The perils of stop and go

Credit Bubble Bulletin/Doug Noland/4-13-2019

“Such a precarious time in history. So much crazy talk has drowned out the reasonable. Deficits don’t matter, so why not a trillion or two for infrastructure? Our federal government posted a $691 billion deficit through the first six months of the fiscal year – running 15% above the year ago level. Yet no amount of supply will ever impact Treasury prices – period. A Federal Reserve governor nominee taking a shot at ‘growth phobiacs’ within the Fed’s ‘temple of secrecy’, while saying growth can easily reach 3 to 4% (5% might be a ‘stretch’). Larry Kudlow saying the Fed might not raise rates again during his lifetime. Little wonder highly speculative global markets have become obsessed with the plausible.”

USAGOLD note:  In this edition of Credit Bubble Bulletin, Noland notes having been influenced by the highly regarded Dr. Kurt Richebacher (1918-2007). Although he actually worked directly with the Austrian economist/banker, my connection came only as an appreciative reader of the Richebacher Letter (in pre-internet times) and his Wall Street Journal editorials. Richebacher concerned himself regularly with the interplay between financial market credit leverage, ordinary investors and the real economy. Please see “International Precious Metals & Commodities Fair – Munich, Germany Transcript of Dr. Kurt Richebächer’s Lecture” (USAGOLD, November 19, 2005). In re-reading that lecture, I am struck with how much of Richebacher’s analysis at the time can be applied to the present and a very similar set of circumstances. Now that Noland has acknowledged Richebacher’s influence, it explains to a large degree why his writings – like the snippet above – strike a chord.


Image:  John Exter’s Inverted Pyramid of Global Liquidity


“Well, as the facts turned out, they succeeded in bringing the 10 year long-term yield rate down to 3.1 %. That was the lowest yield in the whole period and it was achieved by encouraging yield curve playing. As a result, they had developed a whole composite bubble system. The first was the credit bubble. The second was the mortgage refinancing bubble which later led to the third bubble, i.e., the consumption bubble. Since then, all economic growth has been consumption led. One has to realize that this was an unusual development and it was all based on bubbles. The bond bubble emerged which ignited the carry trade bubble which later spawned the housing bubble. As you can see, one bubble is dependent on the other one and they all work in tandem with each other. . .No, I would say that there will be a change in perception. We have at the moment a perception that the US economy is in splendid shape. Interest rates make nothing and yet consider the bullishness in the stock market. I think the American economy is at its most critical situation point in the whole of the post-war period because all of the excesses have accumulated.” – Dr. Kurt Richebacher, November 19, 2005  (From the speech linked above delivered two years before those bubbles began to deflate with devastating results)

“Sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong” – Paul Volcker, former chairman of the Federal Reserve

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