La Bubble Epoque

“It was horrible! Horrible! Like lightning had struck. No one was prepared.

“You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery store were empty. There was nothing you could buy with your paper money.”

In 1993, Friedrich Kessler, law professor at Harvard, described an event from his past – Weimar Republic’s hyperinflation. He might have been describing the future too.

All over the world, the inflation pumps are running hot. In Australia, the government recently announced a stimulus program. Checks of $1,000 per child will be sent to deserving parents. Senior citizens will get $1,400.

The Japanese have a 5 trillion yen program, while Europeans are in for $1.8 trillion. But it in the United States the pumps are practically burning up. The Americans have put up $8.5 trillion, including $120 billion to bail out a group of foreign countries, as well as the homeland. A trillion here…a trillion there…pretty soon you’re broke. But who’s worrying?

“I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States,” Ben Bernanke assured Congress, adding that “a determined government can always generate higher spending and hence positive inflation.”

So determined was the U.S. Fed since 1970 that the dollar lost more than 3/4s of its purchasing power. But now, all over the world, prices are falling. Inflation is no longer a sure thing. For the first time since the 1930s America, and many other nations, run the risk that inflation rates will turn negative.

Ben Bernanke has been wrong about many things; but as to the Fed’s ability and determination to destroy the dollar, he is almost certainly right. The burden of today’s column is that we share his confidence. Having inflated so many bubbles – including the monster in private debt that has just blown up – the Fed chief should have little trouble inflating another one in public debt.

History will record that the Bubble Epoque began soon after the Plaza Accords in 1985. The immediate problem confronting the finance ministers and central bankers at the Plaza Hotel in New York was what to do about the dollar. After having gone down in the late ’70s, it went up so much in the early ’80s that there seemed no stopping it. The strong dollar had its advantages of course. American tourists visiting London in the early ’80s could leave their calculators at home. A dollar was a pound. A pound was a dollar. But the strong dollar was a threat to America’s commercial interests. Japanese imports, in particular, were undermining America’s competitive position.

So the assembled economists came up with a solution. It was decided that the yen should be revalued, upwards, so as to tilt the playing field a little more in the Yankees’ advantage. With a higher yen and a lower dollar, products from Japan would have to roll uphill if they were to reach U.S. markets.

Since Richard Nixon had closed the gold window at the U.S. Treasury, in 1971 dollar, not gold, was the bedrock of the new financial system. But the dollar was hardly granite. It was more like gas. Foreign nations bought dollars from their local merchants and exporters, and paid for them with their own currencies. The more greenbacks America emitted, the more money of all shades and colors expanded all over the planet. If central banks failed to keep up with rising supplies of dollars, their local currencies would rise against the greenback, hurting sales to everyone’s favorite customer, the USA. The banks also used dollars as reserves; as their capital increased, so did their lending.

The system was absurd; but it wasn’t unpopular. The more Americans spent, the more money foreigners had available to lend them

Readers should be grateful; if this column were not so short we would give you more of the details. But there is no need. The facts are not in dispute. The Plaza Accords was followed by the first major bubble of the bubble era – in Japan. The Nikkei Dow, rose from 12,000 in 1985 to over 39,000 in 1990. Property prices in Tokyo soared.

The Japanese bubble found its pin in January of 1990. It brought about a bust that has lasted longer than marriages and refrigerators. The Bubble Epoque was only beginning. A few years later came bubbles in Asia, Russia, and an oft-rehearsed one in LongTerm Capital Management. LTCM was the blow-up not heard around the world. Investors should have listened more carefully. The fund had two Nobel prize winners on its payroll. Their theories of risk management and mark-to-model pricing were clearly wrong. Pity no one noticed.

Instead, the authorities learned exactly the wrong lessons. When one bubble blew up…the feds pumped in more hot air – inflating a new bubble somewhere else. When the bubble exploded, they pumped overtime. Pretty soon, they had inflated huge bubbles – in emerging markets, housing, consumer credit, the financial industry, commodities, food, and even art. Private debt – used to fund the asset bubbles – was the biggest bubble of all. And now, with all those bubbles flattening, along comes another one. A bubble in public debt.

It’s inflation they want. And inflation they shall have. Of course, Mr. Bernanke is as keen to avoid the “hyper” modifier. “Just a little bit” would be plenty, he says to himself. He aims for 2%…maybe 5%. And if inflation rises to 10%…20%…or more…he won’t be the first central banker to miss the mark.

Bill Bonner
for 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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4 Comments on "La Bubble Epoque"

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rick e

What would be the best and worst case scenario in regards to future interest rate rises for Australia? Will we see the 15% to 18% era of hawk? And what time frame are we looking at 2010 to 2015? When deflation runs its course and inflation starts with this entire world stimulus.
I just need a time frame to work off. Thanks to all that comment on this site.

Greg Atkinson
Hi Rick. To be honest nobody can accurately answer that question and in general, economic forecasts tend to be useless after a few months. All I can say is that central banks and governments around the world are trying to “inflate” economies by pumping money into the system and cutting interest rates. This should eventually lead to inflation and the raising of interest rates at some point. However making any calls out to say 2010 – 2015 is near on impossible. Be wary of statistics and graphs though as they can be manipulated in order to suit a persons argument.… Read more »

Hi Dan,

That would be l’Epoque Bubble. For the rest I could not agree more.

All banks want the public to spend more and save less. There is just too much excess capital in bank treasuries around the world. It is just not possible to lend it all out for wealth generating activities. By spending more and saving less, in theory one should get inflation, but this economic model is erroneous, and it is about time we re-examined it. In a free market, spending more should lead to greater competition as the size of the market increases. Of course, not all players will survive, so it also increases the risk to those who invest in… Read more »
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