Blowing Bubbles

The stock market breached 15,000 yesterday — thar she blows!   But is this a solid advance, or does the huge rise in the stock market represent a bubble?

To followers of the long-term global economy, it should be obvious.  The US employment figures alleviated fear of a dramatic slowdown — but showed the same steady stagnation we have seen for many months.  A slow, steady economy plus a huge injection of liquidity from the Fed, the ECB, and now the Bank of Japan, adds up to one thing and one thing only — a liquidity fueled asset bubble.  Commodities have faltered, growth is slowing in China, absent in Europe (where unemployment is at all-time highs and several countries will miss their deficit targets; the latest shock is that property prices in the Netherlands — yes the Netherlands! — are now in free fall), and weak in the US.

So a sudden 15% run up in the stock market in the last few months is telling us one of two things — we can expect a sudden surge of real global growth despite continuing global debt and deleveraging, population aging and decline, and government austerity policies in the worlds two largest economies (US and EU), OR we are seeing an asset bubble driven by huge injections of money from all major monetary authorities.

Put like that, it seems obvious we are seeing a return of the NASDAQ in 2000, or the property market in 2006.  It hasn’t reached those vertiginous heights yet, and no one wants to leave the party while it is raging.  So expect the tide of market enthusiasm to run higher.  But the taller the building put up on weak foundations, the bigger the crash.

Since the 1990s, we have seen one bubble blown and popped after another:  the Nasdaq (tech stocks), real estate, equity/derivatives.  Why is that? Because the economy has simply STOPPED pumping out real growth in the wages and incomes of ordinary people.  So they demand credit, and the spouts of liquidity are turned on full, and the resulting funds concentrated among the speculating wealthy and financial institutions are turned into investments, driving up the fashionable investment of the day.

Readers of this column know I have long been a pessimist about any sudden upturn in the global economy.  What would make me change my tune?  A sustained gain in employment and wages across Europe and the US; Europe clearing off its bad debt problem and agreeing on fiscal union; the US shifting from sequestration (soft austerity) to aggressive investment in future growth via infrastructure, education, and basic research.

We can enjoy paper growth — profits growing from holding down wage costs, investment gains from holding assets while the monetary authorities offer up a feast of liquidity — but that is not the same as real growth rooted in more people producing more goods and services of higher value.

So enjoy the bubble while it lasts; but be prepared to take cover when it pops!

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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