THE ECONOMIC DEBACLE in AMERICA

THE ECONOMIC DEBACLE in AMERICA

WHAT HAPPENS WHEN RAMPANT ASSET INFLATION ENDS?

http://www.washingtonsblog.com/    Posted on August 4, 2016   

by Charles Hugh Smith

Yesterday I explained why Revealing the Real Rate of Inflation Would Crash the System. If asset inflation ceases, the net result would be the same: systemic collapse. Why is this so?

In effect, central banks and states have masked the devastating stagnation of real income by encouraging households to take on debt to augment declining income and by inflating assets via quantitative easing and lowering interest rates and bond yields to near-zero (or more recently, less than zero).

The “wealth” created by asset inflation generates a “wealth effect” in which credulous investors, pension fund managers, the financial media, etc. start believing the flood of new “wealth” is permanent and can be counted on to pay future incomes and claims.

Asset inflation is visible in stocks, bonds and real estate:

The sources of asset inflation are highly visible: soaring central bank balance sheets, credit expansion that far outpaces GDP growth and ZIRP (zero interest rate policy):

Destroying the return on cash with ZIRP and NIRP (negative interest rate policy) has forced capital to chase any asset that offers any hope of a positive yield. As asset inflation takes off, the capital gains attract more capital (never mind if yields are low–we’ll make a killing from capital gains as the asset inflates further) which creates a self-reinforcing feedback: the more assets inflate, the more attractive they become to capital seeking any kind of return.

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