Is Another Bubble in the Making? Could Central Banks Lose Control?

Bill Gross of PIMCO: “Moving out on the risk asset spectrum has worked wonders since March of this year, but it comes with the risk of principal loss – failing to receive the return of your money. China may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland. With renewed upward appreciation of the yuan may come potentially volatile global asset price reactions to the downside – higher Treasury yields, and lower stock prices – which the Fed must surely be leery of before making any upward move, of its own. Policy makers recognize that asset prices must be supported in order to generate positive future nominal GDP growth somewhere close to historical norms. Investors must recognize that if assets appreciate with nominal GDP, a 4–5% return is about all they can expect even with abnormally low policy rates.”  In order to avoid debt deflation in the real economy, nominal GDP must grow in the 4%-6% range.