Well, it’s only fair.

After all, Ben Bernanke got to help blow the biggest-ever bubble (real estate bubble), and of course Alan Greenspan could rightfully be called the Lawrence Welk of Central Banking because he was a bubble-blowing machine (technology stock bubble, LBO, commodities, real estate).

Now it’s Janet Yellen’s turn.

We understand that she might already have “bubble envy,” but just what kind of bubble she will be known for is not yet clear. She has a good start on several potential good ones, though.

On her watch, we have 1) a bond bubble that features the highest prices for government bonds in history (which implies that interest rates are at record lows), and she has 2) a central banking bubble that features the US Federal Reserve balance sheet up 500% percent in the last ten years, the European Central Bank balance sheet has seen about 400% gains, and the Japanese and Chinese central banks trying to out-print the West.

Some would point to 3)  a looming dollar bubble where the continued perception as a safe haven would send the dollar to new heights (this could hurt exports and cripple dollar-based debtors abroad). And lastly, there’s 4) a global debt bubble, with estimates of 200 trillion of total global debt, spurred on by central bank cheerleaders.

While stocks are not technically in “bubbleland,” it’s clear that the Fed still relies heavily on stock market gains to boost GDP. It works like this: The Fed lowers interest rates and also injects capital into the financial system through asset purchases (they’re still buying about $20 billion per month by using matured bond payments to buy more bonds, though no one talks about it anymore). The lower rates and excess liquidity make for happy corporate borrowing, which allows stock buybacks on the order of $1.2-1.4 trillion per year (the equivalent of total corporate earnings for the S&P 500!). Of course, higher stock prices accomplish a few things (even though they worsen the wealth gap): they help government budgets by propping up pension funds, they create wealth-effect consumer demand, and they create a sorely needed sense of confidence about the future. Yet when interest rates are so awfully low, savers have to either invest more in stocks (or real estate) to generate growth–or they have to alter their future consumption plans: they are being herded toward more risk in any case.

We know how that movie ends.

The fact is that Janet Yellen and the Fed will NOT raise rates until they have to.  This means that the bubble machine is plugged in and chugging. In the last 30 years, the Fed has always been behind the curve in raising rates.

Janet will get her bona fide bubble in one form or another, but when this one bursts, we will see the end of the US Federal Reserve as we know it.  Will we go back to the gold standard?

It wouldn’t surprise me if we revised our currency system to employ a commodity currency of some kind–the kind where you can’t print money unless you first produce more of the commodity you promised to back it with.

WRH