The global devastation unleashed by the spectacular bursting of the U.S. housing and credit bubbles has left deep scars, provoked an unprecedented government response and stoked fears that any sharp new rise in asset prices means another round of bubbles is brewing.
Plenty of analysts say such worries are overdone, that most assets are merely recouping some of the ground lost during the meltdown of 2008 and that any overheating - whether in U.S. Treasury bonds, emerging market equities, Chinese property or Canadian housing - will be corrected in due course by market forces. If not, putting curbs on leverage would quickly do the trick.
But others insist the sequel to The Attack of the Killer Bubbles is already playing out around the world and that the extraordinary government measures designed to stabilize the financial system ought to be placed at the top of the credits.
"Unfortunately it seems like the worst-case scenario is unfolding in front of us," says Doug Noland, a senior portfolio manager with Federated Investors in Pittsburgh and a long-time bubble watcher. "It's in play now."
The world is awash in easy money poured into markets by policy makers to revive credit and prevent a full-blown depression.
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"Excessively loose monetary policy causes asset bubbles and excessively loose monetary policy is what we have now," says Harvard University financial historian Niall Ferguson. "It's a little early to start pointing fingers and calling things 'bubbles,' however."
But Mr. Noland and a handful of other increasingly vocal critics warn that we are already faced with a massive new global bubble different from previous ones, which were largely inflated by a combination of cheap credit and hot speculative money chasing the latest craze - whether it be tulips, railways to nowhere, Florida swampland, worthless dot-coms or securities backed by junky mortgages.
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Every major bubble in history - from the legendary South Sea and Mississippi scams that ruined private investors and destroyed public finances in the 18th century to the Internet-stock craze of the 1990s and the housing mania of the mid-2000s - has been aided, abetted and sometimes spawned by government policies. But they could all be dwarfed by what one observer has labelled the "Quantitative Bubble," if the darkest predictions come true.
"The world is devoid of a monetary anchor and operating in a unique monetary environment that foments speculation, financial excess, imbalances, economic maladjustment and potent bubble dynamics," Mr. Noland wrote last month in his Credit Bubble Bulletin.
"The year 2008 marked the collapse of the Wall Street/mortgage finance bubble. It specifically did not mark the end of the Chinese Bubble, the global Credit Bubble or even the greater U.S. Credit Bubble."
And then along comes what Mr. Noland has dubbed the "Global Government Finance Bubble."
He has proclaimed 2010 "a bubble year" and warns that excesses could surface anywhere. He already sees the telltale signs in U.S. Treasuries, mortgage debt issued by U.S. agencies and frothy emerging-market equities and bonds.
Yet not even the experts find it easy to spot true bubbles in the making or identify them before they blow up.
At the height of the U.S. housing boom in mid-2006, when prices peaked as much as 90-per-cent higher than at the start of their six-year climb, some analysts argued the price jumps were justified by changes in the market fundamentals. These included a spike in demand, the availability of cheap long-term financing and even the improved quality of the housing stock.
"Lots of people at the Federal Reserve thought we were in a housing bubble," says former Fed economist Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington. "But there were some smart people who tried to argue that it was not so clear."
That's because bubbles remain elusive. Economists have yet to devise an accepted scientific means of measuring them, comparing them or calculating the crucial role played by human behaviour in their creation and collapse.
"People seem to see a bubble everywhere they turn. It actually takes a long time to develop a major bubble," says Harold Vogel, author of Financial Market Bubbles and Crashes.
Not enough data are available yet to confer formal bubble status on any of the recently hot market segments, including U.S. Treasuries, emerging market securities, Asian real estate and a handful of commodities, Mr. Vogel says.
He does describe what happened to gold and U.S. Treasuries last year as "bubble-like behaviour" triggered by the flood of government money. But gold has already peaked and the Treasury rally likely lacks staying power. And when it comes to public finance, that debate is still open too.
"We tend to throw the word bubble around a lot these days," says Dennis Gartman, publisher of the Gartman Letter. Policy makers "haven't created a bubble, for the simple reason that the monetary aggregates they did in fact create are not being absorbed by the public." In other words, the money being created isn't getting into the hands of people who spend it.
Mr. Vogel also rejects the notion we are in the midst of a new credit bubble. But his own research shows that, historically, bubbles invariably follow crashes.
Mr. Noland argues we are already well down that rocky road. This is nothing new for the U.S., which has developed an economy whose growth depends on keeping asset prices inflated, he says.
He cites Federal Reserve data showing that in the 1990s, the U.S. economy needed annual credit growth of $650-billion (U.S.) to keep the economy rolling. By fiscal 2007, the number had jumped to about $3-trillion.
When the markets seized up in 2008, the financial system could not create enough credit. Asset prices plummeted into "a downward death spiral" that was only interrupted by the Fed's intervention. The system stabilized, but at the cost of a dangerous new bubble, Mr. Noland says.
He acknowledges that Washington and other governments had no choice, even when, in the case of Greece and some other countries, the added debt burden left their finances in tatters.
"I understood they were going to throw the kitchen sink at this thing. I can't find any fault with that."
What he does fault is the change in objectives from stabilization to rapid recovery. "There needed to be some limit. Rates should not be at zero today and we shouldn't be running double-digit deficits. There should have been some recognition that it was going to take years to get out of this mess."
He may not have the specifics right, but the scenario fits the available research.
"The real GDP economy cannot absorb very rapid credit expansions," Mr. Vogel says. "The minute there's a panic in the market and you have a collapse or a crash, central banks immediately start to lower interest rates. They print money and they encourage investment in other areas. So they create a lot of instant credit."
And that, Mr. Noland says, is why we are now facing the Godzilla of all bubbles.
Developed world in debt
Here's a look at the 12 most indebted countries in the developed world, based on estimates for 2010 by the Organization for Economic Co-operation and Development. Figures are expressed as gross government financial obligations as a percentage of economic output.
1. Japan: 197.2 per cent
2. Iceland: 142.5
3. Italy: 127.0
4. Greece: 123.3
5. Belgium: 105.2
6. France: 92.5
7. United States: 92.4
8. Portugal: 90.9
9. Hungary: 89.9
10. Canada: 85.7
11. Britain: 83.1
12. Germany: 82.0
(Hungary and Iceland have received an International Monetary Fund bailout.)
World's great bubbles
Tulip mania, 1630s Worst excess at peak: Highest price for single bulb hits 5,200 guilders in 1637. At the time, a small house in Amsterdam cost 300 guilders.
South Sea Bubble, 1720s
Worst excess: Began with speculation in England's South Sea Co., and spread to hundreds of firms; one raised capital in the public market to construct a perpetual motion wheel.
Mississippi Bubble, 1720s
Worst excess: French aristocrats sell estates and pawn their jewellery to buy soaring stock in a worthless company set up to control trade with a colony of German farmers created in a Louisiana swamp.
Florida land boom, 1920s
Worst excess: Proposed island lots on 875 acres fetch $18-million (U.S.), even though most of the land is underwater. Another $8-million has to be returned to chagrined investors who got there too late.
Dot-com stock bubble, 1995-2000
Worst excesses: Too many to list, but here's an early one. A two-year-old software company called Netscape gives away most of its products and makes no money. When it goes public in 1995, the stock shoots up to $71 from $28 on the first day.
U.S. housing bubble, 2004-06
Worst excess: U.S. banking heavyweight Wachovia pays $25.5-billion in 2006 for Golden West Financial, a small mortgage outfit raking in millions from subprime loans to bad credit risks. Wachovia collapses soon after the bubble bursts.