Cheapest money in 500 years will end how?


The Pascometer has a good piece today on the global dash for trash:

It’s one thing for the central bankers’ central bank to warn of cheap money distorting the world’s markets, but it’s another for more comprehensible anecdotes to start adding up to the trillions. In short order:

  • Last year a record US$477 billion worth of high-yield bonds were sold, but US$340 billion worth have been offloaded in just the first half of 2014.
  • Dutch interest rates have never been lower, not in 500 years.
  • Fuelled by cheap money, there are more American mergers and acquisitions underway than there were at the previous peak in the heady pre-GFC days of 2007.
  • The Japanese government is lending trillions of yen to Japanese banks for almost nothing.
  • The Australian mortgage securitisation business is back in full swing with second-tier banks able to get as much funding as they desire at record low rates.
  • Spanish and Italian bonds have been trading on record low yields.

Funds manager Mike Mangan, in his newsletter for 2MG Asset Management clients, put this perspective on the unprecedented level of cheap money:

“Meteorologists (and insurers) speak of the 1 in a 100 year flood. But what is happening in western economies (and Japan) is not even close to a 1 in a 100 year event. It has not happened in centuries and I would argue human civilisation hasn’t experienced the sort of monetary conditions we now bear witness to, since the Bronze Age. How and when it all ends, no honest person knows. But I strongly suspect that when it ends, it will end badly.

And that’s only part of the list. A couple of points to add:

  • of course it will end badly;
  • yes, as badly as the GFC, and our banks will lose access to offshore credit again;
  • Australia’s mortgage securitisers will be wiped out again (or be nationalised) And, BTW, they are not borrowing anywhere near record low rates. They’re raising money around 70bps over swap. Pre-GFC it was more like 10bps;
  • it will be worse for Australia than the GFC as it will mark the genuine beginning of China going ex-growth and both monetary and fiscal policy have much less flexibility;
  • I still see the end coming from either China, as its reform process slows growth inexorably, or from the US bubble bursting once more. GMO’s Jeremy Grantham reckons the free money cycle will run right through the 2016 Presidential election first. God help us if he’s right.
  • no, it won’t end fiat currencies but you’ll sure want to hold some gold as fiscal and monetary madness reaches lunatic new levels.

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. outsidetrader

    “How and when it all ends, no honest person knows. But I strongly suspect that when it ends, it will end badly.”

    Well if that’s what the Pascometer says then I guess we’ve got nothing to worry about 😛

    • It wasn’t him but the fund manager that said that.

      Hope that doesn’t make you worry.

  2. “as fiscal and monetary madness reaches lunatic new levels.”

    This is gibberish. What is it supposed to mean?

      • – interest rates are low by historical standards, but so what? Are we seeing even a hint of inflation anywhere? Are we seeing even a hint of any forward indicator of inflation anywhere?

        – ditto debt monetisation

        – ditto money printing.

        The world has changed.

      • The Dow Jones P/E is high-ish, but well within the ranges that its been before without crashing. The Australian P/E is below the long run average.

        As for house prices in Australia, as long as tax, subsidy and supply-side policies are set to keep them high, they will stay high. There’s a lot of talk about how it would better if they came down, but no action that will bring them down.

        But the major failure of analysis, from the BIS down, is the failure to recognise that QE is not going to result in an inflationary disaster. These people have been so brainwashed into believing that monetary expansion always leads to inflation that they can’t or won’t comprehend that it just isn’t happening. They’ve had six years to be proven right and they have been proven wrong, again and again and again.

        Edit: deflation? That is a bigger risk. But ongoing QE should curtail it.

      • Uranium GeoMEMBER

        Governments will stave off inflation for as long as they can. Wouldn’t you rather inflate away your debt?

        Could go either way. I doubt they will stop the printing.

        *EDIT*: meant deflation.

      • What is wrong with deflation ?

        Falling prices and improved purchasing power of your paper fiat, you would have to love it.

        Unless you are an over leveraged git who will happen to see the burden of debt repayment get beyond ones control to manage it. Oh that would be a real shame……….

        You make your own bed – be prepared to lie in it.

        In the end it will be a huge deflation that will wipe out the over leveraged and the speculators, it will be absolutely necessary if we are to start again.

      • Uranium GeoMEMBER

        @ Bob

        I agree but they will keep this going for as long as they can.

        In Australia the private and business debt is tapped out, the government will eventually borrow even more to keep this thing going. Then it will be the end game buggered if I know what that will look like.

        Bring on deflation but I don’t think they will let it happen.

      • Jesus, are there really still people around who think they’re in possession of privileged wisdom when they point out that inflation isn’t a concern right now?

