The creators of bubble economies must be made to pay for their sins
Andy Xie says the central bankers and officials who tolerated, even encouraged, the bubbles that set economies up for a crash should answer for their disastrous monetary policies
Since 2008, US household wealth has risen by US$6 for each dollar increase in nominal gross domestic product. The current level of household net wealth is 4.8 times GDP, higher than in 2000 or 2008, when the previous two bubbles burst. The Fed is scared that the same could happen now if it raises interest rates. But, if the rate is never raised, will the bubble last forever?
US Federal Reserve divided on keeping rates flat highlighted by rare triple dissent
The Fed has been nursing a bubble economy for two decades. When Alan Greenspan mused over irrational exuberance, the Fed was still shy about running a bubble economy. But, when the Nasdaq took off in 1999, he let rip. After the internet bubble burst, he tolerated the rise of a property bubble.
Bubbles lead to overinvestment in the East but overconsumption in the West
His successor, Ben Bernanke, watched over asset inflation in stocks, bonds and properties. The Fed is now explicit about running a bubble economy. It often quotes the magnitude of the increase in household wealth as a leading indicator for growth down the road. Unfortunately, in three cycles of bubbles, the linkage between asset markets and growth has become weaker and weaker. The Fed is puzzled by this and is still waiting for a growth boom after an increase in wealth of nearly twice the GDP.
The US has become a bubble economy because its monetary policy accommodates the forced savings in East Asia. The rise of East Asia is based on its labour productivity. However, its policymakers have tried to juice the growth through forced savings to maximise investment. Net savings in East Asia are probably over 10 times those in America, with about the same GDP.
The Fed’s accommodative policy and East Asia’s forced savings have led to global bubbles again and again. But, the bubbles have very different long-term consequences in the East and the West. Bubbles lead to overinvestment in the East but overconsumption in the West.
