Category Archives: Sustainable Prosperity

The Importance Of Asset Bubbles

“When you live in a bubble, everyone is delusional…” –

-Nouriel Roubini, May 11 2010 Charlie Rose interview

Many people fail to see any asset bubbles in our current economic environment.  Others see isolated asset bubbles.  As I have previously stated in the April 8 post,  “Our societal inability to spot and prevent asset bubbles is problematical.”

I have written extensively about the existence of asset bubbles.  The topic is of critical importance as their widespread existence precludes the possibility of Sustainable Prosperity.

A Special Note concerning our economic situation is found here

SPX at 1109.55 as this post is written

ECRI On Frequency Of Recessions

I recently came across a notable excerpt in ECRI’s “U.S. Cyclical Outlook” of December 2009 (pdf):

“The bottom line is that long expansions are needed after severe recessions to undo the damage.  After the 1932-33 depression, not even four years of expansion were quite enough, despite 10% annual GNP growth.  This time trend growth is likely to be far lower, and the danger of frequent recessions accordingly higher.”

my comment:

I find the above excerpt interesting and notable.   While I don’t necessarily agree with ECRI’s current forecast or economic interpretations, the concept of Sustainable Prosperity is one that I have frequently written of, and it is imperative that we, as a nation, should consider our longer-term economic plight as we seek to improve our current economic  condition.

Mishkin’s Previous Comments On Bubbles

On April 8 I commented upon William C. Dudley’s “Asset Bubbles” speech.

In that speech, he refers to Frederic Mishkin’s speech of May 15, 2008.  It should also be noted that Mishkin offered similar thoughts in a Financial Times op-ed of November 9, 2009.

There is much I can comment about in each of Mishkin’s commentaries about bubbles.  For now, I will limit myself to the following:

Here is a passage from the aforementioned 2008 speech which I found most interesting:

“…monetary policy should not try to prick possible asset price bubbles, even when they are of the variety that can contribute to financial instability. Just as doctors take the Hippocratic oath to do no harm, central banks should recognize that trying to prick asset price bubbles using monetary policy is likely to do more harm than good. Instead, monetary policy should react to asset price bubbles by looking to the effects of asset prices on employment and inflation, then adjusting policy as required to achieve maximum sustainable employment and price stability. This monetary policy response should prove sufficient to prevent adverse macroeconomic effects of some types of asset price bubbles.”

I interpret this (and other points in his speech) as (in effect) saying that monetary policy shouldn’t be used to prevent bubbles, but it should be used to “clean up the mess” should they “pop.”

This “mindset” seems to be prevalent now among policy makers.

I believe this overall “treatment” of bubbles is frightfully perilous, has already created immense damage, and will end very badly.

It appears as if not only are we (as a nation) downplaying the risks of bubbles, but also are continually unable to identify their existence.

As I wrote on March 29: “I strongly disagree with those who think that bursting bubbles are not something to be unduly concerned about….While it may be pleasant to ignore the existence of bubbles, and downplay the potential significance of their bursting, I believe that the existence and prevalence of bubbles in today’s worldwide economy is perhaps the largest threat to achieving Sustainable Prosperity.”

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SPX at 1217.28 as this post is written

Greenspan’s Most Notable Phrase

Alan Greenspan recently gave a lengthy video interview on Bloomberg.  A short summary is found at this link; the actual video is the first listed near the bottom of the article.

I found the video to be most interesting.  Greenspan elaborates upon his recent “The Crisis” paper, which I mentioned here.  As well, he discusses many other issues.

While there is much I can comment upon in this interview, I want to focus on a key phrase he mentions with regard to what is now happening:

“You can see the whole blossoming of finance.”

I believe this to be the most notable of all of Greenspan’s famous phrases.

I think we are seeing a blossoming – not of “finance”, but instead of (hyper)bubbles.  I think there are many bubbles of severe magnitude throughout the worldwide economy.  I have previously written of these bubbles in a variety of posts.

I strongly disagree with those who think that bursting bubbles are not something to be unduly concerned about.  In fact, Greenspan says in the interview, “Remember that the bursting of the bubble by itself is not a big catastrophe. We had a dot-com bubble, it burst, and the economy barely moved.”

