Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20

Market Oracle FREE Newsletter


Risk Trade Collapse Could Trigger Global Economic Depression

Economics / Great Depression II Nov 07, 2009 - 07:31 PM GMT

By: Bryan_Rich


Best Financial Markets Analysis ArticleA lot of focus was given to the central banks’ meetings this week.

That’s because a lot of people would really like to see target rates start moving up from their low levels.

Some argue for higher rates because they think the world is returning to normal and the emergency policy responses need to be removed sooner rather than later to avoid a date with inflation.

Others are concerned that all of the ultra-easy money will result in asset price inflation, another bubble and ultimately another bust.

But clearly, the central banks have different concerns. This week …

  • The Federal Reserve kept rates unchanged and made no material change to its statement. The markets were looking for some language change that would open the opportunity for an earlier rate hike. But the Fed did not oblige. Result: Dovish.
  • Next it was the Bank of England. The BOE kept its benchmark rate unchanged and went further in the easy money hole by expanding, for a second time, its asset purchase program. Result: Dovish.
  • And finally the European Central Bank followed suit and left rates unchanged and its bank liquidity program intact. Result: Dovish.
This week, central banks, including the BOE, maintained their dovish positions.
This week, central banks, including the BOE, maintained their dovish positions.

To sum it up, the central banks continue to position themselves to accomdate the challenges in the real economy.

Now, for those who have been pleading for higher interest rates …

While I disagree with the first crowd, the one that thinks economies are returning to normal, I don’t completely disagree with the second crowd, those concerned about asset bubbles.

First, the U.S. economy and major global economies are nowhere near reaching a point of sustainable growth, much less normalcy. In fact the European Central Bank President, Jean-Claude Trichet, put it very plainly …

“I am a little a bit uneasy when I see [reports of a self-sustaining recovery occurring], because we have some green shoots here and there.”

The U.S. economy just printed its first positive GDP number in five quarters and most of it was attributed to government spending. Indeed, the purpose of government spending is to get the economy moving. But the idea is that in the process you create jobs … new industries … demand. And that just hasn’t happened.

So the people who think we’re back to business as usual have their heads in the clouds.

Now, for the second crowd …

Like I said, I don’t completely disagree with them. They fear another asset bubble. Some of my colleagues here at Weiss Research feel that way. And I think they’re dead right. It’s here. Stock markets, commodities, currencies … all 30 percent, 50 percent … even 100 percent higher in the past eight months!

I worry that another asset bubble is building in  financial assets.
I worry that another asset bubble is building in financial assets.

Financial assets have rocketed from their March lows and for no fundamental economic reason. Is it because of the mountains of capital that have been plowed into the system through stimulus programs has ended up in financial assets?

In some cases, clearly yes …

Take China for instance. Its economy couldn’t absorb the massive half-trillion dollar stimulus and uber-aggressive bank lending. So that money found its way into investments like the Chinese stock market. So easy money can find its way into financial markets, for sure.

But can the major economies of the world, namely the U.S., afford to tighten up the belt to keep this under control? In my opinion, absolutely not! And that’s where I disagree with the second crowd.

Financial asset bubbles are one thing, and they are a risk. But most of the risk, at this stage, is to investor and consumer confidence. A bust that would bring financial assets back in line with the fundamentals of the economy would be another major blow to sentiment. And that could be the trappings for another recession — even a depression.

But the guaranteed danger right now is the real economy, real asset deflation, and evaporated demand. The threat of a sharper deterioration in the real economy leads to a complete stand-still in economic activity … i.e. a date with depression. That’s the battle central banks are most worried about.

If you’ve concluded that this looks like a lose-lose scenario for the U.S. and the highly interconnected global economy — I’m afraid you’re right.

A likely best-case scenario is a very slow and painful rebuilding period, where weak demand and lower standards of living rule.

The worst-case scenario: A bout with global depression.

As for bubbles in the financial markets, better known as the “risk trade,” that day of reckoning is coming when prices revert back to fundamental sanity. And the time might be closer than many people think …



P.S. I’m now on Twitter. Follow me at for frequent updates, personal insights and observations from my travels around the world.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules