The west's dismal future: bubbles, bubbles, and more bubbles.

• Author: Roberts, Paul Craig

When the real estate bubble burst and the derivatives and casino bets based on the bubble endangered the large banks, the U.S. Federal Reserve supplied an unlimited amount of liquidity in an effort to keep the banks solvent. The injection of liquidity began in 2008 and has now entered its sixth year. Called Quantitative Easing 3, the Federal Reserve is purchasing $90 billion worth of Treasury bonds and mortgage-backed financial instruments each month, which comes to $1.08 trillion in debt monetization annually.

This enormous outpouring of liquidity has produced a bubble in the bond market where prices are so high that real interest rates are negative despite the inflationary implications. In the U.S. stock market, the liquidity has driven the market back up to, and beyond, its pre-crash peak, despite the report that U.S. GDP declined in the fourth quarter of 2012 by 0.1 percent, later revised to a 0.1 percent increase in GDP.

As large as the stock and bond bubbles are, the U.S. dollar bubble is even larger. As the world's reserve currency, the dollar is supposed to serve as a store of value. How can the dollar be a store of value when dollars are being created at a far greater rate than the U.S. and the world economies are growing?

Foreigners own 34.2 percent, or about $5.5 trillion, of the U.S. national debt. In addition, foreigners own many other dollar-denominated financial instruments and real assets.

With the United States creating more than $1 trillion in new debt and new money each year, the U.S. dollar itself is a huge bubble waiting to burst.

How long can the Federal Reserve keep the three bubbles growing? The answer depends on how long investors can continue to fool themselves for the sake of short-ran profits. The liquidity that the Federal Reserve is pumping into the banks can continue to drive up U.S. bond and stock prices until investors flee the dollar.

This raises the question: Into what alternative currencies or investments can those fleeing the dollar move their wealth? The lack of an obvious answer and the desire of investors not to set off a decline in the value of their dollar wealth has protected the bubbles from bursting.

Many have fled into gold and silver bullion as the enormous price rise in precious metals in the twenty-first century indicates. If there were to be widespread flight from dollar-denominated assets, bullion prices would explode upward. However, bullion prices can be driven down and capped by selling...