The Hill: Georgia and the Everything Market Bubble

Article by Desmond Lachman in The Hill

Herb Stein famously said that if something cannot go on forever it will stop. He might very well have been talking about today’s everything bubble in U.S. and world financial markets, which has largely been fueled by the Federal Reserve’s extraordinarily easy monetary policy. Tuesday’s Democratic victory in Georgia’s senatorial races could very well prove to be the beginning of the end for today’s financial market excesses. It could be so by pushing up long-term interest rates through yet another round of large-scale budget stimulus.

It would be an understatement to say that we are now experiencing the mother of all bubbles in the world’s financial markets. Never mind that the United States and Europe are in the midst of the darkest of COVID-19 winters, world equity market valuations are at record levels. Indeed, according to the Shiller Cyclically Adjusted Price Earnings measure, today U.S. equity valuations are at around the same level as they were on the eve of the 1929 stock market crash.

Other indications of financial market excess are to be found in the world’s credit markets. U.S. 10-year Treasury yields remain close to their all-time lows while a record $18 trillion of global bonds now near negative interest rates. 

Among the main factors driving the U.S. and global financial market bubbles has been the Federal Reserve’s extraordinarily easy monetary policy. One indication of this ease has been the very rapid pace at which the Fed has expanded its balance sheet. While in the wake of the 2008 Lehman bankruptcy, it took Ben Bernanke’s Fed some six years to increase the Fed’s balance sheet by some $3.5 trillion, it has taken Jerome Powell’s Fed less than six months to do the same thing.

The economic significance of yesterday’s Democratic Senate victories in Georgia is that it now gives the Democrats control of both houses of Congress. This will allow President-Elect Joe Biden to make good on his promise that the recently passed $900 billion budget stimulus package should be viewed as a mere down payment for further substantial budget stimulus. It's only a matter of time before Congress approves a $2,000 payment to lower income individuals, a substantial spending boost to state and local governments and a marked increase in COVID-related public spending.  

Substantially boosting government spending may invite higher long-term interest rates and a weaker dollar. This would seem to be especially so as the U.S. budget deficit reached a record 15 percent of GDP and government debt rose above ....

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