The End of the Risk-Free Rate: Investing When Structural Forces Change Government Debt

Chapter 6Bubble Management

In an interview on Bloomberg Television in December 2012, Bloomberg surveillance host Thomas Keene asked me the following: “When you look at central banks, they talk about interest rate management. Now we’ve got the Evans central bank talking about job management. Is Stephen Roach right—right that we’ve got to have a credit bubble management or a bond bubble management as well?” It was not only an excellent question but also one for the books. A central bank managing a bubble is one of the core ideas about the “end of the risk-free rate thesis.” A bubble is about expectations and asset prices. A central bank has to carefully convey a message when expectations are heightened through elevated asset prices. If not, the ...