I've used the data from 1966 to 1995 to create the exponential trend line. It just didn't seem right to use the post-1995 bubble data.
December 5, 1996
The Challenge of Central Banking in a Democratic Society
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?
The chart uses the power of hindsight to offer a few answers to Alan Greenspan's questions.
Let's hope the Chinese Style of spotting bubbles is vastly superior. I have my doubts though. They already missed the first one. One down, one to go?
China Is Not in a Property Bubble: Opinion
These differences, to my eyes, suggest that prices aren't as out of control as is often is suggested. Furthermore, the Chinese government has tremendous authority to intervene in the markets to ensure a soft landing. Its ability to do that will help the China growth story play on for many years to come.
See? Prices aren't that out of control. The Chinese government will no doubt provide the same soft landing for their real estate market that they provided for their stock market (currently 48% off its high). If there is one thing the governments of the world have mastered, it is price control. Always works!
Price Control
The primary criticism leveled against price controls is that by keeping prices artificially low, demand is increased to the point where supply can not keep up, leading to shortages in the price-controlled product.
Of course artificially low doesn't work. That's a given. Artificially high works like a charm though! This crazy notion that supply will increase to the point where demand cannot keep up and that in turn leads to gluts in the price-controlled product is purely a myth. Have we not proven it with our own real estate market? Um, we did prove that didn't we? I've been living in a cave for the past few years. I probably should read the headlines.
You know what else always works? Sarcasm! Love that stuff.
See Also:
Trend Line Disclaimer
Source Data:
St Louis Fed: Total Public Debt
FRB: Flow of Funds
St Louis Fed: Population
Tiny bubbles....In my drink...Make me happy...makes me think...
ReplyDeleteNice.
Stag,
ReplyDeleteYour recent posts have been terrific!
Did you notice the monster jump in bank credit issuance?
http://research.stlouisfed.org/fred2/series/TOTBKCR?cid=101
http://research.stlouisfed.org/fred2/series/TOTLL?cid=100
The increase in bank credit wasn't C&I loans:
http://research.stlouisfed.org/fred2/series/TOTCI?cid=100
I doubt it was real estate loans. The CONsumer loan market isn't big enough to account for a sudden $400+ billion increase either.
Hedge funds and private (in)equity borrowing is my guess (aka asset stripping). Creating credit out of thin air to enable wealth extraction is really key to the eCONmic recovery. And it comes with a bonus! Private inequity & hedge fund gains are classified as carried interest. That classification allows the wealth extractors to pay a low tax rate of 15%! Woohoo. Nothing like perverse incentives to get productive credit flowing again!
One thing is for sure, it wasn't me taking on debt!
GYSC,
ReplyDeleteSo here's to the golden moon
And here's to the silver sea
And mostly here's a toast
To you and me
Here's a toast from one who once embraced the golden moon and silver sea stories to one who is still embracing them. Cheers!
mab,
ReplyDeleteI had not noticed that. Fascinating.
I doubt it was real estate loans.
http://research.stlouisfed.org/fred2/series/REALLN
Right you are.
The CONsumer loan market isn't big enough to account for a sudden $400+ billion increase either.
http://research.stlouisfed.org/fred2/series/CONSUMER
Right you are. There is a jump here though. Wow. What would cause that?
Here's another look from a different angle.
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=CONSUMER&s[1][transformation]=pch
Stag,
ReplyDeleteThere is a jump here though. Wow. What would cause that?
Maybe the answer LIES here:
http://www.federalreserve.gov/releases/h8/h8notes.htm#notes_20100409
http://www.federalreserve.gov/releases/h8/current/
Apparently, banks are bringing some of the Enronesque off-balance sheet "assets" onto the balance sheet. No worries though. The banks have "significant discretion" in valuing said assets. It's all part of Bernanke's push towards greater transparency.
Phoney Capitalism is awesome for bankers.
mab,
ReplyDeleteI am absolutely disgusted every time I hear the term "off-balance sheet".
I have one spreadsheet that contains all of my finances. I don't use "off-balance sheet" accounting tricks to allow me to think I can buy things I can't afford.
Stag,
ReplyDeleteI am absolutely disgusted every time I hear the term "off-balance sheet".
Prepare to be really disgusted:
http://www.bloomberg.com/apps/news?pid=20601109&sid=a1liVM3tG3aI
Most of these off balance sheet entities were separate legal entities that were financed by "safe" money market funds. In many if not most cases, banks were not even legally required to backstop the "off-balance" sheet entities. The banks did step up though. No doubt with assurance from the Fed & Treasury that a bailout would be provided if necessary.
The Fed utterly failed to regulate banks and credit. The American middle class has been destroyed.
The breadth of the fraud is mind boggling. I see no way that all our debt obligations be met.
mab,
ReplyDeleteFrom your link...
``You will rapidly realize what a farce these off-balance- sheet things are,'' said Ladenburg Thalmann & Co. analyst Richard X. Bove. ``You could pick up a lot of loan losses with the stuff you're putting back on.''
As you said...
The breadth of the fraud is mind boggling.
Cendant
At the time, this fiasco was the largest case of accounting fraud in the country's history.
That's where I once worked. It takes bigger and bigger numbers to boggle my mind to the same level. Amazingly, the numbers do get bigger and bigger though.
I am somewhat thankful to Cendant though. I think I'd be doing worse these days had I not been made more justifiably cynical about the questionable ethics pervasive in our economic system.