While it may be pleasant to ignore the existence of bubbles, and downplay the potential significance of their bursting, I believe that the existence and prevalence of bubbles in today’s worldwide economy is perhaps the largest threat to achieving Sustainable Prosperity.

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SPX at 1166.59 as this post is written

America’s Economic Future – A Comment

Those familiar with this blog know that I believe (based off of my overall analysis) that our current purported economic recovery is not sustainable.

As I have indicated in previous writings, we as a nation need to be more “strategic” in nature if we are to attain true Sustainable Prosperity.

One critical question that we should be asking, from a strategic standpoint, is what is the value of a recovery if it is not sustainable?  The answer is that there is very little if any value to such a recovery.  In fact, a very strong case can be made that there will be strong negative repercussions stemming from such an unsustainable recovery.

Another issue, from a strategic standpoint, is one of opportunity cost.  The opportunity cost of attaining a recovery that subsequently fails vs. a true sustainable recovery is enormous.  This is especially true in our current economic environment where many factors such as the national debt are at truly ominous levels.

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SPX at 1165.42 as this post is written

Article On Asset Bubbles

On January 25 Fortune had an article on asset bubbles titled “Beware the 4 new asset bubbles.”

The four purported bubbles mentioned in the article are Gold, oil, the stock market, and Treasuries.  I have discussed each of these markets, with the exception of oil, in previous posts.

I found the logic and discussion in the article interesting, although I did not agree with various aspects of the article.  I especially disagree with the logic about housing, for reasons I have recently written about.

It is very important for investors to understand whether the markets they are investing in are indeed experiencing bubbles.   My previously written posts are found under the “Bubbles” Category.

Of course, the existence and prevalence of bubbles also has massive ramifications for the economy, especially when viewed from the standpoint of Sustainable Prosperity.

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SPX at 1137.15 as this post is written

America’s Economic Future

As a follow-up to yesterday’s post, here is a passage from Larry Summers’ March 13, 2009 speech that speaks of the importance of economic strength in achieving broader societal goals:

“Our single most important priority is bringing about economic recovery and ensuring that the next economic expansion, unlike it’s predecessors, is fundamentally sound and not driven by financial excess.
This is essential. Without robust and sustained economic expansion, we will not achieve any other national goal. We will not be able to project strength globally or reduce poverty locally. We will not be able to expand access to higher education or affordable health care. We will not be able to raise incomes for middle class families or create opportunities for new small businesses to thrive.”

_____

Our national goal to achieve a sustainable recovery (or what I frequently refer to as “Sustainable Prosperity”) has been and will continue to be a challenge, given various underlying fundamentals.

In order to achieve “Sustainable Prosperity” we will need to have a solid focus on planning our economic future and its dynamics.  Toward this end, I wrote an article in May of last year titled “America’s Economic Future – ‘Greenfield’ or ‘Brownfield’?” which can be found listed along the right-hand side of the home page.  That article, as well as others I have written, explores some of what I believe are pivotal issues that lack recognition with regard to our economic future.

All of my articles are also listed and summarized at this link:

https://www.economicgreenfield.com/prosperitybypencom-directory/

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SPX at 1075.51 as this post is written

The Global Economic Situation

On this blog, I have maintained a focus on the U.S. economy.  I have done so for a variety of reasons, many of which are explained in this June 21 2009 post:

https://www.economicgreenfield.com/2009/06/21/the-global-economic-future/

Additionally, from a practical perspective, from a time standpoint it would be prohibitive to attempt to comment on all global economic affairs that I consider relevant.

Although I focus on the U.S. economic condition, this is not meant to imply that the U.S. is the only country that faces an array of difficult economic challenges.  Much to the contrary – many countries currently face economic issues that are exceedingly problematical. 

It is very troubling that so many countries, especially those with large economies, are concurrently experiencing such difficulties.  Such a common and unified adverse condition will not bode well assuming severe economic weakness reappears.

Attaining Sustainable Prosperity is a global challenge.

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SPX at 1140.78 as this post is written

Characteristics Of The Housing Bubble

Given the incredibly outsized intervention efforts in the residential real estate market, I think it is important to examine some dynamics of the real estate bubble.