        Yes, thanks, we know that. Inflation hasn’t been a concern for decades since a massive portion of global spending began being directed into capacity expansion rather than consumption.

        The problem is that the dominant economic ideology today contains the view that monetary loosening isn’t a problem so long as there is no threat of inflation. This attitude, which Acme has expounded here with frankly awkward superciliousness, considering how trite it is by now, was the critical ingredient in the collapse of 2008.

        A key lesson of the GFC (though plenty were already aware) was that monetary policy impacts capital markets in ways that are at least as important as its impact on goods and labour markets, since those capital market effects can ultimately prove ruinous to employment and output.

        There may well be good reasons for the levels of monetisation presently afoot; there may well be a suite of other policy options can be used in tandem with money printing to mitigate the potential side effects on capital markets. But to defend the current era of monetary looseness, you’ll need to do much more than just cite low inflation.

  3. The instinct in the natural world is to not impair your offspring. It’s noble and such to say give the children better, but I would assert its a social construct.

    There is no record in living, or oral history, where a generation has harmed their children as the boomers are now.

    We live in a world where many natural constructs are overridden with social ones, all probably part and parcel of the mess, but if there is a living embodiment of failure in terms of biological ‘success’, the boomers are the undoubted gold standard in history.

    This cheap money will end up very poorly, but given the choice between an enduring civilization, and sacrificing it for two European holidays per year, guess what the failures will opt for?

    • migtronixMEMBER

      Gold standard in history? Probably , but certainly Luis XVI french aristocracy gave them a run for that money:

      The ensuing debt and financial crisis contributed to the unpopularity of the Ancien Régime which culminated at the Estates-General of 1789. Discontent among the members of France’s middle and lower classes resulted in strengthened opposition to the French aristocracy and to the absolute monarchy, of which Louis and his wife, queen Marie Antoinette, were viewed as representatives. In 1789, the storming of the Bastille during riots in Paris marked the beginning of the French Revolution

      • Why are you talking so stupid, when you maybe not stupid? How could everywhere in the developed world happen all the same and you blame it on your baby boomer parents? Are you so short-sighting? This is a major systemic problem, which happens because there is no another alternative and without competition any system is subject to this decay, which we are witnessing – arrogant reckless politicians, policies which are serving them and no one else. Tell me one piece of the policies, which is aimed to our next generation. None, and this is because there is plenty of cheap labour, cheap foreign professionals, global freedom for financial and corporative capital and deregulation on the national level everywhere, because capital would fly away if you even try to have national policy. Think about it, use your brain, not your emotional bias toward your parents. They are pushed by your beloved politicians to do what they are doing. Would you sell your house for half price, because you would be concerned about next generation? Would you ….. I can continue to list all idiotic policies, but you know them. I am angry too, because my children would face the same future as you and there is nothing I can do about it, but vote, which is also useless obviously.

        I have a neighbour, who has 4 kid and all of them highly educated. If he was 30-40 years younger, they would never be able to educate them now or in the future, never! Because they would have to pay for their education as our kids will have to pay for everything. His kids had FREE education and they know that this was like a miracle. Why all this happen? Because capitalism was in competition with another system, which had free education and health care, early pension and social security. Now this system doesn’t exist, it collapsed, and with it collapsed the reason for the West to pay a high price for social peace. Wake up for the reality. It will become worse before people realise that have to do something about all suckers and rent- seekers.

      • Of course they’re not evil, individually they’re great and we all have at least one that we love. But as a generalisation that generation has been exceedingly well catered for, and exceedingly successful in pushing the costs of their lifestyle onto their children and future generations. Nothing represents this better than the explosion in debt levels.

        What is debt but borrowing from tomorrow to consume today and at its most basic level, the run up in debt represents the predominant cohorts failure to live within its means, whilst still demanding all the benefits that are globally available.

        The repayment of that debt means sacrificing future consumption to pay it back – so effectively boomer society, anticipating ever greater economic growth and imparted benefits of technological advancement, have chosen to run up debt levels so they can benefit from the future advancement of society that they envisaged coming down the road.

        Simplistically, technology is going to deliver future residents a higher lifestyle than they can currently afford, so why don’t we load up the economy with debt, so we can enjoy those benefits ourselves – sure future growth rates will be lower, but hey, they’ll have iPhone12’s to make their lives so much more meaningful and enjoyable.

        You would rather blame other forces, the dismantlement of an alternative economic system or a conspiracy by the 1% for the plight we find the worlds economy in today. I beg to differ.

