Central Bankers Warn of Asset Bubbles
By Staff News & Analysis - December 30, 2010

Sweden Shows Central Bankers How to Fight Next Asset Bubble … Riksbank Governor Stefan Ingves (left) has raised the repo rate four times since July even as inflation remains below the bank's 2 percent target. House prices in Sweden jumped an annual 7 percent in the three months through July, the 15th consecutive period of increases. Sweden's central bank may set the direction for other policy makers as it looks beyond conventional inflation targets to asset-price growth in an effort to prevent the next bubble. "Not countering asset-price increases has been the conventional wisdom among central banks, but what has it actually resulted in?" said Tina Mortensen, an economist at Citigroup Inc. in London. "Surely the current crisis has made central bankers rethink policy; Sweden is actually facing this problem" because "asset prices and monetary policy are a hot topic," she said. – Bloomberg

Dominant Social Theme: Responsible bankers are concerned – and may have a solution.

Free-Market Analysis: The Bell recently analyzed "Inflation Heard Round the World" – and now an article (excerpted above) provides us with yet more concerns voiced by central bankers themselves. Swedish central bank head Stefan Ingves is worried about asset bubbles; the article tells us he has bumped up the repo rate considerably even the price inflation remains under two percent. The repo rate technically contracts the money supply.

Sweden thus becomes a country officially running counter to the inflationary trend, or at least one with a lead-banker who has claimed to take action. Europe, America and the BRIC countries are still following a stated pattern of loose money; serious price inflation is all but a given. The article quotes Johnny Akerholm, president of the Helsinki-based Nordic Investment Bank, as saying that the central bankers of most major countries areas are making a mistake: "We are practically re-running the same situation these days. Rates are low and the central banks are ‘printing money' while virtually all prices, except the consumer prices in industrial countries, are increasing rapidly."

European Central Bank Executive Board member Juergen Stark warns that forecasting models are not broad enough and that the ECB's liquidity program in particular may generate the "the seeds for new imbalances." ECB President Jean-Claude Trichet meanwhile continues to insist that emergency bank funds will keep flowing. Kansas City Fed President Thomas Hoenig, a "hawk," reportedly suggests that all the liquidity is well on its way to causing new asset bubbles. The ECB is at one percent, the Federal Reserve is at 0.25 percent since December 2008.

Here's economist Ben May from the article: "There's a risk that if policy makers react to a bubble bursting by aggressively loosening monetary policy, it may lead to new damaging bubbles emerging … The conventional wisdom amongst policy makers has been that you shouldn't lean on bubbles and that the best thing to do is just to try to mop them up when they burst. In hindsight, that looks like a mistake."

It's not just the Swiss, the article reports. Bank of Israel Governor Stanley Fischer has used the discount rate as well. But the newfound conservatism (which admittedly may be more rhetoric than substance) merely confirms what is barrelling toward the West. The determination of central banks to reflate is directly related to the worry over civil unrest due to the current moribund economic situation affecting most major economies. In "Inflation Heard Round the World," we wrote the following:

Efforts at re-inflation taken by central banks around the world has been truly remarkable. Thus while prices have gone down and credit has contracted in the past two years, the larger trend of inflation gaining strength has not yet been adequately reported. What the mainstream press HAS reported on (see excerpt above) is commodity price inflation. This is perfectly congruent with our expectations; the arc of gold and silver price appreciation has to be put in SOME context after all.

Given that printing presses worldwide have been steadily occupied for several years, we are perhaps moving past any likelihood of sustained price deflation or disinflation (certainly for non-Western, major economies). The predictable consequences of virtually endless money printing will be endlessly inflationary. Inflation is, of course, a monetary phenomenon. And printing money does not necessarily trigger it in the short term, but the long-term consequences are disastrous.

Central banks around the world have been coordinating money printing in an attempt to re-stimulate the economy worldwide after the disaster of 2008. Printing yet more currency, and further distorting already moribund or over-stimulated economies just adds to the dislocation. The patient already lies bleeding on the rack. Monetary stimulation merely increases the pressure without providing real relief.

It may sound logical for central banks to anticipate asset bubbles, but the Anglo-American elites that have created the current cental banking economy are not willing to keep economies depressed to ensure that asset-expansion is contained. Only when these asset bubbles are fairly visible will there be action taken to counteract them; action that has never proven especially effective. The power elite may have wanted an economic downturn to help it further consolidate global governance. What it got instead was a Greater Recession, which is really a depression. The response is to try to blow the balloon back up as quickly as possible.

In the current fractured and unbalanced environment, efforts at reflation will go on in an attempt to avoid stagflaton and a jobless recovery. This merely confirms our point of view that the economic distortions that brought down Western economies in the first place still remain in place and that there is nothing the elites can do. They will reflate until the asset-bubbles are evident and obvious; at which point they will once again tighten in a panic.

After Thoughts

Monetary policy is so fractured and the worries over civil unrest are apparently so pronounced that central bankers at the world's larger economies are willing to tolerate the re-growth of asset bubbles. Central bankers are now admitting this themselves. It is not a pretty picture.