The government’s inflation figures always seem much lower than reality. Years ago the labor department implemented quality adjustments and hedonic pricing that lowered inflation rates. If inflation is low then where did all the new money and credit go? For one thing it went into the financial markets and boosted asset prices. Unprecedented credit excess and financial speculation have sent the stock market into orbit. Heavily leveraged asset purchases by hedge funds have grossly distorted asset prices.
All this enabled the financial industry to increase its dominance over economic activity. It’s called financialization and it caused an explosion of mergers and acquisitions, stock buybacks, derivatives, and private equity deals. Record profits accrued to the major New York investment banks, brokerage firms and various lenders and hedge funds. Wall Street passed out generous bonuses.
Extremely low interest rates and huge monetary and fiscal stimulus have created asset bubbles. Today’s immense leveraging and speculation are unmatched for their scope, intensity and peril. The critical point comes when asset prices stop rising. Not a single credit and debt driven major asset bubble has ever ended in a soft landing. America’s bubble economy is the worst in history. Heavily leveraged bonds running into the trillions comprise the mother of all bubbles. The current Federal Reserve tightening threatens to pull the rug out from this episode of excess. Be prepared for a relentless plunge in asset prices. And remember not much ammunition is left for monetary policy to reheat a dying speculative boom.