- The idea that authorities can massage their pumping to keep asset bubbles inflated at a permanently high plateau is currently being tested.
- This is another facet of The Fed’s Double-Bind: if you stop pumping asset bubbles, they pop as participants realize the music has stopped, and if you keep pumping them, they expand to super-nova criticality and implode.The trouble with inflating asset bubbles is that you have to keep inflating them or they pop.
- Unfortunately for the bubble-blowing central banks, asset bubbles are a double-bind: you cannot inflate assets forever. At some unpredictable point, the risk and moral hazard that are part and parcel of all asset bubbles trigger an avalanche of selling that pops the bubble.
- There are several dynamics at play in this double-bind.