We suspect the duration and resolution of the twin bubbles will be a bit more complicated than the dot.com and credit/housing bubble — i.e., a swift waterfall collapse followed by a sharp rebound driven by the Federal Reserve to even higher ground. The nature of the leverage and type of “money” driving assets are “different this time.”
Furthermore, if you listen carefully to Greenspan and read between the lines, it sounds like the rise of inflation, possibly via a collapsing dollar, will burst the bubbles. That could hamstring monetary policy and force the U.S., now much more vulnerable to higher interest rates due to our a relatively larger and growing debt stock, into an emerging market-like stabilization program to arrest the market turmoil and assure our foreign creditors. That is tight monetary and fiscal policy.
The potential downside of withdrawing, or being to be perceived to, from the global community when at the mercy of global creditors. Isn’t it starting to feel like China is about three to five moves closer to checkmate?
Let me put it to you this way. I think there are two bubbles. We have a stock market bubble, and we have a bond market bubble. I think at the end of the day the bond market bubble will be the critical issue……we are working our way to a major increase in long-term interest rates. – Alan Greenspan, January 31, Bloomberg TV
Click here for Greenspan’s full interview. His comments on twin bubbles begin at 6:14 minutes in. We recommend listening to the entire interview.