        Prior to the boomers being handed the reigns of power, there were a large number of checks and balances, both political, fiscal and social, that earlier generations had put in place, to attempt to reign in the inequalities and power of the 1% (or really the 0.01%).

        However, when offered an opportunity to profit by the same sort short sighted policies of self interest, that usually only favour the 1%, as a generation the boomer jumped at the opportunity and have been busy extracting an economic rent from future generations by earning a clip from inflated asset prices ever since.

        It is the values of self interest over society, that the ME generation have famously defined themselves by, that really lies at the heart of many of the problems we as a nation, and society now find ourselves.

        Personally, I don’t think it is wrong or immoral to be critical of those values or the generation from which they emerged.

      • It is even beneficial to criticise any policy, this is the way of society to improve and progress. The problem is you blame a generation, when you have to blame the people who own and rule the world. This problem isn’t about any generation per se, it is about society evolution and systemic changes. Everyone knows that the debt is future consumed today, but that how your generation can be enslave as we don’t have anymore physical enslavement of human beings, it is forbidden by law. But it is not forbidden to enslave people financially for live, it is even seen as a way to wealth. Poor education lack of explanation how debt can create genuine wealth. People are living the illusion that any debt can create (extract) wealth without doing work or producing anything. This is the illusion, which the most developed stage of capitalism creates – that everything can grow like capital, even your house, even your body parts, everything, which can be priced, can grow like capital and can be considered as wealth. This illusion is the drama of our time and will cost dearly to the future generations until the fiat system collapse on its own infinite growth in a limited physical world.

      • BTW, you should really come up with case example to illustrate how I’d be prepared to take a hit to my own personal well being to improve the lot of my children than selling my house for half the price.

        Would I sell my house for half the price – of course not.

        But am I prepared to argue for and promote policies that will act to my personal detriment?

        Yes – I bought a house a year ago, paid some snivelling undeserving ageing hippy boomer far more than they deserved simply for a place to live, while they can use the funds to do whatever the fuck they want. Most likely blowing a fair portion of it on an overseas holiday before coming back and going on the geezer dole.

        But guess what, as futile as it may be I started a FB page “Reform Australian Housing” to try and promote policies that would ultimately lead to my own financial detriment, even though, if implemented they’re likely to make Australia a better place to live. I’m also exploring political avenues, if not becoming involved outright myself, then seeing what I can do to assist or support those that do.

        What pray tell are you doing – apart from saying it is all hopeless, no doubt from the comfort of your much appreciated house?

        My attack on Boomers and Boomer culture is due in no small part to the enormous inertia that they exert on society – they have it all nicely squared away for themselves at the moment, so even if, like yourself some of them disagree with where we are headed, their motivation to actually do something about it is next to none existent (like your hopeless comment).

        A young and vibrant youth culture is necessary in order to effect change. By failing to stand up and push back as older people shirk the responsibilities for the problems of their own making, society as a whole will become increasing sclerotic.

        The opportunities for change diminish as the efforts and energies of young people, that could otherwise be directed towards effecting change, are instead diverted to tread water in their own lives and carry the burden that the old are increasingly placing on them.

        This is particularly the case in societies where declining birth rates (arguably as result of those burdens being placed on people of child raising age) further reduces the ranks of young people capable of pursuing social change.

        So basically, if you are not for change, actively pushing for it, then effectively you are against change.

        Oh and BTW, as a mater of interest, following the pre-budget COA findings and the practical declaration of outright generational war on young people by the controlling cohort, I started a second FB page “Boomers Are Evil”, despite it being in existence for a fraction of the “Reform Australian Housing” page, at nearly 500 likes it already has 20% more likes.

        Proof to me that change isn’t going to come from people comfortably ensconsed in their nice warm houses, but from young people increasingly locked out of what society has to offer, by their parents or more to the point, their grand parents.

        I seriously doubt any meaningful change will be pursued by members of GenX, however where members of my generation can take a leadership role is by influencing those who are increasingly being locked out of life and have nothing to lose.

        Nothing in this world ever gets done without the help of angry young men, and when I look at the demographics of the BAE FB page, it gives me hope that maybe, just possibly, change is still possible.

      • Nick the GreekMEMBER

        Lori – your forgeting China, that is an alternative model we are definately in competition with.

  4. So money means nothing anymore and the pascometer gets his financial advice from his optometrist, interesting times.

  5. For those who own assets and wealth, this will be a great boon. Its only a disaster for those who aspire to wealth, but are currently poor.

