The Number That Blows up the World, “Everything Bubble” Edition

The comments below are an edited and abridged synopsis of an article by John Rubino

We’re deluged with numbers these days, many of them ominous departures from historical norms. But one matters more than the others, and Rubino starts with a history lesson, beginning in the 1960s.

The Number That Blows up the World, “Everything Bubble” Edition | BullionBuzz | Nick's Top Six
Earth grenade bomb concept. Isolated on white. Earth map provided by NASA.

There is a fix for rising inflation and financial instability: Higher interest rates. Unfortunately, we no longer have that tool. In the 1970s, the US was in relatively good financial shape. The debts of governments, corporations, and individuals were low by today’s standards, which means higher interest rates could claim fewer over-leveraged victims while enriching savers with rising interest income.

Today the opposite is true. Debt is at record levels in every sector of every major country. Zombie companies and governments that can only survive with new credit are everywhere. Raising interest rates to 1980 levels would bankrupt pretty much everyone and bring down the curtain on today’s credit-driven world.

Luckily, inflation is low, so we don’t have to resort to 1970s-style monetary policy, right? But a growing number of people are predicting higher inflation, as industrial commodities join stocks, bonds, and real estate on upward sloping price curves.

‘The Number’ in the title of this post is the yield on the 10-year Treasury bond, which has taken the place of the Fed Funds rate as the indicator from which all things financial take their cue. It’s been rising lately, and if it moves from a 1 handle to 2 or higher, it will set lots of things in motion. So let’s say a yield of 3% is the number that blows up the world.

Seen this way, the current environment is similar to 1977, a time of rising but not yet runaway inflation, in which the mood is just beginning to shift from complacency to concern. Not yet an alarm, and not yet panic. But those things will come unless inflation and its attendant instability are quickly reined in.

This time we’ll just have to do it—somehow—without raising interest rates or cutting government spending. It will be interesting to see how that goes—and how people react when whatever else we try doesn’t work.

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