Asset inflation policies threaten to create another economic bubble
Andy Xie says asset inflation is being pumped up in the name of stimulating a stagnating global economy and helping the unemployed. But the reality is that such policies benefit neither
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.
Monetary activism is a new factor that has subverted the market economy in the past quarter of a century. In the name of stimulating an economy in a downturn, to benefit the unemployed, a government cuts interest rates and pumps in liquidity, which inflates asset bubbles. Greenspan did it to the stock market in the 1990s and then the property market. When a bubble bursts, more stimulus is called for, again in the name of helping the unemployed.
The current debate on stimulus versus austerity misses the point. Neither really helps the people most in need. If central banks really want to help people through monetary policy, they should print money and distribute it equally. If monetary policy works, giving it to the people should be most effective.
Pumping cheap money in through asset markets only benefits those people who can borrow. Through such bubble cycles, wealth becomes more concentrated among those who gamble with debt. Maybe it is intended. Central banks seem too close to the people who gamble with borrowed money. Just check out the glitzy financial talk shops. Greenspan-style monetary policy is really a new form of crony capitalism. It rewards a special class of people who borrow cheap money to gamble. When it goes wrong, the bubble bursts. Another round of cheaper money follows. Hence, those with access can always double up. With so much wealth concentrated in finance, the central banks can even justify making policy for them. Otherwise, they may bring down the house.
Bubbles are really a redistribution game. As money becomes cheaper and cheaper, inflation is inevitable. Even though reported consumer price indices are not yet high, check out education, health care and housing. The biggest expenditure items are not in the CPI basket and are rapidly inflating. The little people are hurt most from such inflation. Their suffering then subsidises those who borrow cheap money to bet on asset bubbles.
Crony capitalism is associated with backwardness, and for a good reason. When profits go to those with power, not productivity, economic progress is slow. As the developed economies embrace bubble economics and crony monetary policy, they may join the ranks of emerging economies. The world may become more equal after all, with the top falling down.
Andy Xie is an independent economist