The Die has been Cast

When the bubble bursts?

We have a choice this presidential year. We can vote for Biden or Trump. It’s a dumb or dumber redux.

Central banks do not believe in capitalism and for years they corrupted interest rates by leaning against the forces of price discovery. They instituted a zero interest rate policy with QE, making money free so the federal government could borrow an unlimited amount of money with little debt service consequence. They forgot there’s tomorrow. So that worked for a while because there was a lot of borrowing and massive new money creation.

Big players borrowed the free money and all that new money went into stocks, bonds and real estate causing massive asset inflation. When central banks artificially suppressed rates, the bond market bubble occurred because we had the lowest interest rates in U.S. history.

Free money is popular and American’s became addicted to it. But free money and zero rates don’t exist in the real world of capitalism so central banks broke the number one fundamental law of capitalism; money can never be free.

Capital, in capitalism, must have a cost for the system to work; it cannot be zero. That punch bowl was removed when consumer inflation rose in real terms to over 10%, which was the result of too much money in the system…massive amounts of new money, hit the economy during COVID. House price inflation rose aggressively when the 10-year treasury rate was under 1%. So did car prices and car insurance prices.

When money is free, it causes inflation.

80% of all the money ever created in America was created since year 2000.

60% of all the money ever created in America was created since the Great Financial crisis when ZIRP and QE began.

So the ten year rate got as low as .6% in 2020 because of ZIRP and QE, but when that nonsense stopped because of consumer goods inflation, the 10-year rate jumped to 5%…an 800% increase.

The FED created an interest rate trap and while they were no longer creating new money through more debt purchases during the ZIRP period, Trump and Biden created tons of new money with massive deficit spending in 2020, 2021, 2022. The deficit in 2020 was over $3 trillion, and in 2021, it was nearly the same. So all that money hit the economy like a sledgehammer with Hedge funds borrowing; they bought stocks and bonds with the free borrowed money. 

This has created our current stock bubble, bond bubble and even a crypto bubble. There is a house bubble and a condo bubble as well.

We had a similar debt orgy in the 1920s and we know how that debt bubble ended starting in 1929. Tremendous amounts of new money were created in the roaring 20s through more and more debt, but that debt was liquidated during the Great Depression, and the money supply fell dramatically, along with the price of stocks, homes and everything else. This debt bubble created by central banks will follow a similar pattern and it will be worse because the debt bubble is worse.

There will be no soft landing.  This is the time when the preservation of your principal is far more important than return on your principal.

DYI