It seems that politicians and economists have not learned many lessons from the bursting of the US real estate and credit bubble in 2008, which explains the persistence of quantitative easing that heralds a painful economic meltdown.
In a report published by the American magazine “National Interest”, author Desmond Lachman says that at a time when the world is witnessing a rise in prices and a credit bubble bursting larger than the one that the U.S. experienced during the last crisis, the world’s major central banks are still insisting On its loose monetary policies and deals with the situation in a non-serious way, while deafening silence hangs in academic circles.
The primary source of today’s global “everything” asset price and credit market bubble is the maintenance of zero policy interest rates and the unprecedentedly aggressive bond-buying activity by the world’s major central banks.
Following the Lehman bankruptcy in September 2008, it took 6 years for Ben Bernanke (former Federal Reserve Chairman) to increase the size of the Federal Reserve’s balance sheet by $4 trillion, but in the wake of the coronavirus outbreak, Jerome Powell (current Chairman) made a similar decision in less than a year.
Over the past year, the European Central Bank has increased the size of its balance sheet from less than $5 trillion before the pandemic to $9.5 trillion.
global price bubble
The global price bubble is one of the consequences of the rapid and unprecedented pace of money printing in central banks, for example, today U.S. equity valuations, as measured by the Shiller Cyclically Adjusted Price Earnings ratio, are more than double their historic average.
Another manifestation of rapid money printing has been housing market bubbles around the world. This has included a U.S. housing bubble, where house prices today in real terms are at a level similar to those in 2006 at the peak of the previous housing market cycle.
More disturbing yet for world financial market stability are the pervasive global credit market bubbles that have been spawned by today’s ultra-easy monetary policies.
Despite record-high levels of public debt in emerging markets and their budgets severely affected in the wake of the pandemic, these countries are still able to borrow large sums at relatively attractive interest rates.
In Italy, the government – despite its debt level rising for the first time in 150 years – is still able to borrow at a lower interest rate than the US government is borrowing.
In light of the flow of cash globally, American and European companies – which do not enjoy a high level of credit quality – were able to continue to borrow at relatively low interest rates.
Change policies before the collapse
The main factor fueling the asset price and credit market bubble is the belief that interest rates will remain at their current low rates for a long time, but that the current policies may leave a severe dilemma for the Federal Reserve.
If the US central bank chooses to raise interest rates and limit its bond-buying policy, it risks exploding the asset price bubble on a global scale, causing a problem for the country and the global financial system, as happened in 2009.
If the Federal Reserve does not rein in the monetary easing policy, it risks continuing price inflation. This, in turn, will pave the way for a severe crisis that the Federal Reserve may not be able to stop in time.