Financial bubbles will inevitably burst

Ben Bernanke, chairman of the US Federal Reserve, is no longer paying any attention to price stability. He has been printing money like crazy since 2008. Now with “QE Infinity”, he is printing money out of thin air to the tune of US$85 billion a month. Bernanke says he will continue to print money until unemployment, now at 7.5 per cent, falls below 6.5 per cent and economic growth resumes its normal path.

Modern economic thinking is now associating money printing from central banks’ computer keyboards with job creation and economic growth. Bernanke, who has brought the interest rate down to 0.25 per cent, purchases both US Treasuries and mortage-backed securities from the banks. By doing so, he is financing the US government’s deficit and keeping the banks from failing. American politicians have found it unnecessary to improve public finances because they know the Fed will print the money on their behalf. The purchase of mortgage-backed securities from banks will expand the Fed’s balance sheet to $4 trillion this year. This will turn the privately owned Fed into the largest holder of US properties.

In the meantime, banks use cheap money from the Fed to subscribe to higher yield bonds, the proceeds of which are used to recapitalise their capital base. The banks also use money to speculate, particularly on the stock market. The US stock market, which peaked at more than 14,000 in 2007 before crashing to 7,000 in 2009, has now reached a new record high of more than 15,000. The new record was set without the US undergoing any economic restructuring to improve its competitiveness. The employment situation remains sluggish as ever. The only explanation for the stock market rise is liquidity from QE. If you divide the stock market gain with the Fed’s balance sheet, the index isn’t going anywhere. Investors are now seeing a moral hazard: they believe the Fed will come to their rescue any time the stock market pops. The only way for the stock market to go now is up. And we all know that this bubble is not sustainable.

Japan, which embarked on money printing nine times since its economy tanked in 1990, is reviving its money printing programme. It plans to spend $1.4 trillion over the next two years to combat deflation, devalue the yen, boost the stock market and revive the ailing economy. Inflation will be driven up from 1 to 2 per cent. The yen has fallen sharply due to “Abenomics”. It broke recently 102 yen to the dollar, compared to 78 late last year. The yen has effectively been losing value by 20 per cent in a hurry. Against the Thai baht, it is weakening by a similar amount, making Thai exports to Japan less competitive. Japanese politicians wanted to boost the stock market to 13,000 by the first quarter of 2013. Now the Nikkei index has breached 15,000. Again, Abenomics looks like a miracle of renewed prosperity. The danger lies in the sliding yen and higher bond yields. If investors lose confidence in Japan’s money printing, and interest rates have to go up, it is game over.

We have seen stock market targeting as the top agenda of US and Japanese policy-makers. However, the stock market rise has not proved to have a trickle-down effect for people on the streets.

A financial executive told me some time ago that Kittiratt Na Ranong, the deputy prime minister and finance minister, tied his performance to that of the Thai stock market. “He’s been telling friends how strongly the stock market is performing,” she said.

Kittiratt has spent a large part of his career in the stock market. His last formal position before entering politics was president of the Stock Exchange of Thailand. Naturally, now as finance minister, he has an instinct for promoting the SET and banking on it as a measurement of his success. Initially, we heard Kittiratt talk about income distribution, a need to raise the minimum wage to Bt300 a day to increase the purchasing power of hard-working Thais, and implementation of the rice price-pledging scheme to put more money into the pockets of farmers. But his focus on social welfare improvement is fading, with the Bt2 trillion mega projects coming to the fore. High economic growth through public sector-led spending now tops his agenda.

Even with the surge of the stock market from 1,000 to 1,600, a 60-per cent gain, Kittiratt wants even higher growth. The Thai market is now hitting a 16-year high, breaking 1,600. Goldman Sachs predicts an upside gain by another 20 per cent to 1,900 for 2013. Kittiratt also wants the interest rate cut steeply by one full percentage point. Certainly, lower rates would boost the stock market and keep the real estate bubble going. The game of musical chairs can’t be stopped.

The Bank of Thailand is pursuing price stability as the anchor of its macroeconomic management. Kittiratt and the Finance Ministry want it to focus on exchange-rate targeting instead. But the hidden agenda is stock-market targeting, which is the primary goal of policy-makers in the era of high finance and the coming bursting of all the financial bubbles.