June 27, 2016
Back in 2011 the Bank of International Settlements (BIS) began warning of the risks of run away inflation associated with the expansionary monetary policy being pursued by the Fed, the European Central Bank and other central banks. It is still making these warnings. Unfortunately, the NYT presented the warnings as being somehow new information that should interest them, rather than old predictions that had been proven wrong repeatedly.
Even better, the piece tells us that one of the main credentials of Jaime Caruana, the managing director of the BIS, is that he missed the massive housing bubble in Spain:
“It is worth noting that Mr. Caruana is familiar with asset bubbles: He was the head of Spain’s central bank a decade ago when reckless lending among the country’s financial institutions resulted in a boom and eventual bust of Spanish property prices.”
Incredibly the piece only presents the views of people who are opposed to expansionary monetary policy. The views of Stephen Jen, a former official at the International Monetary Fund who now manages a hedge fund in London, figure prominently. Jen insists that we have lots of inflation, it’s just in asset markets. Actually, most economists would make a clear distinction between inflation in the markets for goods and services and asset markets. The former tend to feed into inflation and can lead to a wage price spiral. The latter cannot unless Mr. Jen has developed a new theory on inflation dynamics.
The piece also misleadingly implies that rising asset prices are an important factor in wage stagnation in the UK telling readers:
“Thanks to aggressive central bank policies, house prices in London are among the most expensive in the world, yet the inflation-adjusted weekly average wage of 470 pounds, or about $632, is still £20 lower than it was before the financial crisis, according to the Resolution Foundation, a British research organization.”
Actually, house sale prices don’t factor into the inflation index, even if people like Mr. Jen and the reporter writing this piece want them to. The housing component that is used to measure inflation and therefore provides the basis for the real wage calculation cited here is a rental index. This will not be directly affected by house prices. In fact, the low interest rate policies of central banks are likely to go the other direction by making it easier to build more housing and thereby driving down prices.
Also, while there is a strong case that the UK again has a housing bubble (which may now burst in response to Brexit — a good thing), asset prices in most of the world are not out of line with fundamentals. The U.S. stock market has risen roughly in line with GDP from its 2007 peaks, which almost no one considered to be a bubble at the time. Most real estate prices in the U.S. are still far below bubble peaks and only modestly above trends, with the exception of some California cities.
In short, this piece is effectively an opinion piece calling for higher interest rates and an end to expansionary monetary policy. It’s just a lot more confused than the typical NYT column.
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