
… Additional corroboration this week of global Bubbles at the precipice. The Nasdaq100’s 1.7% decline pushed y-t-d losses to 14.2%, supporting the thesis of a deflating U.S. “tech” Bubble. Ten-year Treasury yields traded to 2.06% Wednesday, with stress building in U.S. corporate Credit. U.S. bank stocks were hit 3.0% this week, and bank CDS prices continue their upward march. And the Fed has yet to even end QE or move off the “zero bound”. The Bloomberg Commodity Index’s 1.6% advance pushed y-t-d gains to 12.6%. Gold this week traded above $1,900.
Chinese Bubble developments this week were no less ominous. A Friday Bloomberg headline: “Crisis in China’s Property Industry Deepens With No End in Sight.” And Thursday: “China Builders Miss More Deadlines as Yango Fails to Pay Coupons.” “Chinese high-yield dollar bonds fall 1-3 cents on the dollar Thursday…, putting them on track for a fourth day of declines.” One cannot overstate the significance of the ongoing spectacular collapse of China’s massive (and massively levered) developer industry.
From the nineties “tech” Bubble to the grander “mortgage finance” Bubble to the unbelievably colossal and historic “global government finance” Bubble. Bubble inflation not only made it to every nook and cranny across the global landscape. Wild excess went to the very foundation of global finance – central bank Credit and government debt. This is it. Nearing the end of the road. There’s no fledging Bubble waiting to heroically save the day this time around.
Moreover, the amount of monetary inflation necessary to sustain aged financial and economic Bubbles has fueled dangerous inflationary dynamics. The Fed and global central bank community are being forced into action, with the tightening of finance necessary to rein in inflation, placing myriad Bubbles in danger. There is today acute fragility throughout global finance. “Money” and Credit have been severely degraded. Financial manias and speculative leverage have destabilized markets and economies virtually across the board. Gross inequities have destabilized societies and international relationships. In sum, the existing global order appears one serious catalyst away from a megaquake.
Find the rest of Doug Noland’s work here.
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