Further core Bubble theory bears rehashing. A bubble financed by an expansion of high-risk credit (i.e., junk bonds) poses minimal systemic risk. Why? Because such a bubble will be relatively short-lived. When things start to get crazy, the holders of junk debt will invariably reach their risk tolerance threshold. “I’ve got enough. No more junk!” And this will bring the bubble to its conclusion before it has had years to inflict deep structural damage.
Bubbles fueled by money-like instruments function altogether differently. Money is something we trust for its attributes of safety and liquidity. Unlike junk debt, there’s no point where we say “No thanks. I’ve got enough money.” And it’s this insatiable demand that creates the ultimate fuel for protracted bubbles and deep structural maladjustment. Incredibly, this historic Bubble – inflating at the heart of system finance – is now into its 15th year.
From a purely analytical standpoint, it’s all fascinating. Bubble analysis was some years ago completely discredited. Stock market “investors” are convinced nothing can get in the way of equities prices invariably marching ever higher. There’s been some bond market pain, but fears of runaway deficits and a crisis of confidence have not materialized.
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