In his column in the Washington Post Robert Samuelson muses about whether high asset prices are signalling an incipient recession:
To test his theory, Steuerle compared U.S. household net worth (what people own minus all they owe) to the economy’s annual output, gross domestic product (GDP). Since 1950, the ratio has mostly remained 4-to-1 or less. Americans’ assets, from homes to stocks, grew roughly in tandem with the overall economy.
But there were two glaring exceptions. In early 2000, the ratio jumped to 4.5-to-1, and at the beginning of 2007, it rose to 4.9-to-1. There are two possible explanations for these leaps: Americans had become permanently richer — their accumulated wealth was rising faster than their annual incomes (GDP); or for some reason, the value of their assets had temporarily increased.
With hindsight, we know that the second answer is correct, because in each case, the economy soon entered a recession that reduced the ratios. What worries Steuerle is that the same pattern is now unfolding. Toward the end of 2018, the ratio hit an all-time high of 5.3-to-1.
The implication is that asset prices — particularly for stocks and real estate — are artificially high and that, when the bubble inevitably pops, a serious recession will occur, Steuerle writes in the journal Business Economics. People will feel poorer; joblessness will rise; confidence will slacken; business investment will weaken.
It would be about damned time. Make no mistake: artificially inflating asset prices was the explicit objective of quantitative easing. Said another way, the academics at the Federal Reserve’s response to the Great Recession was to exacerbate income inequality in the hope that the newly-endowed ultra-rich would start investing in the United States. The strategy did make the ultra-rich even ultra-richer. It did not spur business investment in the United States.
I agree that Stephen Moore should not be appointed to the Federal Reserve Board of Governors and, if appointed, should not be confirmed. I also agree with the editors of the Washington Post that we need experts there.
However, the experts I’m interested in lean more towards practicum than prowess as a researcher or teacher. Only theoreticians would have given us an abomination like quantitative easing.
I’m not sure when it was, but several years ago you frequently pointed out how overdue we were for a recession, even a normal business-cycle recession.
I’m not an expert by any means, but it seems to me the various indicators make it a clear and present possibility.
Well, let’s see. Since 2008 the DJIA has nearly quadrupled. Federal debt held by the public as a percentage of GDP is at the highest level since the Korean War. Corporate and municipal bonds as a percentage of GDP are the highest rate ever.
And people wonder why I think something is out of whack with the financial system.
We are priming the economic pump ferociously, not getting an enormous amount out of it, but inflation is relatively low. It should be high. We don’t need to wonder where the inflation is. It’s in the financial markets.
“People will feel poorer; joblessness will rise; confidence will slacken; business investment will weaken.”
Time to start working on a bailout plan for the top 0.1%. Cant have them suffer. Sooner or later they are going to start investing all of that wealth and make us all richer. Right?
Steve
A Fed Governor, which one I don’t recall, went on record saying they were trying to engineer a weath effect. And we can see how it inflated assets for a minority through yield chase in equities. And how it benefitted many through mortgage rates and housing prices.
But to be accurate, the classic wealth effect is designed to spur consumption due to consumers’ feeling that their two primary assets are more valuable. There even academic studies estimating consumption coefficients of 6-8 cents for every dollar of asset appreciation. That worked.
But as I’ve always pointed out, as a general proposition investment usually follows demand, not the other way around. And as I’ve also pointed out, if your economy has shifted its composition more towards services you won’t get the hoped for kick in investment. Industries that have moved to China don’t invest here; Porsche buyers buy product from factories in Stuttgart, and you don’t need a lot more investment to service more patrons of Morton’s vs Ponderosa Steakhouse.
You throw in the US regulatory and relative tax burdens that affect the numerators of investment models and you get a pretty good picture. The Fed has blood on its hands, but so do the globalists.
It may be true in general but it didn’t work out more recently. PCE have risen much more quickly than BI.
In my opinion, for the reasons I cited.
I’m sure I know less than others, but I’ve never let that stop me before. To me, it’s that interest rates are too low, people put their 401k s into the equities market because CD rates are not even keeping up with inflation. Pension fund managers see the same thing but are restricted by law to percentage in equities, percentage in bonds.
When I see 500-1,000 point swings in the DOW, It tells me tons of money is sitting in brokerage houses, looking for a profitable home.
If people could get 6% on a CD for retirement, they’d never cash them in to chase returns on the market.
There probably will be a recession, or downturn, but that retirement money has nowhere else to go for growth.
Gray
My portfolio, with a decidedly “risk off” orientation has an expected return of 4.5%. Admittedly, I am able to construct such a portfolio because I can maintain lifestyle with the proportion of equities at only 20%, and withstand a market downturn for approximately 10 years. Some need their savings to work harder, because of a smaller principal base. But it is possible to construct such a portfolio.
Quantitative easing to to pump up the supply of money, zero interest rates to force investors to seek returns in the stock market and other risky venues, and the absolute refusal to end the double-taxing of overseas profits, encouraging companies to park their earnings outside the country or invest overseas rather than at home. And they wondered why income inequality was exacerbated and jobs were being at an anemic rate?