Bubbles Inflating Faster Than GDP

  on May 13 2013 10:06 AM

Global central banks have clearly demonstrated the ability to re-inflate stock and real estate bubbles. Global stock markets are roaring ahead of their economies and real estate prices are quickly rebounding from their recent collapse. However, rock-bottom interest rates and massive money printing have yet to show an aptitude for creating sustainable GDP growth.

There has been a lot of talk about a rebound in the equity and real estate markets helped along by the Fed’s free money. That much is for sure the truth; but the evidence of a viable and sustainable recovery built on free-market forces just isn’t there.  

For example, the percentage of consumers who own their own home continued to fall during the first quarter of 2013, dropping to a national level that hasn't been seen since the fall of 1995. The Census Bureau reported that the nation's homeownership rate slipped to 65% in Q1 2013, a decline from 65.4% posted in the last quarter of 2012. The rate of home ownership now stands at a 17-year low!  

But if the housing market was gaining ground on stable footing then why is it that first-time home buyers and owner occupiers aren’t participating. Instead, it has been hedge funds and speculators that are sopping up all the foreclosures. One has to wonder if these “investors” will hold onto their rental properties if the economy tanks once again and home prices take another steep drop.  

In addition, the labor market isn’t rebounding as the Fed had hoped and projected it would. Last month’s NFP report showed that despite $85 billion per month of QE, 9k goods-producing jobs were lost. And even though you here the MSM talk about resurgence in the manufacturing sector, there were zero manufacturing jobs created in April. What’s even worse is that aggregate hours worked fell by 0.4% in April over March. Therefore, despite the fact that the Labor Department says that 165k net new jobs were created, the actual total number of labor hours worked was in decline.  

There is a reason why the Fed and other central banks have been unable to achieve a healthy and viable economy even after five years of trying to manufacture one from a printing press. The truth is an economy that is soaked in debt just doesn't grow because it is always marked by at least one, if not all three, of the following growth-killing conditions; high interest rates, rampant inflation and onerous tax rates.  

Any country with outstanding debt that is equal to or greater than its GDP is forced into sucking an exorbitant amount of capital out of the private sector due to burdensome rollovers and interest payments on that debt. In addition, rising tax rates act as a disincentive to increase productivity and whatever money that is taken from the private sector is always redeployed in an inefficient, GDP-destroying manner. Rising interest costs also discourage borrowing and lead to capital shortages. And finally, inflation destroys the purchasing power of the middle class by eroding the value of the currency and leaving consumers with an inability to make discretionary purchases.  

But central bankers don’t acknowledge this truth and are instead seeking to increase their efforts in pursuit of ever-increasing money supply growth. Of course we are all familiar with the counterfeiting undertakings of the Fed and BOJ. Now Australia's central bank is joining the crowd of inflation lovers and cut its key interest rate by 25 basis points on Tuesday, to a record low of 2.75%.  

Investors need to be aware that if a central bank wants to set an inflation target it will be achieved. ECB President Mario Draghi said recently that the ECB was "technically ready" to shift the deposit rate into negative territory, meaning it would start charging lenders for holding their money with the central bank. A bank cannot accept a negative return on its assets. Therefore, if Draghi follows through on his threat, expect money supply growth and inflation to kick into high gear over in Euroland.  

The bottom line is that central bankers are totally inept at creating economic growth but extremely proficient at building asset bubbles. Inflation targets will be met and exceeded as they deploy their new “tools” of charging interest on excess reserves and buying up the stock market. They are in the process of rebuilding the equity and housing bubbles and have already created a massive bubble in the sovereign debt of Europe, America and Japan. Once this bubble breaks (like every other bubble has done in the past) expect economic chaos in unprecedented fashion.        

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