Booms, Busts, and Famous Last Words

Welcome to the new version of “this time it’s different”.

By Marshall Auerback and cross-posted from Asia Times.

Can runaway booms descend into busts absent monetary tightening by the world’s central banks? I pose this question in the wake of an extraordinary exchange on January 22 in Davos, Switzerland, between Bloomberg editor-at-large Tom Keene and Bob Prince, co-CIO of Bridgewater Associates, in which the latter posited the notion that “we’ve probably seen the end of the boom-bust cycle.”

It is striking that one of today’s titans of finance has given us what appears to be another version of “this time it’s different,” which the famous investor Sir John Templeton once described as “the four most expensive words in investing.” My own basic take has been that the US economy over the past three years has been weaker than the underlying quantitative data suggest and that there is ample historical precedent to suggest that credit cycles can end, even in the context of a low-interest-rate environment, notably via a deterioration in the quality of credit itself, as the great economist Hyman Minsky once explained in his financial instability hypothesis.

The truth is that for decades, the US – indeed the entire global economy – has been characterized by an economically unsustainable model in which larger and larger portions of GDP gains have been going to a smaller number of people at the top (who also have a higher propensity to save than people with lower incomes, which means the “trickle-down” effect is minimal to non-existent). Wage gains also appear to be leveling off, which could have ominous implications for sustainable future growth.

Yet many investors like Prince seem to accept today’s buoyant asset bubbles as a given in the absence of a concerted effort by the central banks to “take away the punch bowl just when the party gets going” (in the famous words of former US Federal Reserve chairman William McChesney Martin), via higher interest rates

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