Global: Still Blowing Bubbles
Stephen Roach (New York)
I'll be the first to concede that the US economy has been more resilient than I had expected in this post-bubble era. So far, all we have seen is the mildest and shortest recession on record -- a surprisingly benign outcome given the seemingly lethal combination of rising unemployment and a sharply negative equity wealth effect. Ever-rising property values -- and the ability of households to extract purchasing power from these inflated assets -- appear to be one of the key missing pieces of this puzzle. Can this asset-driven growth dynamic be sustained?
The short answer is, I doubt it. Three key reasons come to mind: First, the housing cycle is extended and increasingly vulnerable to a downturn. Second, the American consumer must now face up to the legacy of an asset-driven consumption binge -- a debt overhang with a painful workout. A third consideration could prove most vexing. The Federal Reserve is doing everything in its power to forestall the endgame. Monetary policy is being aimed increasingly at prolonging the housing cycle -- a strategy that runs a growing risk of adding yet another bubble to the Fed's recent track record. To me, all this paints a picture of an increasingly slippery slope for an already precarious US economy. In what follows, I deal with each of these three considerations in turn.
(The rest of his analysis in this story can be found at www.321gold.com
I've mentioned the pizza delivery guys all getting new cars. One just bought a new house too. He and his wife have both now started to work two jobs. A first for both. It seems to me a heavily indebted population facing lower wages and benies is just what Greenspan and co. are aiming for.