Central Banks and The Final Chapter in the Credit Bubble Story

Nafea faa ipoipo?

Before we get to that, we note that the Dow fell 60 points, or 0.3%, on Friday. Gold was more or less unchanged. An ounce of the yellow metal traded at $1,242 at last check.

Not to leave our dear readers in doubt, we expect a crack…or even a crash…in stocks sometime this year. But that won’t be the end of the story. We suspect it will mark the end of one chapter and the beginning of another — the final chapter in the credit bubble story that began in the early 1970s.

It’s a long story. And it’s a big story.

Too bad it has been so overshadowed.

Watergate…Vietnam…massacres from Hanoi to Bombay…Boy George and J-Lo. The plain people have time for the Super Bowl, but certainly not for the Super Bubble…even though it is more important to them.

Besides, the Super Bubble story has yet to be told. The best we can do is to give it to you in little bits and pieces, as we uncover them.

The $300 million painting
In case your Tahitian is foggy, Nafea faa ipoipo? means ‘When will you marry?’

It now has the distinction of being the most expensive work of art ever sold.

Painted by the French post-Impressionist artist Paul Gauguin in 1892, it brought $300 million at auction on Friday.

What makes it so valuable?

‘Gauguin won’t paint any more pictures,’ you may say. But that could be said of any dead artist.

‘He was a great genius,’ you may add.

But if he was a great artist, he was no less of a great artist 10 or 50 years ago, when his paintings sold for a fraction of last week’s price.

Yes, he is dead. And yes, maybe he was a genius…but what makes a run-of-the-mill work by a Frenchman with rigor mortis so valuable?

We propose a better explanation: The price has been refracted by the worldwide credit bubble. In other words, this is yet another thing that makes us say, ‘Huh?’

Magic wealth
All we can do is laugh. The rich get richer. Central banks see to that. They create money ex nihilo and use it to push up asset prices for the already wealthy.

What do the rich do with this magic wealth?

Do they invest in new factories, hire people and make the world a more prosperous place?

Why bother?

The world already has too much capacity — thanks to too much credit. Businessmen, investors and speculators have been able to borrow with hardly a care. They’ve built factories in China, sunk oil wells in Texas, and produced cars out the wazoo.

Now, what can they do but look for ways to impress each other?

Every day, the whole thing becomes more astonishing. Central banks buy government bonds from banks and other big financial institutions.

This puts more debt on central banks’ balance sheets and makes more liquid cash available for investors, speculators and art buyers.

A beautiful scam
For months — if not years — serious economists concerned themselves about what would happen when central banks had to shrink their balance sheets by selling their bonds back into the market.

That is the only way to reduce the monetary base (made up of bank reserves and physical currency in circulation) and return things to normal.

And things have to return to normal somehow…don’t they?

Now, economists scarcely bother to think about it. For normal is not coming anytime soon. Central banks are never going to sell their bonds back into the market. The air will not deflate out of the credit bubble.

Not voluntarily, at least…

Instead, central banks will continue to buy government debt, put it in their vaults and throw away the key. They know perfectly well that they can never unload so many bonds without causing a crash in the debt market.

And guess what?

Central banks pay back to governments the interest they earn on the bonds in their portfolios.

In effect, the more central banks buy debt from governments, the more government debt goes down.

Can you believe it?

What an elegant solution to so much government indebtedness — just sell it to the central bank and forget about it.

What a beautiful system. What a scam!

Right now, about 25% of all government debt is sitting on central banks’ balance sheets. In the US, the figure is as high as 50%.

And most likely, this debt will never come back into the market again.

What will happen to it?

It will go back whence it came — vanishing into thin air.

What this means is still coming into focus. All we know so far is that things are getting further and further out of whack. And somehow, sometime, someday they will have to get back into whack.

We wonder how much ‘Nafea faa ipoipo’ will be worth then?


Bill Bonner,
for Markets and Money

Join Markets and Money on Google+

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money