Asset inflation policies threaten to create another economic bubble

Five years after Lehman Brothers went bust, the global economy remains in stagnation. But you wouldn't notice it if you are in the stock market. The US market is hitting all-time highs. The Japanese market has risen by half in five months. And while Europe's economies are in recession, the shares of its top companies are highly elevated too. Shouldn't stock prices reflect or predict the economy? Don't count on it. The dichotomy shows how ill economic management has become.

In the name of stimulating the economy and creating jobs, today's macro policies mainly cook up asset inflation to benefit a few, which may trickle down to the unemployed through the so-called wealth effect. Unfortunately, few crumbs reach the bottom.

The US Federal Reserve claims that its policy has helped create two million jobs; that's less than US$100 billion in income per annum. But one-third of the stock market valuation, over US$6 trillion, can be attributed to the Fed's policy. The decline in interest rates may account for one-fifth of the corporate earnings. Instead of investing more to create jobs, the big companies have borrowed to buy back shares or pay dividends. Unless you are a shareholder, the Fed's policy doesn't benefit you much. The unemployed are, of course, least likely to be shareholders.

The Bank of Japan is learning from the Fed about boosting asset prices by printing money to buy whatever it wants to lift. Japan doesn't even have an unemployment problem. It believes that asset inflation will lead to sustainable economic growth, ignoring that Japan's main economic problems are its declining population (falling by around one million per year) and that its leading companies such as Sony and Sharp are no longer relevant to today's world. Euphoria over the bubbly asset prices is giving instant credibility to the Bank of Japan's policy. If asset inflation were the solution, Japan wouldn't have suffered for the past two decades. Didn't people blame the prolonged stagnation on its asset bubble then? A decade ago, even the then Fed chairman, Alan Greenspan, blushed to explain the logic of asset inflation leading to economic growth. Bubble-making was then considered wrong. Now what the Fed is doing is widely praised. And the Bank of Japan has earned much kudos for copying it. Didn't the bursting of the Greenspan bubble lead the world into this mess? When people are in pain for too long, they begin to believe in quick remedies. Current Fed chief Ben Bernanke is being praised for doing what Greenspan was cursed for. It will take another bubble burst for people to see through this.

Capitalism is about market forces or the profit motive allocating capital, not governments or inherited power. In the real world, though, it never works exactly that way. It is often more profitable to subvert market forces rather then embrace them. Robber baron capitalism is one manifestation. John D. Rockefeller acquired his wealth mainly through creating and enforcing a monopoly. No one could be so rich in a perfectly competitive environment. Since antitrust laws were introduced in the developed economies, no one has become as rich as the robber barons a century ago.

Most emerging economies remain emerging because they practise crony capitalism. If undocumented wealth is included, the richest people in the world are really from emerging economies, not people like Bill Gates or Warren Buffett. Bad systems, not a lack of money, is the reason poor economies remain poor. If an emerging economy wants to develop, it must replace crony capitalism with the rule of law. But that, of course, won't please the rich people there.