(1-15-13) The markets are increasingly divorced from reality.

There was some indication of this in Fed Governor Bullard's warning Friday that the Fed and other central banks are creating yet another new speculative bubble.

How? By keeping their foot down on the monetary accelerator, as it were, to ensure that negative real interest rates remain for a protracted period of time.

In fact one of the goals of the central banks and one of the goals of a grey skies economic policy is to maintain negative interest rates as long as possible. There are numerous benefits in so doing.

The problem with grey skies policy, however, is that it may actually work -- and therein lies the very problem of grey skies policy, namely if it actually works, i.e. increases economic activity and increases GDP, then it can longer be maintained because negative interest rates can no longer be maintained.

This then creates a potential debt time bomb somewhere out in the future because government's cost of debt service, which has been falling for 5 years, is going to at some point increase as economic activity increases.