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Outgoing German Finance Minister Warns Global Policies Are Causing Bubbles

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We live in a world full of bubbles. We’ve reported extensively on the stock market bubble, the student loan bubble, and the auto bubble. We even told you about a shoe bubble. Last summer, US Global Investors CEO Frank Holmes called global debt “the mother of all bubbles.”

So what happens when these bubbles start to burst?

In a recent interview, outgoing German Finance Minister Wolfgang Schäuble warned about bubbles and said global debt could set off the next financial crisis.

The IMF and others agree with us that we are in danger of encouraging new bubbles to form. We have no idea where the next crisis will happen but economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity, and the growth of public and private debt.”

Bankers and investors around the world have expressed concern about the rapidly inflating stock market bubble and its future impact on the world economy. Just last month, Tiger Management co-founder Julian Robertson unequivocally called the US stock market a bubble. Not only that, he said it was the Federal Reserve’s fault.

But the granddaddy of bubbles is debt.

According to the Institute of International Finance (IIF), global debt levels reached a staggering $217 trillion in the first quarter of 2017. That represents 327%  of global GDP. To put that into perspective, before the 2008 meltdown, global debt was a mere $150 trillion.

Schäuble emphasized that this global debt threatens the world economy. He attributes the risk to the loose monetary policies of central banks across the world put in place in response to the global financial crisis in 2008. He said when push comes to shove, the tendency is always toward more government spending and more money printing.

It’s always a narrow tightrope walk. And by the way, we also had lots of economic discussions, and will do in the future about what the correct relationship is between fiscal policy, monetary policy, and structural reforms. Everyone talks about structural reforms. But when it gets concrete, for most people it’s more about fiscal policy, and in case of doubt deficit spending, and about monetary policy, and in case of doubt that means more liquidity.”

Other European finance chiefs interviewed by CNBC share Schäuble’s concerns about excessive liquidity stemming from the trillions of dollars central banks have dumped into the markets. Consider these comments by Klaus Regling, managing director of a crisis resolution mechanism for eurozone countries.

We know that there will be another crisis one day. We all hope it doesn’t happen too soon.”

That’s nice he hopes it doesn’t happen.

It’s interesting that these high-powered financiers and government officials see the problem and yet continue the same policies of quantitative easing and government stimulus that caused them in the first place. It’s almost like they just want to kick the can down the road and hope they are gone when the bubble finally bursts. That goes to show diagnosing the problem and solving it are two different things.

There’s not much we can do to stop this kind of official malfeasance. But we can prepare for the inevitable results.

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