Ben Bernanke 370.
(photo credit: REUTERS/Gary Cameron)
That hissing sound you hear is the air going out of the global bond market.
There is no more ominous sound in the world than that, because – as Andrew
Haldane of the Bank of England explained to a parliamentary committee last week,
and was quoted in this column – the world’s leading central banks have been
engaged for the last four years or more in creating the biggest financial bubble
in the history of markets, and they did so in the government bond
If, therefore, one or more of the big central banks – certainly
if the biggest one, the US Federal Reserve – says it will desist from making the
bubble ever bigger, indeed it will start reducing the flow of new money into the
markets that created the bubble and has kept it expanding, then that is the
bubble’s death-knell. Everyone hearing that pronouncement, which was most
officially declared by Fed Chairman Ben Bernanke on Wednesday but had been
widely previewed by Bernanke and his colleagues on numerous occasions over the
previous month, must react by adjusting, if not reversing totally, their
investment strategy, activity and portfolio.
This adjustment process is
what has caused the massive sell-off in global markets – all markets, including
equities, government and corporate bonds of every level of quality, commodities
and other assets – over the last couple of days.
It is more than likely
that it has much further to go and that over the course of the coming days and
weeks we will see the largest and most violent “correction” in the markets since
the summer of 2011.
It is also possible that these falls mark the onset
of something much bigger than a mere correction, however sharp. It is possible
that we are in the early stages of another global market collapse, on a par with
or greater than that of 2008- 09. That is so because, unfortunately, the
speculative excesses engendered by the bubble in government bond markets was
even greater than those generated by the real-estate and housing bubble that
blew up in 2007.
The only possibility that the leaking of air out of the
bubble will be stopped or prevented is if other central banks take the baton
that the Fed has now dropped. The Bank of Japan seemed to be doing just that;
indeed, on April 4 it said it would do much more than the Fed has ever done.
But, as discussed here in recent weeks, the Japanese economic policy experiment,
known as “Abenomics” after the premier who launched it, is in deep trouble in
Japan itself, as well as creating growing tensions between Japan and other
economic powers, most recently Germany.
Worse, by far, is that whatever
contribution Japan is making to the maintenance and further expansion of the
global liquidity bubble is being more than offset by the monetary policy of
China, which is actually moving in the other direction.
That is the
popping noise – which you probably can’t hear because your ears are directed
toward Washington and Bernanke while the pop came from the other direction, from
China. It should be remembered that the true “savior” of the global economy in
2009, during the “Great Recession,” was not Bernanke, although he certainly did
his best. Rather, it was the political leadership of China, which unleashed the
largest stimulus program ever seen (equivalent to some 15 percent of China’s GDP
then) and thereby provided the primary impetus for the recovery that began in,
and was led by, East Asia and the developing economies around the
However, in so doing, China exhausted its abilities, and it now
appears that the distortions it created in its own economy, by misallocation of
capital and over-investment, have forced it to end its unsustainable growth
path. The popping noise is the deliberate bursting of bubbles being undertaken
by the Chinese central bank, the People’s Bank of China, and by other regulatory
agencies. The Chinese bubbles have been on so massive a scale that they have not
only caused severe distortion and hence damage to the Chinese economy, but they
have affected the global economy via their impact on essential commodities – and
none more than copper.
Readers with a keen interest in the mechanics of
market distortion and a good understanding of financial instruments and how to
use them, as well as with an hour of undivided concentration to devote, should
read this very long, complex, but utterly riveting explanation provided in the
Zero Hedge blog, based on an outstanding piece of analysis by Goldman Sachs
The bottom line is shockingly simple: The Chinese
manipulations of the markets, which were much more sophisticated and hence more
powerful than anything going on in the West in recent years, are being targeted,
ended and reversed. The fallout, the collateral damage, the unintended
consequences of this development, are huge. One of the most dramatic is the
extraordinary rise in money-market rates in China in recent days as a severe
credit crunch wreaks havoc on financial institutions.
The bang heard
Wednesday, which made a considerable contribution to the market mayhem, was the
report that a Chinese bank had gone bust for lack of liquidity. If this proves
true, much louder bangs will soon follow.
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