When will the economic stimulus bubble burst?

Some analyst somewhere is always predicting an economic meltdown. After a while you stop paying attention to the doom and gloom. Life goes on.

However, well-known commodity trader Errol Anderson is sounding alarm bells and his arguments are not easily dismissed.

Anderson, with ProMarket Communications in Calgary, is best known for discussing the price direction for canola, barley and peas, but in a recent presentation he outlined his fears for the world economy.

Remember the dot.com bubble back in the 1990s? Start-up tech companies saw their share values skyrocket despite limited or no profitability. The bubble eventually burst, wiping many companies off the map.

Anderson says the second bubble was the U.S. housing market. Ninja mortgages were widespread: no income, no job and still accepted. Almost anyone could get a mortgage because housing prices would just keep going up. Mortgages were bundled and sold. Fraud was rampant.

The situation is masterfully explained in the movie The Big Short. Eventually, the housing bubble burst, throwing the U.S. economy into turmoil. Canada was spared most of the pain because of our tighter regulations.

Anderson says the third bubble will be three times the size of the previous two combined. He calls it the central bank QE stimulus bubble.

Most of us have heard about quantitative easing but would be hard-pressed to explain it. In layman’s terms, it’s governments throwing stimulus money at the economy — big, big dollars. It has occurred in many nations, especially the United States.

This might make sense as a short-term strategy, but when it occurs over and over and the economy is still limping along, there’s trouble brewing.

Governments in the U.S. and Canada have lost the ability to battle deflation, says Anderson. Low interest rates are meant to stimulate activity and prevent deflation, but interest rates have been at record lows for a long time, and there isn’t much room to drop them further.

Deflation can be very damaging, warn economists. Consumers withdraw from the marketplace when prices start to drop, waiting for goods and services to become even cheaper. That aggravates the situation.

Meanwhile, government debt is becoming unmanageable. Anderson said the U.S. national debt was $9 trillion when Barack Obama became president. It will reach $20 trillion when he leaves office in the next little while.

Governments basically print money trying to induce inflation and reduce the impact of their debt load. If we hit a deflationary period, the debt looms ever larger compared to a country’s economic output.

Currency wars have ensued. China keeps its currency value low to facilitate exports. Here in Canada, we’ve benefited from a 75 cent dollar. If we were at par with the U.S. dollar, our canola would have been around $7.50 a bushel rather than $10. Other commodities would see a similar adjustment.

On the trading front, the U.S. is suffering because of its strong greenback. If the American economy goes into a tailspin, its dollar could drop and propel ours higher.

The housing bubble remained inflated far longer than it should have. Maybe this third bubble will take years to burst or maybe analysts like Anderson are wrong.

However, it’s never a bad idea to have your farm’s financial situation in good order. Maybe it isn’t yet time to batten down the hatches, but perhaps we should be ready in case the bubble bursts and a storm ensues.

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