Monday, August 30, 2010

The Theory And Pactice Of Blowing Asset Bubbles

Central bankers have yet to demonstrate the ability to learn from history.  They continue to debate ways of preventing asset bubbles from forming:

Central bankers and economists at a Federal Reserve symposium clashed over how to best contain asset-price bubbles three years after a crash in U.S. housing prices led to the worst global recession since World War II.


This debate occurs while the BOJ engages in the one practice known as a surefire way to launch asset bubbles - monetary stimulus:

The Bank of Japan added 10 trillion yen ($118 billion) in liquidity injections after a surge in the nation’s currency to a 15-year high threatened economic growth.


You'd think that the one no-brainer course of action would be NOT to pump more liquidity into an economy that has already been over-liquefied for a generation.  The U.S. isn't nearly as far down this road as Japan but it's making the same mistake.  This lesson is even lost on international institutions, with the IMF angling for a permanent liquidity-producing vehicle
 
If the monetary steroid shot doesn't work, there's always another fiscal stimulus to be wasted.  China has reached the end of private enterprise growth thanks to its over-levered real-estate bubble and is now turning the fiscal spigot back on for its state-owned companies.  Tolerating a little stagflation look like a better deal than a hard landing with social unrest. 
 
This circus never seems to end.  It certainly will end, with plenty of despair and unrest for all countries playing this game.