The End of the Great Financial Bubble is Perhaps Within Sight

The End of the Great Financial Bubble is Perhaps Within Sight, by John Gittelsohn. Bill Gross is known as “the Bond King” because he is the preeminent bond expert, for a long time running the largest bond funds in the world, and building a $1.9 billion personal fortune as a bond investor. (A bond is debt, a promise to pay a certain amount of money at a certain time.) So, a financial expert by any account.

Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said he expects corporate-bond prices to fall in part because they’ve risen so fast since mid-February but also because he believes a day of reckoning will come when central banks will no longer be able to prop up assets and investors will withdraw from markets.

“… I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk.”

The background to this is that the amount of money in the world, which is equal to the amount of debt because modern (post-gold) money is debt, rose from its usual level of 150% of GDP starting in 1982, rose past the previous high of 200% that ushered in the Great Depression of the 1930s, and peaked in 2007, just before the GFC. (The debt to GDP ratio rises for a while after the recession hits because the GDP contracts faster than the debt level.)

If the amount of money should fall significantly other than by an orderly repaying of debts, there will be deflation, a recession, then a depression that is  potentially much bigger than the 1930 Great Depression because (a) we are falling from much higher debt levels, and (b) this time it’s global.

Here is the graph of money/debt for the USA (all Western countries are broadly similar):


Since the GFC, the central banks have been keeping the money levels from falling by lowering interest rates to stimulate new debt/money creation, by quantitative easing (direct creation of new money at the central banks), and by intervening in markets everywhere to prop up asset prices and lower commodity prices. This has been sufficient to prevent disaster, but not enough to re-start the bubble — so our economies remain mired and anemic, but still growing, just.

Central bankers, seeking to stimulate economies, have lowered rates below zero in Europe and Japan, driving down returns on national debt, while investors seeking higher yield have pushed up the value of other credit. Stimulus from central banks worldwide has artificially pushed up values of stocks and credit, which has made Gross cautious on such assets, he said. …

Gross cited a number of scenarios that may prompt him to short credit, including a slowdown in China that would spill over into financial markets, Britain leaving the European Union, an escalation of problems in Greece or Brazil. Another such scenario is if the U.S. Federal Reserve raises interest rates faster than markets can handle, Gross said.