The bubble economy is set to burst, and US elections may well be the trigger

Andy Xie says the failure of central banks to focus on asset inflation has led to rising inequality on the back of mistaken stimuli. More than interest rates, it will be political tensions in the West that will burst the bubble

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Published: 11:01am, 8 Oct 2017Updated: 6:37pm, 8 Oct 2017

In today’s bubble, central bankers and governments are fools. They can mobilise more resources to become bigger fools. Illustration: Craig Stephens

Central banks continue to focus on consumption inflation, not asset inflation, in their decisions. Their attitude has supported one bubble after another. These bubbles have led to rising inequality and made mass consumer inflation less likely.

Since the 2008 financial crisis, asset inflation has fully recovered, and then some. The US household net worth is 34 per cent above the peak in 2007, versus 30 per cent for nominal GDP. China’s property value may have surpassed the total in the rest of the world combined. The world is stuck in a vicious cycle of asset bubbles, low consumer inflation, stagnant productivity and low wage growth.

The US Federal Reserve has indicated that it will begin to unwind its QE (quantitative easing) assets this month and raise the interest rate by another 25 basis points to 1.5 per cent. China has been clipping the debt wings of grey rhinos and pouring cold water on property speculation. They are worried about asset bubbles.

But, if recent history is any guide, when asset markets begin to tumble, they will reverse their actions and encourage debt binges again.

Recently, some central bankers have been puzzled by the breakdown of the Philipps Curve: that falling unemployment rates would lead to wage inflation first and consumer price inflation next. This shows how some of the most powerful people in the world operate on flimsy assumptions.

This inflation mystery clouds the central bankers’ meeting in Wyoming

Despite low unemployment and widespread labour shortages, wage increases and inflation in Japan have been around zero for a quarter of a century. Western central bankers assumed that the same wouldn’t happen to them without understanding the underlying reasons.