Early last week there was some chatter regarding the upcoming G-20 meeting that tried to play down the idea that the G-7 countries -- the biggest of the industrialized nations -- are engaged in a competition to see who can debase their currency the fastest. Of course, such chatter is meaningless, because even if those countries were in a currency war, they wouldn't acknowledge it.

More important, what is under way is bigger than squabbling over who can make the most confetti. We are in the midst (or, more likely, somewhat past that point) of the third massive misallocation of capital of the past 15 to 20 years, all three of which have been precipitated by irresponsible central bank activity.

Anyone hear an echo?

The first instance was mostly a Federal Reserve-inspired party/debacle (the equity bubble) that allowed people to live beyond their means, dream that they could be day traders or start up spurious businesses they believed would one day be worth billions of dollars.

When that burst, the Fed printed even more money and we had the even more dangerous misallocation of capital that resulted in the real estate bubble, where people used debt to live beyond their means and the financial system itself embarked on a similar strategy. The result was a cataclysm that nearly wiped out the world's banking structures in 2008/2009.

The response to that was worldwide quantitative easing (as central banks monetized government debt with money they created with the click of a mouse). While this has not produced the bubble-like euphoria we saw in the equity and real estate bubbles, it has allowed governments to behave in totally irresponsible fashion.

That has allowed people to believe that a recovery is under way, that the bond markets are OK and that we don't have any inflation; thus, all of our problems are in the process of being solved. In other words, everything is just right (à la Goldilocks).

Aka, a Grimm reality

That is, sadly, pure fantasy (again). What has caused the stock and bond markets to levitate is nothing short of an extraordinary amount of worldwide money printing that thus far has not resulted in "enough" inflation for people to recognize it as such. (Most likely, the fear of a deflationary accident still lingers, even though that is receding into the background.)

How long folks will remain in denial (delusional) is not knowable in advance, just as it wasn't possible to know when the equity and real estate bubbles would end. What is knowable, as it was with the prior two bubbles, is that it will end, and very badly.

Once central banks cannot monetize government debt, we will have a variation of the scare we saw over the past couple of years involving European governments, but this time focusing most likely on Japan, Great Britain and the U.S., as well as Europe.

In other words, we are in the final misallocation of capital. As I have noted before, we can't really call it a bond bubble, since we don't have the euphoria and behavior-changing aspects that normally accompany bubbles. But the warping that has been caused during this go-round is no less significant, and the ramifications will be even more powerful, simply because the scale of the abuse is gargantuan.