2 FB Friends with insightful ideas about our Economic Condition. Wordy, but worth the time reading if you are so inclined. Kimball Corson says The Prospect of a Coming Crash Bigger than the Last One Robert Shiller, a Nobel Laureate and one of the few who truly predicted the Crash of 2008, says it is not just stock prices that are excessively elevated according to his 10 year P/E ratio, but it is also bond and housing prices too. But he puzzles over why? My answer is -- easy, it is all due to excessive Quantitative Easing. That is what is behind all these elevated asset prices. But how? Here is how: Quantitative easing acts to depress interest rates in the hope of inducing more private investment and it also tends to increase the quantity of money to counter hoarding and expatriation. Money somehow defined, circulating in the economy, is held more even. Both of these effects are good for the economy, correct? But there is a catch most people do not understand. The real impact that is important here, however, is that depressed interest rates from Quantitative Easing act to reduce competitive returns on other assets such as bonds, stocks and even housing, They do so by the market mechanism of equalizing returns for like risk assets. However, by so reducing those returns, Quantitative Easing is also pushing up those assets prices in those markets and that is why we have bubbles in stocks, bonds and housing now. The bubbles are a fact that Robert Rubin, Martin Feldstein, Robert Soros and Robert Shiller have all noted with alarm. Soros plans to short the stock market big time. If I am correct, this house of cards will strongly lean toward collapse when the Federal Reserve seriously backs off quantitative easing and allows interest rates to rise so that, therefore, by that same market return equalization mechanism, asset returns will also rise and asset prices will collapse. The issues will be not mopping up any excess liquidity, long the worry of many, but instead mopping up the blood. Soros has the correct idea here and I might well follow him, but timing is always tricky, if not impossible. Shiller says his stock prices 10 year P/E ratio can sit at elevated and dangerous levels for years on end. But the key, I argue is the Fed and what it does about Quantitative Easing and interest rates. Fed Chairwoman Yellin is in a real box here, a box no one really well foresaw, although I wrote earlier about how quantitative easing was pushing up asset prices and enriching the oligarchs who unsurprisingly hold most financial assets. So there is our conundrum. Too many are clueless about it, especially on the Federal Reserve Board. This collapse, especially if mishandled out of ignorance could be a real doozie. and Jonathan Hall replies, But there is a solution. Overall this is the main line Austrian criticism of monetary policy . (And just a few weeks ago I thought I saw Kimball sitting in the Keynesian camp.) The Austrians maintain that when gov intervenes in the interest market, that the correct price signal can no longer direct the market. I was going to write can not be seen, but obviously here it is being seen at least by Soros and some other people who can step back from their day trading. But I have some different takes on this. The wealth effect, that which makes people feel wealthy (and productive) and thus spendy in most part draws from home values and not the stock market. The bulk of us slobs have way more in our home equity then we have in shares. There is this correlation between share prices and the economy, but its far more the other way; the prices react. Its a casino, largely emotional, often very irrational, and always overestimated in its effects on GDP. Recall how quickly it shot back up despite dismal growth. Or how long it remained high despite the gathering clouds in 2007. Land prices are the dog, among so many watched tails. These get too high, and essentially over tax the economy into collapse. It bears repeating that any payment for merely owning land is pure privilege, and has never and will never create more land or do anything else productive. At least taxes will produce some benefit to the taxed. High land prices with their high deadweight drag have preceded every major collapse. They are the cause, and only their collapse effects the real cure. But Obama took some typical land blind foolish steps and tried to pump those prices back up. The result was the sluggish recovery. Kimball and I have agreed that Keynesian stimulus depends on the price stickiness of land. But heres the odd thing, that only works when there is inflation. And there hasnt been any in the range to swing that effect. And so once again a sluggish recovery. The numbers of new jobs are barely beating the numbers of new Americans. The Recovery is more talking point then reality. The fundamental problem remains that there is an asset class where the prices instead of causing stimulation, instead of moving the economy forward does just the opposite. And this is only possible because it is essentially legalized theft. We allow investments in theft, and then that robs the economy. Which surprise surprise doesnt react well. Kimball says there is no solution here, but there is. All production, and any expression of freedom is simply the taking of nature and changing its form. No nature no freedom. (1) Taxes on natural resources serve to socialize and share that freedom, instead of allowing it to be privatised. The great privitisers of freedom, aka modern slaveholders, have managed to sell the opposite story by conflating these freedom providing taxes with the nasty freedom destroying production taxes. Thus allowing their theft machines to pump up the 1% to levels before the French terror. The solution, surprise surprise is to end the legal theft. And that is as easy as raising the property tax on land only. The means for this already exist everywhere. All the states that want to thrive need merely shift their taxes from production to privilege. And the Fed, which never should have been granted the authority to tax income can go back to taxing the states in proportion to their population. Which will force the states, via competition to adapt the most economically efficient revenue collection. That being collecting all that theft. Collecting theft is not a tax, it is a boon. Not politically feasible? All that means is that there is an opinion it cant be done. Which is always the case, right up until it gets done. So fix it, or let the economy dwindle and sputter.
Posted on: Thu, 21 Aug 2014 13:08:22 +0000
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