| Online: | |
| Visits: | |
| Stories: |
| Story Views | |
| Now: | |
| Last Hour: | |
| Last 24 Hours: | |
| Total: | |
File Away For The Future: Shiller Doesn’t Worry About Bond Bubble
TND Guest Contributor: Paul-Martin Foss |
Nobel laureate Robert Shiller doesn’t seem to think that the United States is experiencing abond bubble.
But the explanation that we developed so long ago still fits well enough to encourage the belief that we will not see a crash in the bond market unless central banks tighten monetary policy very sharply (by hiking short-term interest rates) or there is a major spike in inflation.
And if there is a market collapse, Shiller believes that it will have little to do with the bond market.
Regarding the stock market and the housing market, there may well be a major downward correction someday. But it probably will have little to do with a bond-market crash.
What does he base that on? Well, his doctoral dissertation for one, as well as subsequent data collection. But what Shiller (and likely others) fail to realize is that this current bond market is being driven largely by worldwide central bank quantitative easing, an unprecendented situation.
It is this undercurrent of quantitative easing, purchasing bonds with money created out of nothing, that is driving bubbles not just in the bond market but throughout the economy. Shiller may have faith in his data and faith that history will repeat itself, but that’s precisely why stagflation caught people by surprise in the 1970s and why the financial crisis of 2008 was so devastating: if you expect history to keep repeating itself, you’ll be caught completely flat-footed when it doesn’t.
Looking at data is a superficial method of analysis that sees only what the numbers are, not the how and why of how those numbers came about. Just like with overall price inflation, looking solely at numbers is misleading. Asset prices can rise for a number of different reasons, but the effects on the economy of prices rising from increased demand in the market is very different than the effects of prices rising due to newly created money and credit being pumped into the banking system.
Quantitative easing can’t last forever, and when it does end the bond bubble will collapse. It may not be the first bubble to burst, but when it does burst it will undoubtedly have far-reaching implications throughout the economy. Dismissing that possibility just because it hasn’t happened that often in the past, or because bond yields have consistently dropped over the past 30 years is short-sighted. It seems that Shiller discounts the possibility that the 30-year bull market for bonds is an unsustainable bubble. He wouldn’t be the first Nobel laureate to get the bond markets wrong. Smaller bubbles have popped along the way, but the big one, the bond bubble, is yet to burst. When it does, it’ll be interesting to see how Shiller reacts.
# # # #
About Paul-Martin Foss:
Paul-Martin Foss is the founder, President, and Executive Director of the Carl Menger Center for the Study of Money and Banking, an Arlington, VA-based think tank dedicated to educating the American people on the importance of sound money and sound banking.
Prior to founding the Menger Center, Mr. Foss worked in the U.S. House of Representatives for seven years, including six years as Congressman Ron Paul’s legislative assistant for monetary policy and financial services, and one year as Deputy Legislative Director for Congressman Thomas Massie.
As Congressman Paul’s legislative assistant, he assisted the Congressman in his duties as Chairman of the Subcommittee on Domestic Monetary Policy by helping to develop hearing topics, agendas, and briefing Congressmen and their staffs on monetary policy topics. Mr. Foss also was responsible for the management of Dr. Paul’s monetary policy and financial services legislation, including the “Audit the Fed” and “End the Fed” bills, and was co-editor of Ron Paul’s Monetary Policy Anthology, a multi-thousand page compilation of hearing transcripts, lecture transcripts, and other documents related to Dr. Paul’s chairmanship.
Mr. Foss received his Bachelor’s degree from The University of the South (Sewanee), and Master’s degrees from the London School of Economics and Georgetown University’s Edmund A. Walsh School of Foreign Service.
This article appeared on the Carl Menger Center for the Study of Money and Banking and is reprinted with permission, “Creative Commons 4.0.”
Source: http://thenewsdoctors.com/file-away-for-the-future-shiller-doesnt-worry-about-bond-bubble/
