According
to Tony Boeckh, the underlying force that creates bubbles — and bursts them —
is the ebb and flow of money. Boeckh was chairman and editor-in-chief of BCA
Publications, publisher of the highly-respected Bank Credit
Analyst from 1968 until 2002. In his new book, The Great Reflation,1 Boeckh focuses on the importance of
money flows, whether from debt or from monetary easing.
Today,
as he points out, governments around the world have successfully “reflated” the
global economy. Now, the question is what bubbles will this create and how
will it all end?
The Trends editors have discussed “the great reflation” before in looking at
the broader “debt super-cycle.” In late 2008, we described why this reflation
strategy would succeed short-term and why it would result in the V-shaped
recovery now taking place. We’ve also discussed the longer-term risks as the
government tries to compensate for a lack of private consumption and investment
by relying on government spending. Going forward, the biggest risk will come
if the government keeps spending and tries to raise taxes.
Our
present discussion of The Great
Reflation will highlight the underlying realities that got us to
this point where we are, and the most likely scenario that lies ahead. To do
so, we will examine Boeckh’s fundamental arguments in the context of what we’ve
learned from other sources.
Let’s
start by looking at how we got to our present situation. In the wake of the
late 2008 financial panic, the Federal Reserve and U.S. Treasury, in concert
with foreign central banks, reflated the economy “artificially” and got it
restarted. But in saving it, they did not cure its long-term ailments.
As
we’ve previously discussed, this was no isolated response to an isolated
crisis. Boeckh makes the point that about two decades after World War II, the
monetary system in the U.S. began to founder. That led to a period in the ‘60s
when a process of money and credit “inflation” began, which continues to the
present day.
Initially,
this was characterized by a period of high “Consumer Price Index (CPI) price...
