Fed’s Aggressive Attempts to Put More Money and Credit in Circulation and the Asset Bubbles

“One market bubble may be an accident;” begins an article in the Financial Times , “two in the space of a decade begins to look like carelessness.”

In our view, the bubbles in housing and debt were the result of neither accident nor carelessness. They were the result of Fed policy.

The Fed thinks it has two mandates: to preserve the value of the U.S. dollar…and to maintain full employment. The two are as incompatible as a sanctimonious governor and the Emperor’s Club. At some point, you have to choose. What’re you going to be – a governor or an emperor?

Fed governors chose the easy path – they chose to try to boost up the economy…and let the dollar go to hell. That’s why the greenback has lost half its value against major foreign currencies since the beginning of this century. And it’s why we have had two major, related asset bubbles so far this decade – one in housing and the other in housing debt. And it’s why we have also had a credit crisis…from which we now seem to be emerging.

People are beginning to put two and two together – to make the connection between the Fed’s aggressive attempts to put more money and credit in circulation and the asset bubbles. And now that they’ve got their slide rules out…they’re wondering about the oil price too…and gold…and food…and consumer prices…

…and now, in this moment of high anxiety, the whole world turns its weary eyes to Paul Volcker. Like France recalling the old Hero of Verdun – Marshal Petain – in ’42, the press goes to Volcker and asks his opinion.

The latest Bloomberg report:

“Volcker, who engineered a surge in interest rates to 20 percent when battling consumer price gains 18 years ago, said ‘there is some resemblance to where we are now in the inflation picture to the early 1970s.’ The Fed failed to contain a pickup in prices at that time, spurring the acceleration of inflation later that decade, he said.

“‘If we lose confidence in the ability and the willingness of the Federal Reserve to deal with inflationary pressures’ and buttress the dollar, ‘we will be in real trouble,’ Volcker said. ‘That has to be very much in the forefront of our thinking. If we lose that we are back in the 1970s or worse.’

“Consumer prices rose 3.9 percent in April from a year before, compared with an average rate of 2.7 percent over the past decade, a Commerce Department report showed today. Volcker said there’s ‘a lot more inflation’ than reflected in government figures.”

Yes, dear reader, the battle between inflation and deflation has been noisy and indecisive. But the real cost of this war hasn’t even begun to register. Unbeknownst to most observers, almost a whole generation of wealth building has been wiped out. Wages are back to levels of the ’70s. Stocks have gone nowhere in 10 years. And houses are headed back to levels of the mid-’90s.

On this last item, we have some news headlines. Foreclosure filings rose 65% in April, from the year before. In California, foreclosures hit a new record high. And land prices in Las Vegas, away from The Strip, are down 24% from a year earlier.

Toll Bros. says its sales will go down 30% in this quarter. Mortgage fraud cases are up 31%, says the FBI. And in England, realtors say the market is the worse they’ve seen in 30 years.

How cometh these things to pass? Fed governors have been enjoying their own emperors’ club, if you know what we mean. They’ve had their cake – and eaten it too. Until now, they could cut rates and increase the money supply, and still hold their heads up look Americans in the eye: “Do you see any inflation? We don’t see any inflation.”

Alas, the rumors are out…the receipts are turning up…and people are appalled. They’re turning on Alan Greenspan, in particular. We opined years ago that Greenspan’s reputation was inversely correlated to the price of gold. As gold rose, Greenspan’s stock went down. As you will see, below, this trend probably has further to go.

Even Ben Bernanke has disavowed his former boss – saying that the Fed can and should spot bubbles and lance them before they get too bad. But while Bernanke talks tough…he has shown himself unwilling to make Volcker’s tough choice. Between protecting the dollar and keeping the bubble pumped up, Bernanke has chosen the pump, not the lance.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

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.
Bill Bonner

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6 Comments on "Fed’s Aggressive Attempts to Put More Money and Credit in Circulation and the Asset Bubbles"

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Most people who are in debt are in denial about it. They bury their head in the sand, and hope that it will all go away. And even more dangerous than being in denial about it, they also deny that they are in denial Gosh, that must be the ultimate form of denial huh? To deny that you are in denial. How ironic is that? Maybe they should hold a special conference for people to go to, and call it “The national seminar to help people who are in denial”. Of course, nodoby would turn up to it, because they… Read more »

Hey, here’s a good quote that I just read on another website

“Reality is a gift. It’s the only truth. Truth is bigger and even safer than hope”

Dont cha just love that quote?


It’s very hard to take this article, or author, seriously when he writes a sentence like this: ”And houses are headed back to levels of the mid-’90s.” That’s just pure drivel. The fact that the market might give back most of the run up that took place after 2002 or so, (when the supply of money and the requirements to qualify for a mortgage both went into crazy territory) doesn’t mean we are going back to the mid nineties. What a silly thing to write.


Is your reality the same as mine Christina?


I think he might mean the USA Peter…although with inflation the way it is, I think that will never be right either


no he mean the global real estate bubble

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