Gold News

End Not Nigh? Soon, Then

Debt bubbles always burst. This one will be no different. Are you prepared...?
The END WILL come – sooner or later – for the big bull market in US stocks...and for the debt bubble, writes Bill Bonner in his Diary of a Rogue Economist.
But it didn't come yesterday. Will it come today ortomorrow? We don't know. All we know is you want to be prepared. (Unlike bonds, gold has no counterparty risk.)
Today, we explore the time that land forgot. That phrase doesn't really make any sense, but we wanted to try it out anyway. We're talking about the space on the calendar filled by "eventually" and "sooner or later" – that part of the future where things that can't last forever finally stop.
Specifically, we wonder about when and how the biggest debt bubble in history finally blows up. Recall that Planet Debt added $30 trillion to its burdens in the last six years – a 40% increase. That can't continue forever. But how does it end? 
To make a long story short, a bubble can't blow up without a lot of "flation" of some kind. And with a bubble so big, it's bound to be a humdinger. Most likely, we will see "flation" in all its known forms. And maybe in forms we haven't heard of yet.
You can argue about what effect QE has had on the economy...and what effect it will have when it is withdrawn. But there is no doubt that microscopic interest rates have done their job.
People who could borrow at the Fed's low rates, did so. Washington borrowed more heavily than ever before – just to cover operating expenses. Corporations borrowed, too – mainly to refinance existing debt at lower interest rates and to buy back shares (raising the price of remaining shares and, coincidentally of course, giving management bigger bonuses).
The most recent figures we have are from the third quarter of 2013. Those three short months saw $123 billion of buybacks of US shares – up 32% from the same period a year before. If that rate were to persist throughout 2014, it would mean nearly half a trillion Dollars devoted to boosting corporate stock prices, coming from the same corporations that issued shares in the first place.
Is management stupid...or just greedy? The sage advice of "buy low, sell high" doesn't seem to have sunk in. At the bottom of the crash in 2008-09, reports Grant's Interest Rate Observer, hardly any US corporations availed of the opportunity to buy their own shares at a bargain price. Now, that prices are high again, almost all seem to want to buy.
Surely, that is something that must end too. It doesn't take a lot of imagination to foresee what will happen when it stops: Stock prices will fall.
First, credit expands, and asset prices rise. Then credit shrinks, and asset prices fall. Asset prices typically foreshadow consumer prices.
After so much inflation in credit, we'd expect to see a helluva deflation when the bubble bursts. All of a sudden the "wealth effect" would become the "poverty effect" – with consumers cutting back on expenses, investments and luxuries.
This would be normal, natural and healthy. A debt deflation doesn't create bad debts or bad investments. It just forces people to own up to their mistakes.
Businesses go broke; they can no longer borrow nearly unlimited funds at nearly invisible yields. People can once again default...and have plenty of company in doing so. The $5 trillion in paper wealth that came into being – almost magically – as the stock market rose...suddenly disappears from whence it came.
There is no mystery about the credit cycle. Wealth created "on credit" goes away when the credit is cut off. Then you find out who's made the most serious mistakes.
The open questions are: How big can this bubble get before it explodes? And how will central bank meddling affect the outcome?
The first question gets the obvious reply: Who knows? Central banks are still at it – led by the US and Japan. The corporate and government sectors are still willing borrowers. Corporations are still borrowing money at ultra-low interest rates and using it to buy back their shares. And asset prices, as near as we can tell, are still going up. It could go on for a while longer. No one knows how long.
Tomorrow, we take up the second question: When the end comes, what form will this new "flation" take?

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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