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  • Dec 27, 2014
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CommentInsight & Opinion

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

PUBLISHED : Tuesday, 21 May, 2013, 12:00am
UPDATED : Tuesday, 21 May, 2013, 4:15am

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.

Pumping cheap money in through asset markets only benefits those people who can borrow

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

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This article is now closed to comments

captam
It should come in handy,
this truth revealed by Andy.
But bankers will despair,
if governments listen to Xie.
johnyuan
Andy Xie again informs me brilliantly in one column about the state of economy of our modern time. Let this piece be made a required reading for students in both schools and university and more importantly, for the poor and rich to read it too. Let all of us to understand the simple reasons that cause our economy to become such a mess. The understanding should really be telling what governments and policy makers should do. For Hong Kong, it should reflect on its crony capitalism of which Xie wrote in the conclusion: “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.”
impala
Does anyone still take Andy Xie seriously at all? The guy is such a broken record: same thing over and over again

He has spent the past five years predicting inflation left and right, and seeing bubbles everywhere but under his bed. Most notably, he has consistedly been forecasting the imminent collapse of the Chinese housing market, which we are still waiting for. When will he admit he has been wrong about pretty much everything for the better part of a decade and switch to a different model?
impala
My point is not that all is fine and dandy in the Chinese housing market. Nor that there is no inflation in China. It is a country that has been growing at 7~9% per year in the past years. Of course there is inflation.

My point is that all Andy Xie ever does is predict bubbles and inflation. Everywhere and all the time. He gained some fame since he was right once (US Housing bubble), but has just been repeating the same mantra over and over again since then.

If I predict every day that tomorrow there will be a thunderstorm, on some days, I will be proven right. That does not make me a good meteorologist.
babyhenry
Actually Andy bubble prediction have been spot on since the Japanese bubble more than 2 decades ago.
Compare prices now vs 2 decades ago. A taxi driver in HK for example can have a better life 2 decades ago charging HKD5 than now HKD 20. I can eat a wonton noodle for around HKD 5 back then now its more than HKD 25 in the same shop, and the business still have to close down. When you have a fake/bubble economy that make up a significant amount of the economy whether in HK, China, US or elsewhere, the GDP figures are screwed and unreliable.
BTW many saw the Asian financial crisis way before 1997 or the 2008 US housing bubble, just because they got the timing wrong and overestimated the intelligence of the herds in waking up, barely means they are wrong.
The fact is the poor is only getting poorer and the rich is getting ever richer even when the GDP is rising. It only shows how meaningless GDP figures truly are.
A perfectly good house adds nothing to GDP, destroying and rebuilding the same house adds to GDP, even when its wasting resources which in reality hurts the economy.
Artline500
All time highs? Compared to 5 years ago. Asset prices for the 1% class such as London and New York apartments are at record highs. But the stock market prices, even if you merely adjust it for Little Guy inflation rates, which have been pretty darn flat but even if you make that small adjustment..... those record highs are not records at all.
boondeiyan
You go lao Xie! Shock and awe 'em.
babyhenry
Your ignorance is baffling.
The housing market in most Chinese cities are already crashing with little to no transactions. Developers are going backrupt and or unable to finish their project. All these time it was only because of the Central Gov't intervention in saving these companies and projects thats why they survived, now it seems the constant intervention have led excess debt generated by local gov't and the ministry of railways, and if the CCP do want to survive for the next couple of decades instead of the next few years, they better stop inflating the bubble and start letting people fail.
BTW please drop by shenzhen and look at those prices or have a meal, it must be my eyes, but they are certainly much much much more expensive even without the RMB appreciation against the HKD. If SZ is a bad example, then go to Foshan, Zhuhai, Chengdu, and other 2nd to 3rd tier cities. Talk to taxi drivers they tell you how expensive things have gotten and all the while more and more companies are struggling to grow profits. Sounds like inflation to me.
impala
"The liquidity environment, however, is likely to turn against the bubble soon. The killer is inflation driven by a surge in money printing. The average lag between currency creation and inflation is 18 months in the United States. China's lag could be two years since the government uses subsidies to suppress inflation. By 2012, China could experience 1990s-like inflation. And that's when the property bubble will probably burst."
Andy Xie: 'Trapped Inside A Property Bubble,' January 2010

"All the money governments and central banks released is turning into global inflation. And they resorted to bailing out speculators, laying the foundation for another crisis."
Andy Xie: 'Pumped with Cash – And Ready to Crash,' January 2010

"The excess money supply has created a new liquidity bubble."
Andie Xie: 'The Big Burnout,' October 2009

"Chinese stock and property markets have bubbled up again. It was fuelled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued."
Andy Xie: 'China Has Become A Giant Ponzi Scheme,' August 2009

"Printing money spreads the pain for all dollar holders, and many are foreigners. This is the last tool that the US has to not pay the full cost on. Eventually, foreigners will realize this and run. When the dollar goes into free-fall, America will finally have to wake up to reality."
Andie Xie: 'Obama or McCain: The Dollar Will Weaken,' October 2008
donniemcm
No he is completely right unfortunately.
And unfortunately too many people are expecting things to happen quickly which is the same state of mind of having a stock market or going listed in the stock market.
Leveraging something that doesn't exist is very harmful as it forward the burden X years ahead and will be paid and dealt by the people in these years.
China is doing the same buy faking stimulation but at the end will eventually fell.
impala
Ah, so we just have to wait for a very long time before the truth reveals itself, and everything that happens in between for years or even decades is somehow the great market getting it all wrong. In the long run... right?

Why by the way do you and reader 'babyhenry' think that Mr Xie is talking about China? He specifically is not. He doesn't even mention China once in this piece. He is talking about the US and about Japan, by proxy also about the UK, but for once, this piece is not about China. China is not doing QE. China doesn't have a loose monetary policy of zero interest rates. China doesn't even have an open capital account. China may or may not have bubbles too, but it is not because of Mr Xie's alleged central-bank-led asset price inflation that is the focus of this piece. For that, we have to look at the US, Japan and the UK.

Mr Xie is an Austrian-leaning economist who has repeatedly stated the best cure for the world economy is to let the post-bubble bust do its 'benevolent' work of weeding out the excesses of the preceding credit boom. At best, this is a very misguided viewpoint. At worst, it is outright dangerous.
donniemcm
Well I think he is just giving us a peek of the dust that is put under the carpet. And unfortunately we are no fortune teller in saying when the whole will blow.
And as for China let's remove all the pretend-to-be-intelligent or superior financial terms. What China is doing is no different from what US QE or upcoming Japan money overflow into the market. The difference is US and Japan are "trying" to show some honesty and justification to their doing while China do it in the shadow (shadow banking huh?).
What is the difference from the chinese government encouraging (not to say obliging) bank to lend money regardless of the borrower situation and if it's a border line borrower, no worries, there is still people to lend money to them _compare_ to US unlimitedly printing money?

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