Next Bubble in Equities and Real Estate

Posted on November 14th, 2009 by admin in Political Economy

Judy Shelton, an independent economist and author, wrote a fascinating piece in the Wall St. Journal on Thursday, 12 NOV 09. The thrust of her argument is that the Fed’s low interest rate policy is creating the next bubbles, in equities and real estate.

She says

The Fed’s asymmetrical thinking extends as well to its treatment of financial assets—such as equity and debt instruments—en route to a bubble. As prices surge and markets soar, the Fed is reluctant to raise interest rates lest it be accused of hindering growth. But when the bubble bursts and asset prices begin to tumble, the Fed quickly steps in with dramatic interest rate reductions to “restore investor confidence” in hopes of avoiding a meltdown.

and concludes with

Now here’s the scary part: Even though more than half of all American households now own equities directly or through mutual funds, an increase in equity prices does not figure into the Fed’s calculation of inflation. So while measures of core inflation (which exclude food and energy) carefully register minute gains in the price of a fixed basket of goods and services meant to reflect what a typical family buys to achieve a minimum standard of living, they ignore massive price surges in what has effectively become a widely held consumer good: stocks.

Read the full article here

Leave a Reply

More News