What Capacity for Perversion and Delusion? :: by Wilfred Hahn

Financial markets continue to boil. The world’s equity markets are again soaring. In the U.S. and some other countries, stock markets have even attained new highs … yes, new highs. Many investors are starting to worry that they are being left out of the party. Presumably they think that since stocks markets are on the rise, the economic outlook must be improving and a new prosperity is just around the corner.

Therein lies the great deception at this time. Underlying financial and economic conditions worldwide continue to worsen. People seem to have little idea as to the human susceptibility to the dangers of deception, delusion, manipulation and corruption, all of which are currently at play. An enduring prosperity is not in the cards.

The fact is that for the third time in 15 years, a massive global financial bubble is again underway. The current bubble stands to be much bigger than the previous one which preceded the Global Financial Crisis (GFS). Why? Because the excesses of the previous financial bubble had yet to be unwound.

Policymakers have simply resorted to creating ever bigger bubbles to treat the impact of the bust of the previous bubble. What that means is that the bust of the next bubble will be even more traumatic.

How do we know another bubble is underway? Contrary to the claims of economic luminaries such as Alan Greenspan (onetime Chairman of the U.S. Federal Reserve), the existence of financial bubbles can be discerned in advance of their eventual bust. The diagnosis couldn’t be more straightforward.

Yet many influential economist and policymakers continue to deny the existence of bubble conditions. Says Janet Yellen, the soon-to-be Governor of the U.S. Federal Reserve, “[…] you would not see stock prices in territory that suggest bubble-like conditions.” We could quote many others that hold high positions of influence who are also blinded and deluded.

There are five major signs of an unfolding financial bubble. These are our condensations from the observations of such sensible economists as Charles Kindleberger, Hyman Minsky, John Maynard Keynes, Irving Fisher and a number of economists that were influenced by the Austrian School of Economics. The five basic symptoms of a financial bubble are as follows:

1. A large expansion in debt, either driving an overconsumption or over-investment binge.

2. A heavy reliance on capital gains for income and reported profits.

3. A sharply-higher participation level in an asset market (most importantly, marketable items of some kind that can be readily borrowed against, usually securities) either directly or indirectly.

4. Crucially, a misreading of underlying credit and inflation trends.

5. A “great new world” impulse, usually represented by a technological shift of some kind.

Our conclusion? Without a doubt another monstrous financial bubble is underway. All five conditions are in place. That said, what we don’t know and cannot know is how long it may last or how extreme it may yet become. Conditions of mania and delusion are very difficult to measure; for example, how do you determine that someone is twice as delusional as someone else? As we have speculated in the past, this bubble could be the last, or part of the last, sequence of bubbles and busts. Yet, it could carry on much further, entrapping a greater part of humanity. Its deceptive appearance as a new period of prosperity could mislead many, including earthbound Christians.

As the above list outlines, every period of a systemic financial bubble and/or an investor mania has had a broadly endorsed “belief” or “reason” in which investors place their faith (a great new world impulse). For example, in the last half of the 1990s, most investors were convinced that a new era had begun based upon the new possibilities of technology. Prior bubbles had expectations inflamed by such things as the invention of the telephone or the automobile.

What is it this time? We see two inter-related beliefs being adopted: firstly, that Central Bankers are omnipotent; and secondly, that macroeconomics is a reliable science.

These beliefs couldn’t be further from the truth and yet, these are the hopes underlying people’s expectations today.

Allow us to expand further upon false humanistic beliefs and attitudes that are bound to lead to great disappointment and disaster.

There is rampant and widespread economic immorality. Policymakers and macroeconomists have been carried away with their theoretical perversions and remarkably, despite their history of errors and sheer confusion, nonetheless are looked to as the world’s creators of prosperity.

Macroeconomics has been elevated to a science. That is an incredible hoax. In reality, macroeconomists are the modern-day equivalent of witch doctors. Their prescriptions for healing are utterly laughable. Unknowingly, they may even be the agents of the ultimate global financial trap.

Central banks have been set on the top pedestal of human self-determined destiny. They are seen as the new saviours, widely praised for having steered economies away from a certain world-wide depression. However, the erstwhile reality is that they have dug a much deeper grave for the world’s financial systems in the future.

To repeat, a massive financial bubble is again in full bloom — the third systemic bubble in 15 years. Another bust will surely follow.