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Deutsche Bank Strategist: Pump the Bubble To Prevent Collapse

Sept. 12, 2014 (EIRNS)—In a 104-pages report, Deutsche Bank strategist Jim Reid candidly wrote that central banks must keep pumping the bubble or the system will collapse. "We think this bubble needs to be maintained to ensure the solvency of the current financial system," Reid wrote.

The bubble he refers to, is the global financial bubble, which has now wandered into the bond market.

"It has long been our view that over the last couple of decades, the global economy has rolled from bubble to bubble with excesses never fully being allowed to unravel. Instead, aggressive policy responses have encouraged them to roll into new bubbles. This has arguably kept the modern financial system as we know it a going concern. Clearly there have always been bubbles formed through history, but has there been a period like the last 20 years, where the bursting of one bubble has consistently led directly to the formation of the next?

"What we found, was that bonds are where the bubble has migrated to. This is not to say that the bond market bubble is about to burst—far from it—but that it is a necessary condition for maintaining the debt-ladened financial system.... The worry is that there is nowhere left for this bubble to go given that it is now in the hands of the lenders of last resort (governments and central banks with regulators ensuring other large captive buyers). Although we think this bubble needs to be maintained to ensure the solvency of the current financial system, the best case scenario is that it slowly pops over time via negative real returns for bondholders. The worst case scenario being future restructuring."

What Reid is calling for is exactly what the European Central Bank is doing with its negative interest rates, asset-backed security (ABS) purchase program, and long-term refinancing operations. Today, European Commission President-elect Jean-Claude Juncker said that reviving the ABS market will be one of the priorities of his commission. Juncker takes his post in November; he announced the slate of commissioners yesterday, which will then go to the European Parliament to vote for or against the slate en bloc.