    There is no reason why this ever needs to end: money is limitless

    • Lets’ say that money is limitless. Then what are the current asset holders going to exchange them for, when the time/need arises? Money? As you suggest, it’s limitless and as such, who’d want it? You? Me? So how do we transact assets? Barter in a world of 9 billion barterees? Not likely! Assets will be the ‘thing’ that bears the brunt of monetisation, as they become’ worthless’, and money is once again limited, to restore transactional value, and those caught with extra ‘worthlessness’ = debt, will be hammered the hardest.

      • please elaborate janet.

        Money is exchanged now for assets, when the current asset holders want to exchange them in the future they will exchange them for a greater sum of money

        this process can continue to infinity

      • As the Zimbabwe case showed us in all it’s magnificent glory, at some stage, no one will take even the greatest sum of money in exchange for the physical asset they have. So trying to exchange one asset for another, becomes almost impossible in a practical world. Try exchanging you house for a basket of food from the supermarket, or petrol from the Shell station. Exchange will grind to a halt until such time as an acceptable medium is re-instated to allow that to happen. In Zims case, that was the Rand, The US$ and the Pound. For those currencies , it can only be themselves, as newly restored value. ie: US$’s will be recalibrated to a better value, and that will entail assets being the counterbalance of the re-balancing. ie: Money worth more = assets worth less. Those who do well, will be those that sell their assets and get the money, before the re-calibration happens.

      • casewithscience


        Janet is right. There must be a connection between the stock of a currency and things that can be purchased by that currency in any particular market. Otherwise, the primary risk is that a vendor will not accept a currency (this starts wars). The secondary risk is inflation and price instability (this has a crippling effect on economic activity).

        I suggest it is likely we will see the secondary issue once markets adjust to whether currency is a fair exchange. At present, everyone around the world seems so shocked by the prospect of being caught out that they are not objectively making that determination.

        I only see the primary concern arising from the USD/CNY exchange. This is almost balanced given the massive money printing episodes of both sides. If they don’t taper down or do ancillary activities (like China passing back its currency reserves) then there could be a shocking refusal to make exchanges resulting in a lot of economic pain and pulling out the sabres.

      • janet and casewithscience: we have seen that the effect so far has been to inflate asset values.

        What makes you think this relationship will invert? and what will cause it do so

      • casewithscience


        I am not saying it will invert – just that the price increase won’t sate a vendor’s concerns (ie they will hold and not sell).

  6. casewithscience

    We have seen this before:

    During the maritime era, European trade routes passed opium to the Chinese in exchange for goods. When Lin Zexu rejected the British (and French) currency of opium, preferring silver and gold, the British forced the issue with war ships.

    What will happen when countries refuse to take on Yuan or USD exchanges because the currency is (clearly) over-inflated. The risk of another Opium war is reduced because the speed of transactions should provide quick correction of currency value, thus reducing the risk of a rejection of currency exchange. That said, a sudden shocking realisation of the lack of value of a currency in a substantial enough transaction could lead to the same response as Queen Victoria initiated nearly 170 years ago.

    • Ronin8317MEMBER

      The big money back then were being made from the arbitrage between the gold/silver exchange difference between China and Europe. Opium got into the picture when the Europeans ran out of silver for use in the carry trade, and the rest is history.

      • casewithscience


        Undoubtedly, but the shooting only began when the exchange was refused.

        Ironically, the silver the Europeans were using came from the Americas anyway. It was a local conflict from global consequences.

      • migtronixMEMBER

        Like you said @ronin arbitrage! Price in one market, versus price in another market…

  7. Gold, glorious gold (and silver).
    Food. (Animals, eggs, fruit, veg). And the means to produce it.
    And just in cases, ammunition.

      • Season with drugs, isolate in a moderate climate for 90 weeks, and you’ve just baked yourself a cult. Add more gold to upgrade to ‘religious movement’.

      • migtronixMEMBER

        You know a thing or two about this spleen, ever work for the CIA?

        …. Textbook…

      • No, but I once worked for a discount phone warehouse in Virginia with an ex-CIA operative for a boss who thought it was just as ruthless and chaotic as the agency. I am definitely trying to get a harem together, though. If you know any credulous, big hipped DD girls with a penchant for hobby farming, knitting and group sex then send them up Tweed Valley way for me.

      • migtronixMEMBER

        Sorry spleen, I only know the ones into group sex 🙁

        EDIT: But they’re reeeeaally into it if that earns them extra points?

      • If I knew that, I wouldn’t be sitting here commenting on MB.
        I’d be in France watching Le Tour with the yacht parked up in Nice.

  8. When the Boomers start retiring en masse. Assuming the CB’ give up the ghost of QE…

  9. If interest rates rise, how is it possible for an indebted government to pay rising interest bills without its central bank printing even more?