![\"fed_debt_leverage.png\"](\"\/blog\/wp-content\/media\/images\/fed_debt_leverage.png\" "\\"fed_debt_leverage.png\\"")
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Even though the first-order effects of the Covid-19 pandemic are still impossible to predict, it’s already possible to ask: did the pandemic pop all the global financial bubbles? The reason we can ask this question is the entire bull mania of the 21st century has been based on a permanently high rate of expansion of leverage and debt.<\/p>\n
The lesson of the 2008-09 Global Financial meltdown was clear: any decline in the rate of debt\/leverage expansion is enough to threaten financial bubbles, and any absolute decline in debt and leverage will unleash a cascade that collapses all the speculative bubbles in stocks, real estate, collectibles, etc.<\/p>\n
What’s the connection between Covid-19 and the rate of debt\/leverage expansion? Confidence and certainty: people will make bets on future growth and take on additional debt and leverage when they feel confident and have a high degree of certainty that the trends are running their way.<\/p>\n
Over the past 20 years, the certainty that central banks would support markets has been high, as central banks stepped in at every wobble. Today’s 50 basis-points cut by the Fed sustains that certainty.<\/p>\n
What’s now broken is the certainty that central bank interventions will lift risk assets and the real-world economy. Given the uncertainties of the eventual consequences of the pandemic globally, confidence in future trends has been either dented or destroyed, depending on your perspective and timeline.<\/p>\n
Certainty that central bank interventions will push markets and real-world economies higher has also been dented. What happens if the market tanks after every 50 basis-points cut by the Fed?<\/p>\n
We wouldn’t be in such a precariously brittle state if the global economy hadn’t been ruthlessly financialized to the point that market dependence on central bank intervention is now essentially 100%.<\/p>\n
Once confidence and certainty are lost, the willingness to expand debt and leverage collapses, and that reduction in the rate of expansion will pop all the global asset bubbles.<\/p>\n\n\n
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Authored by Charles Hugh Smith via OfTwoMinds blog We wouldn’t be in such a precariously brittle state if the global economy hadn’t been ruthlessly financialized to the point that market dependence on central bank intervention is now essentially 100%. Even though the first-order effects of the Covid-19 pandemic are still impossible to predict, it’s already possible […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-583","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/583","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=583"}],"version-history":[{"count":3,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/583\/revisions"}],"predecessor-version":[{"id":587,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/583\/revisions\/587"}],"wp:attachment":[{"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=583"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=583"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.pbmv.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=583"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}