Here is a chart from the 12/15/09 Contrary Investor commentary that I believe is interesting, as it depicts some underlying residential real estate fundamentals.  It shows the equity and mortgage debt situation.  The underlying data is from the Federal Reserve Flow of Funds:

http://www.contraryinvestor.com/

As far as real estate prices are concerned, I would like to show two charts, both from the CalculatedRisk blog:

http://www.calculatedriskblog.com/

The first chart was posted on 12/21/09 and is the LoanPerformance Price Index from 1976:

Next, a chart posted on 12/29/09 showing the LoanPerformance Index as well as Case-Shiller, from January 2000:

As others have commented, it appears as if the overall intervention efforts are aimed at reflating (or to re-inflate) the housing bubble.  Conventional (investment) wisdom has held that reflating a burst bubble is impossible.

However, I think given the tremendously outsized intervention efforts in housing, we are truly in a unique situation.  I don’t believe there has ever been such a large intervention effort in our country, at least in the last 150 years.  Depending upon how one would measure such intervention efforts, it might even be among the largest interventions in world economic history.

A casual observer might assume that such an outsized effort would be destined to be successful.  However, (economic) life is not that simple.

From an “all things considered” standpoint, I don’t believe the residential real estate bubble has actually burst.  It appears to me that it has somewhat deflated.  I base this view on a variety of fundamental and technical factors. 

Assuming this view is correct – that the residential real estate hasn’t popped – the implications are immense.   I think it is likely that one of two possibilities will occur from here, and each could happen in a relatively rapid fashion.  The first possibility is a “successful” reflation of the residential real estate market, with accompanying economic activity.  The second possibility is a collapse of the residential real estate market with accompanying economic repercussions.  As to the path real estate will travel from here – my previous writings on interventions, bubbles and real estate indicate my thoughts on the subject.

If a “successful” relation occurs, one is led to wonder as to the characteristics of such a “successful” reflation of the real estate bubble.  Among other critical questions is how long would such a reflation last?

I think it very important to note the quality and durability of the economic activity that occurred in the first phase of the bubble, which peaked in 2006.  Can one hope for any better outcome during a subsequent reflation?

These issues are critical to the concept of Sustainable Prosperity, of which I have previously frequently commented.

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SPX at 1137.37 as this post is written

Sustainable Prosperity

One of the terms that I frequently mention is “Sustainable Prosperity.”  I think the term and its meaning have tremendous significance to our economic future at this juncture.

Providing an exact definition for the term is difficult due to the complexity of the underlying concepts.

“Sustainable” can be defined in terms of time, as well as continuity.  If a posititive economic trend exists for a few years, can it be termed ‘sustainable’?  Case in point was the housing bubble.  Most would say it lasted between 5 to 10 years.  The economy certainly benefitted from it.  However, the benefit was not sustainable.  In fact, in its wake, it has caused an immense amount of damage and poses a tremendous ongoing threat.

From a continuity standpoint, in order for growth to be sustainable it has to be resistant to severe economic setbacks.  Of course, history has shown that recessions, panics, and the occasional depressions are inherent in the economic cycle.  However, if economic growth is sustainable in nature it should over the course of time be able to recover “lost ground” and attain new highs.

The concept of “Prosperity” is somewhat difficult to define as well.  I like to think of it as being multifaceted and having deep “breadth.”  Of particular concern should be enrichment that is narrowly achieved, i.e. a large amount of the nation’s prosperity concentrated in the hands of a few.  This is a concern from both a societal and economic standpoint.  Strong, vibrant, and sustainable economies have widespread prosperity.

Other aspects of “Prosperity” is the amount and composition of such.  If median household income is growing at a rate greater than inflation, can that be termed prosperity?  Can prosperity be defined in GDP growth?  Or is prosperity a more general term that encompasses such concepts as standard of living, the ability for the masses to have affordable access to healthcare, higher education, etc.?

As aforementioned, I believe that the concept of Sustainable Prosperity is more important now than ever before.  If one assumes, as per the current economic consensus, that we are experiencing economic recovery, I think it would behoove us to constantly assess whether we are experiencing true “Sustainable Prosperity” or something that might only resemble such.

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SPX at 1123.89 as this post is written