US, China play with fire by manipulating housing prices
Andy Xie says attempts by the US and China to control housing prices - to try to revive the market in one case, and prevent a crash in the other - will only lead to another crisis
Financial gloom pervades the global economy five years after crises struck in 2008. The medicine used to try to cure the malaise - bailing out failing banks and countries, flooding the financial markets with liquidity, and increasing government spending - are obviously not working. Instead of looking for a new prescription, the global leadership seems bent on increasing the dosage of the same medicine. More of the same won't revive the global economy but it will send it towards an inflation crisis, possibly next year.
In the closing days of 2012, the US Federal Reverse introduced a fourth round of "quantitative easing", only months after the so-called QE3. The measures are expected to push the Fed's balance sheet to US$4 trillion this year from its pre-crisis level of US$800 billion. Through its aggressive purchases of long-dated US Treasuries and mortgage-backed securities, the Fed has brought the costs of financing a property purchase to a new low. The US housing market is reviving. And the liquidity buzz is pushing stocks to record highs.
Fearing that markets may bubble up too quickly, the Fed signalled it may end the monetary expansion sooner than expected and talked tough on inflation. The mixed signals seem intended to control asset prices. Targeting asset prices looks like a new tool for the Fed to revive the economy.
On the other side of the world, "land kings" are returning to China's major cities. Their action encourages speculators laden with millions of empty flats who are waiting for higher prices, and brings fear to "bottom fishers" who hope for lower prices. The market revived in the fourth quarter.
This time around, the land kings are state-owned enterprises. By buying land from local governments, they help the government shift money from one market to another. Prices are being inflated. Such actions revive greed among speculators and instil fear among end-users. The Chinese government wants, using this technical improvisation, to guide the overheated property market to a soft landing.
The US and China are the two biggest economies in the world. Both are trying to control asset prices to manage their economies. The global economy depends on how effective their policies are.
Manipulating asset prices is like playing with fire. The people who play are either fools, or bubble chasers who want to make money from the fools. Whatever the benefits to the economy in the short term, this would be more than offset by the calamities that follow. In the current scenario, the calamity ahead is inflation. Printing money inevitably leads to inflation, and when asset prices are kept high, the lag time is shortened.