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Last year's daring emerging markets values are collapsing. Does this mean that the bubbles of an artificially inflated market finally explode? This is an issue that deserves to be asked ten years after 2008. As all readers of the Financial Times know, the world's central bankers have ensured that the Great Recession does not become another Great Depression. by maintaining interest rates of $ 15 billion. their balance sheets.
This has led equity markets to record highs, even though they have not created real wage growth. Central banks can create asset bubbles, of course, but they can not change the effects of globalization, technological deflation and the growing concentration of corporate power in rich countries.
I do not blame the US Federal Reserve, the European Central Bank or any of the other institutions that have had the greatest experience of unconventional monetary policy ever conducted in the world – although I maintain that at this stage, is not so unconventional.
Since the days of Alan Greenspan in charge of the Fed, the bias has been to leave rates low and worry about the inevitable asset bubbles later. This is an understandable attitude, especially given the inability of politicians in the developed world to carry out large infrastructure projects or educational reform or other things that would actually make a difference. for ordinary people in the last 10 years.
But it is clear that we have reached the limits of what simple money can do constructively. When 10% of the US population owns 84% of equities, rising asset prices do not create inflation, but inequality.
While the Fed's first big speech, Jay Powell at Jackson Hole last month, made it clear that he would not move away from the situation as it should, I was very intrigued by a single transition to the very end. This seemed to indicate that the Fed knows that the current strategy does not really work anymore.
"Inflation may no longer be the first or best indicator of a tight labor market," he said, noting that "before the last two recessions, the destabilizing excesses were manifested. Risk management suggests looking beyond inflation for signs of excess.
Translation? The head of the Fed admits that financialization exists and that the markets are now the tail that moves the dogs. Central bankers and most economists tend to use a model that assumes economic downturns cause market downturns. But Mr. Powell suggests that the opposite may be true.
This is a big deal. But this is not really a new overview. Far from being a blind follower of the "best-known markets" theory of efficiency, Mr. Greenspan himself was aware that monetary policy and stock prices could create bubbles that could have dreadfully detrimental effects. (he wrote about it in 1959).
Why, then, have Mr. Greenspan, and all the Fed chiefs since, allowed the bubbles to expand and have fun instead of going out in front of them?
The details depend on the scheme. Despite his lateral credentials to "irrational exuberance," Greenspan was a favorable finance regulator who did not want music to stop. His successors, Ben Bernanke and Janet Yellen, believed that low interest rates were the only thing between the US population and the poverty line. In any case, politicians have never made things easier for central bankers.
Is there any doubt that this mega bubble will eventually burst? When that happens, the results will inevitably affect the real economy (academic research shows that most recessions since the Second World War have followed the collapse of stock markets).
It is possible that the current slowdown in emerging market equities is spreading and triggering the economic slowdown that most people think over the next few years. Given that, I would say that we should abandon the "wait and see" approach to monetary policy. Ten years after the crisis, and four decades after interest rates began to fall, it is time to take a new approach to monetary policy.
What could this entail? For starters, central bankers should make financial markets a central part of their models. It is amazing that they are not already in the forefront, given the rise of financialization since the 1980s. Mr. Powell admitted that "inflation sends a more signal "low" than in the past, which makes it important to look for signs of overheating elsewhere.
What steps could the Fed and other central banks consider? I suggest three. First, the accelerated pace of debt, which is still the main predictor of market problems. It has grown faster than the gross domestic product for several years. The growth of financial assets in relation to GDP is also close to record levels. Margin debt, idem.
Or just walk around Brooklyn, where I live. In Bedford-Stuyvesant, a neighborhood where shootings are still a problem, a townhouse recently sold for $ 6.3 million. As was the case before 2008, the best economic indicators are sometimes those that are nearby.
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