Here’s How “Prosperity” Ends: Global Bubbles Are Popping

The comments below are an edited and abridged synopsis of an article by Hugh Smith

There are two kinds of prosperity: One fake, one real. Bogus prosperity depends on credit-asset bubbles inflating, creating wealth not from labour, production or improving productivity, but from the value of assets soaring as bubbles inflate.

Here’s How “Prosperity” Ends: Global Bubbles Are Popping - BullionBuzz - Nick's Top Six
Fed and inflation. Tank with symbol of Federal Reserve system inflates of ballon of global economy. 3d illustration

Bubble-generated wealth fuels credit and consumption as assets soaring in value increase the collateral available to borrow against, and selling these generates capital gains and stock options, which fund higher consumption.

Eventually, the expansion of money chasing yields and seeking places to park all the excess cash trickles into the real economy and the result is inflationary.

Nearly-free money sloshing around seeps into the real economy, jacking up prices without increasing the production of goods and services or improving productivity. Costs rise solely as a result of the bubble.

Central banks raise interest rates and reduce credit expansion to halt the bubble, an inflationary spiral. Marginal borrowers can no longer roll over their debt based on ever-higher collateral, and default become inevitable once markets tighten.

But inflation generated by bubbles is sticky. For example, landlords are reluctant to drop rents, as they’ve been trained by central bank bailouts and decades of easy money/credit to expect a prompt resumption of the bubble’s expansion. This mentality permeates the entire economy.

The inflation generated by bubbles remains as collateral crashes and credit expansion reverses into contraction. There are fewer people willing to pay bubble prices for assets. The smart money sold long ago, but the not-so-dumb money finally awakens to the potential downside of bubbles popping: Rather than reaping huge gains, assets might become illiquid, or valuations might fall faster than anyone believed possible in the heady bubblicious decades.

Bubbles liquidate the illusory wealth they generated when they pop, and then the bogus prosperity goes. The only source of real prosperity is improvements in productivity that generate more goods and services with fewer inputs of capital, labour, materials and energy.

The global credit-asset bubbles are popping, and the illusory prosperity generated by them is about to crash. It was all a fraud: Jacking the valuation of a bungalow 5-fold doesn’t improve productivity or create any new goods and services.

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