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A Bubble That’s Ready To Burst

The signs are there for all to see. We ignore them at our peril.

When you hear of investors falling over themselves to lend Argentina money for a hundred years at an interest rate of 8% a year, you know that something is not right.

Argentina has defaulted on its debts eight times in the last 200 years. That’s one default every 25 years. That should be a bit too often for comfort.

So you either have to be nuts or very brave to buy the country’s 100-year bonds at a yield of 8%. But the world has gone bonkers.

Bubble everywhere

There are bubbles everywhere we care to look, and in places we dare not look, also.

The Bank of International Settlements (BIS) is seeing the writing on the wall too. And it doesn’t like what it sees.

It is calling on central banks to move forward with interest rate increases to slowly deflate the bubbles before they explode and wreak havoc on the global economy, again.

It is calling on policy makers to push ahead with the unwinding of their post-crisis stimuli, even if they might cause short-term bumps along the way.

But why raise interest rates and tighten money supply, if there is no discernible inflation to speak of?

What’s normal?

Admittedly, inflation is far from rampant right now. At below 2% in most developed countries, it is just about tolerable. But the BIS, which is considered to be the central bank to central banks, says inflation should not be the be all and end all of monetary policy decisions.

Instead, central banks should monitor credit growth and be aware of the potential economic cost of bubbles bursting. Thank goodness America is paying some attention.

But even at the Fed, there are those who think that it is unnecessary to raise rates, even though financial conditions are the easiest in over two years. Global debt is now higher than before the crisis.

It is more than four times higher than the world’s total economic output for one year.

Below the surface

But inflation may yet return with a vengeance.

For instance, it didn’t take much to stoke inflation in the UK. The fall in the value of sterling has driven up the price of imports that, in turn, has driven up the cost of living. With continued uncertainty surrounding Brexit negotiations, the Bank of England is caught between the proverbial dog and the lamp post.

Inflation is bubbling just below the surface. But gauging the impact of inflation would depend on how we choose to measure the rise in the cost of living.

Some authorities would like us to think that inflation is under control. It could suit them to do so.

It means that they don’t have to cope with the financial fallout, if certain asset bubbles should burst, when interest rates go up. Kicking the can down the road is preferable to having to explain why another financial crisis has erupted.

No guarantees

Imagine how difficult it would be to cope with a property crash now. It could dent consumer confidence, which is at best fragile. It could damage household wealth, which is currently balanced on the edge of very unaffordable property prices.

Hopefully central banks around the world will heed the warning from the BIS. But there are no guarantees that they will.

That means we have to take matters into our own hands.

We at the Motley Fool Singapore don’t deal in hope. We deal with reality. We always have. We tell it as it is.

We believe that we have to do what is right, rather than hope that central bankers will do the right thing for us.

That means putting our money into assets that are able to generate a decent return, whilst we hold them. But we need to know the difference between good assets and those that are flaky.

I want to help you find those reliable assets. I want to help you build a financial future on sound foundations. If you want to find out how we can do it together, just click here.

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.