Must-Read: The problem is that ultra-easy money that creates financial imbalances is supposed to create real-side imbalances as well. That is, in fact, how you know that there are financial imbalances: financial assets are supposedly "backed" by real-side assets that simply aren't there. The financial imbalance of too much CDS in 2005 was matched by real houses that had been built that were occupied by "owners" who had no chance of paying their mortgages, and could only come out whole if the cycle continued another round at yet a higher level of prices. The financial imbalance of too much dollar-denominated Latin American debt in 1982 was matched by a real export sector in Latin American that simply could not export to earn enough hard currency to make up the debt amortization. In both cases, lenders made soporific by easy money did not do their due diligence as to what their debtors were doing (or, rather, not doing) to build (or, rather, not build) real assets of the value to back their financial debts.

And the result of ultra-easy money is inflation, in assets or in real currently-produced commodities, as financial and spending values outrun real production values, and accelerating inflation until the crash comes.

But where is the inflation? It's not in any currently-produced goods and services. It's not in any risky financial assets where buyers are ignoring disaster scenarios. Rather, the assets that are high priced are the Treasuries, which are valuable precisely because investors are conspicuously not underpricing risk and not ignoring disaster scenarios:

Bill White: Ultra-Easy Money: Digging the Hole Deeper?:

Ultra Easy Monetary Policy: Why it Hasn’t Worked as Intended

  • Premised on belief that it will stimulate demand BUT
  • Smacks of panic and raises levels of uncertainty
  • Bringing spending forward only works for a while
  • Consumers restrained by many factors including debt
  • While corporate investment also faces headwinds
  • Just as Keynes himself suggested

Ultra Easy Monetary Policy: Why Unintended Consequences Matter

  • McKinsey says global debt ratios are almost 20 percentage points of GDP above pre crisis levels
  • Asset prices in AMEs raised to unsustainable levels?
  • Risk Off/Risk On investment patterns and other market “anomalies”
  • Threatened financial institutions also lower “potential” growth
  • EME corporates run many risks
  • Other “unintended consequences”?
  • More dangers now than in 2007?