Bubble, Bubble, Toil and Trouble: When Authorities Buy Assets to Prop Up Markets
The Central Planners who thought that buying shares to prop up the stock bubble was an excellent fix are about to find out the true meaning of toil and trouble.
The actual line from Shakespeare’s Macbeth is double, double, toil and trouble, fire burn, and cauldron bubble but for the purposes of analyzing what happens when authorities prop up market bubbles by directly buying assets, bubble, bubble, toil and trouble is also appropriate.
China’s authorities seem to have chanted Shakespeare’s magical incantation nonstop this year, as the Shenzhen and other Chinese stock market indices have more than doubled. This chart illustrates what the Chinese authorities were aiming for: a bubble that just keeps expanding and never pops:
But what actually happened was predictable: China’s stock bubble burst. In response, Chinese authorities threw everything within reach into the market to stem the decline: criminalizing negative comments about stocks, loosening credit, enablinggreater fools to post their homes as collateral for margin accounts, and the last and chillingly irreversible tool in the Central Planning Bubble Inflation Tool Kit, direct purchases of stocks: China Spends 10% Of GDP On “All Bark, No Bite” Stock Bailout:
In gambling parlance, Chinese authorities doubled-down on their bet (there’s your double, double) that they could save their bubble, bubble.
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