Why This “Boom” Doesn’t Feel Like One

Asset price inflation, always of monetary origin, comes in two distinct types rather than just one. The first and best known is the boom-type (type A) and includes examples such as 1924-9, 1985-9, 1995-2000. The second is the depression-type (type B) and includes 1934-7, 2003-7, and 2010-? Type B is comparatively modern, and stems from radical monetary experimentation, accompanies continuing economic weakness and has an end phase which can be more deadly than that of type A.

The “long-term interest rate bubble” is a serious hazard unique to type B disease. Greenspan and Bernanke blamed artificially low level of long-term interest rates in the mid-2000s on the Asian savings surplus. In fact, this was a symptom of the type B asset price inflation which their policies had created.

Both types of asset-price inflation have bad economic outcomes. But there is no ground from historical experience to suggest that type B is likely to be less devastating in the end. Under type A, there is at least some economic cushion left over from the years of plenty (albeit amidst considerable mal-investment). On the other hand, the bond bubble under type B not only aggravates the bust’s hazards, but may also directly contribute to a growth of Big Government which proves irreversible.

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