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When the economy is growing — as it did for years, under presidents as different as Reagan and Clinton — the inevitable down-cycles are more bearable. Going from, say, 4% growth to 2% growth isn’t as hard as going from 2% to -1%. (Hi, President Obama!)
It’s the same with asset inflation cycles. When the stock market is frothy and bubbly, everyone knows that a bounce down to earth is imminent. (Timing it precisely, of course, is a different matter.) In the autumn of 1987, when the stock market took a dive, the economy itself was strong enough (Hi, President Reagan!) to pull itself together. The point isn’t to eliminate the booms and busts — we couldn’t do that even if we tried — but to make sure that there are enough incentives and smart regulations in place to fuel a growing economy.
So, that said, this is worrisome news. From Business Insider:
The Bank for International Settlements — the Swiss-based financial institution that acts as a counterparty to national central banks — has declared that stock markets are in a “euphoric” state and has urged central banks globally to begin tightening interest-rate policies now while economies are growing rather than wait for another recession, when it will be too late.
Bankers, in general, love cheap money for themselves — they get to borrow at low, government-sponsored rates and lend at usurious, rapacious, banker-invented rates, and I’m being only half-facetious here — but cheap money chases things to buy, like stocks and real estate. Enough cheap money chasing enough assets and you get asset inflation. You get a bubble. And when bubbles burst, central banks move in with the only weapon they’ve got, which is….cheap money:
These words from the BIS ought to terrify anyone who thought central banks were unprepared for the last recession in 2007, when U.S. interest rates were “high” at about 5.3%:
“Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession.”
And that crisis looks set to arrive any day now because stocks are at a peak.
Let’s look at the real estate market for a moment, if you don’t mind. Over at David Stockman’s blog, he reports the following:
Janet Yellen is an officious school marm. She constantly lectures us on Keynesian verities as if they were the equivalent of Newton’s Law or the Pythagorean Theorem. In fact, they constitute self-serving dogma of modern vintage that is marshaled to justify what is at bottom an economic absurdity. Namely, that through the primitive act of banging the securities “buy” key over and over and thereby massively expanding its balance sheet, the Fed can cause real wealth—-embodying the sweat of labor, the consumption of capital and the fruits of enterprise—-to magically expand beyond what the free market would generate on its own steam.
Um, he doesn’t like her. But here’s where he lines up with the International Bank of Settlements:
Once upon a time the world knew better. The pre-Keynesian rule was that when central banks hit the “buy” key they always and everywhere create monetary inflation. Ordinarily that resulted in the inflation of credit, which, in turn, caused prices to rise—whether of commodities, services, wages, real estate or financial assets like stocks and bonds.
In other words, cheap money. And cheap money drives up prices, creates bubbles that burst, and that require cheap money to rectify. Sort of like this:
On the theory that perhaps at some point a picture can overcome the dense dogma of our benighted Keynesian money printers in the Eccles Building, the two illustrations below from the Dr. Housing Bubble Blog are offered. Arcadia and San Marino, California are most definitely not unique national treasures where cracker-box houses should be valued at $1-$1.5 million. No, they are just at the leading edge of the renewed speculative mania that has been touched off by the Fed’s latest and greatest monetary inflation.
Dr. Yellen, of course, claims there are no financial bubbles to worry about because the Keynesian bathtub of potential GDP has not yet been filled to the brim. Perhaps she would like to put in a bid for one of these.
What all of this suggests, I think — aside from the obvious, which is that this administration has failed in its central mission to restore and strengthen economic growth — is that we’re probably in for a nasty correction. Maybe, if tradition holds, in October. Which we can only hope is a preview of the nasty correction the Democrats will face in November.
Meanwhile, I’m keeping my assets dry.