Extreme policies produce extreme attitudes among investors. Now the nearly six years of zero interest rate policies, accompanied by quantitative easing, that we have seen in most Western economies are producing such an extreme attitude – in the world’s bond markets. Bond investors’ appetites for high yields have grown so far that they are seeking out risks far out of proportion to the additional return they may receive. In turn borrowers both corporate and state are forgetting the discipline needed to keep debts under control. Needless to say, this will all end in tears, which will thereafter prevent worthwhile borrowers from accessing the funding they need.

In every sector of the bond market, you can find deals that make little sense on a rational basis. In the tech sector, Tesla’s $2 billion convertible bond issue in February carried a coupon of 1.25% on the longer tranche and a conversion premium of 42%. By definition, the “crossover point” at which the bonds would yield a higher overall return than the stock would be after 33 years – in other words, 26 years beyond the 7-year maturity of the bonds.

Looked at the other way, considering the notes as a debt security, their yield was below the yield on Treasury bonds of the same maturity, while this week Standard and Poor’s assigned the bonds a rating of B minus, well into junk territory and the lowest rating they could hold while being able to meet their current financial commitments. In other words, however fashionable Tesla’s cars may be, and however highly rated its equity, its convertible bonds were a thoroughly irrational investment.

Staying with the U.S. corporate sector, it’s notable that bond financings of leveraged buyouts are back to the criteria of 2007. Covenant-lite transactions are common, and leverage is now acceptable up to a ratio of $7.50 of debt for every dollar of Earnings Before Depreciation, Interest and Tax (EBITDA). With interest rates so low, that gives interest coverage that is still slightly less aggressive than at the 2007 market peak, but it is truly remarkable that such extremes of aggressive financing are available only six years after the last crash.

Since the 2008 crash there has been very little liquidation of “malinvestment” as Austrian economists would call it, as Ben Bernanke’s monetary policy and the flood of institutional funds into private equity have re-inflated the valuation bubble without letting it burst. Only a few deals, like the $36 billion 2006 deal for Texas Utilities, which coincided with a collapse in natural gas prices from the fracking revolution, have been allowed to meet the fate they so richly deserve.

It isn’t just a U.S. problem. Chinese property companies have for the last few years taken massive advantage of the Asian bond markets, as domestic financing became more difficult to get. According to the Financial Times, the covenants on these transactions were even weaker than in the U.S. market, since Chinese exchange control restrictions made it impossible to get proper security over Chinese properties being financed.

However, not only were investors taking a big risk on Chinese property with dubious security, they were also exposing themselves to a massive exchange risk. For a decade, the Chinese yuan had gone in only one direction against the dollar, upwards, but the rise in Chinese wage costs and the emergence of Chinese balance of payments deficits has now made the yuan weak against the dollar – and gravely threatened the balance sheets of Chinese companies with domestic assets such as property and large dollar debt.

Africa looks like the great growth story of the 2010s, with average economic growth in sub Saharan Africa estimated by the IMF at 5.4% in 2014 and 5.5% in 2015, or about a percentage point higher if you don’t include South Africa, which is a near basket case. This has resulted in a flood of international bond issues into the region, with many countries coming to the international markets for the first time. Inevitably, this is resulting in overheating, and in countries borrowing too much, even though debt ratios before the present borrowing boom were comfortably low.

Ghana for example, which has experienced both the current credit boom and an oil boom from the big new Jubilee field, is now running public sector deficits of more than 10% of GDP, while Zambia gave its civil servants average raises of 50% in 2013 while inflation was running at only 7%. Needless to say, the likelihood of overheating in many African economies has increased exponentially. Equity investors will get their money back eventually in most cases; debt investors very likely won’t, as default has become only too easy an option.

My final example is Ecuador, which has been carrying out a roadshow for a $700 million bond issue. Not only is Ecuador a country run on the economic principles of Hugo Chavez’ Venezuela, it is also only six years from its last default, on $3.4 billion of international debt, after which it was able to buy back the bonds in 2009 for about a third of their value. Needless to say, if countries can come back to the markets less than a decade after defaulting on their international debt and buying back their bonds at a third of their issue price, the “moral hazard” element in international bond markets has become unacceptably high.

The bond market bubble is only a modest part of a global asset bubble. Stocks in particular are being bid up and up by the flood of cheap money, and there seems very little prospect of an early end to it. While the Fed is slowly “tapering:” its purchases of Treasury and Agency bonds, it is still at least a year away from its first rise in interest rates. However, even when it begins to raise interest rates, it will do so very slowly, as it did in 2004-06, with no recognition of the immense damage its persistent negative real interest rates are doing in the real world. More damagingly, the European Central Bank has indicated that at its next meeting in June it will reduce its rates further, probably making bank deposit rates with ECB negative. With Japan also showing no sign of even beginning to tighten, and Mark Carney at the Bank of England proving himself a committed inflationist, there is thus every chance that current destructive monetary policies will continue for the foreseeable future.

A “trial balloon” in the FT this week by the leading Harvard economist Kenneth Rogoff is even more sinister. Rogoff has noticed that it’s tough to run a regime of negative interest rates because people can always draw $100 bills out of their banks and hide them under the mattress, thus preventing the negative interest rates from taking effect. Accordingly, he suggests abolishing cash altogether, making everybody pay for everything with debit cards. This would be hugely damaging for consumers, who would be left starving to death every time hackers disrupted the banking system.

It would also be an instrument of Orwellian state control, since all transactions would leave an electronic paper trail. To Rogoff, this is an advantage, since it would increase tax collections, but for anyone not cushioned by a six or even seven figure salary from Harvard it’s a nightmare, exponentially increasing the potential for government meddling. Also – and this to Rogoff is the proposal’s great advantage – it would enable the government to run a negative interest rate regime, since there would be no escape; you would see your bank balances sucked inexorably away by the government (OK, the Fed not the IRS, but so what?) and not be able to do a damn thing about it.

Rogoff wonders naively whether in such a regime the populace might not resort to keeping its wealth in crypto-currencies such as Bitcoin. Damn right we would – and there’s an even better alternative, holdings of direct gold. I am not an extreme gold bug; Steve Forbes’ Gold Standard proposal would be ineffectual if we kept the Fed and deposit insurance, because banks would continue leveraging themselves up to the eyeballs, thus preventing gold’s salutary control system from operating. But if Rogoff’s evil scheme has any chance of getting adopted, I’m converting the lot into gold. Indeed, in that event I would probably go so far as to buy the log cabin in the hills, the shotgun and six months of canned food as well!

This time around, we are probably safe from Rogoff’s schemes of Bernankeian extremism. But nevertheless, at some point a crash must come, and the malinvestment of recent decades must be liquidated. Of those malinvestments, low-grade bonds are by no means the least dangerous, and unlike other forms such as equities and real estate, they are unlikely to be worth anything after the denouement, since as Ecuador is showing the world, default is today only too cheap and easy.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)