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IPFS News Link • Federal Reserve

Another Financial Time Bomb: Corporate And Public Sector Pensions Are....

• davidstockmanscontracorner.com

Yellen describes a bubble as a combination of "clearly overvalued" asset prices, strong credit growth and rising leverage. In other words, the type of financial fragility the central bank, with its vast research staff, failed to spot prior to the subprime crisis.

The Fed's definition of a bubble is too narrow. Bubbles are, in essence, illusions of wealth. The last two great bubbles – internet stocks and U.S. real estate – involved inflated asset prices. The great current bubble is centered around liabilities, or promises to make future cash payments. The owners of these claims consider them part of their current wealth. But what if they cannot be paid?

These thoughts are provoked by a gloomy note on pensions by Andy Lees of the independent research outfit MacroStrategy Partnership. Lees is worried that the assumptions involved in calculating pensions are as flawed as the valuations prevalent during the dot-com bubble.


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