Monet and Bubbles

Economics is like a Monet painting.  Stand too close and all you see is a bunch of seemingly random paint strokes.  Back up a few steps and an image emerges.

The painting of bubblenomics started with the Plaza Accord, September 1985, where five nations agreed to manipulate the dominant currencies at the time.  Japan enjoyed a 50% devaluation of the US$ vs the yen meaning now the yen could buy more dollars than before, artificially enriching its citizens so they could travel the world in busloads with eighty pounds of cameras around their necks.

The consequences of that bubble have yet to be corrected.  Twenty-four years of fiscal and monetary accommodation led Japan to sport the world’s largest public debt-to-GDP ratio.

The next big one was the US dotcom bubble, which was generating great wealth during the 1990s.  More importantly, it started the era during which income and savings became “old school”. Everyone could live off and retire on never ending asset appreciation.  When that bubble burst, in came Greenspan with the mother of all bubbles – the sub-prime bubble.

 

San-Giorgio-Maggiore-by-Twilight-by-Claude-Monet-OSA071

 

Amazingly enough, that mother of a bubble would soon be exceeded by the Bernanke/Yellen yield bubble. In Europe, unbeknownst to the world, the Euro/EC bubble was brewing.  Sub-prime countries like the PIIGS were allowed to borrow in a manner similar to how dishwashers in the US were given loans to buy McMansions.  Marginal economies such as Greece were able to buy Mercedes and import Armenians to do their work while the citizens collected pensions and crowded the coffee bars. The ability to repay was never a consideration.

This massive global bubble financing has unintended beneficiaries.  China, India and other emerging markets could never have had double digit growth rates without the flood of capital from the West and the importing of jobs that were deemed unneeded by asset rich Westerners. Countries like Australia and Brazil benefited from supplying raw materials to fuel these bubbles.

This Monet painting is becoming quite clear.  In the modern world, there are no economies, only bubbles.  There is not a country in the world that is not struggling to survive on yesterday’s stimulus plan, other countries’ stimulus plans, or waiting for tomorrow’s bailout to live another day.

To anyone who is not in denial, it is obvious that no central banker has a viable solution and no one is willing to take any pain. In reality, there is no stimulus, just a continuous game of borrowing by governments and printing by central banks to keep the peasants from revolting.

A true stimulus is as follows:  an investment into something that has future production value, at a cost today.

A bubble is the creation of pseudo demand for something that we do not need, made possible by debt and leverage that we cannot afford.  A bailout is a perpetuation of the bubble, using newly created fiat money and/or more debt to pay off the old.  It sounds awful like a Ponzi Scheme.

I fear our outcome is going to resemble Monet’s painting with everything burning down around us and those holding the paint brush saying “What the hell just happened??”

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