January 02, 2014
Dean Baker
Politico Magazine, January 2, 2014
See article on original website
Two areas that are likely to be important are housing and trade. In the case of housing, we should want to see continued growth in starts, with prices increasing slowly, if at all. Prices are already above trend levels. The last thing we should want to see is a return of the bubble. That will provide a short-term boost to the economy but another nightmare for millions of homeowners when it busts. We were in danger of a new bubble until Federal Reserve Chairman Ben Bernanke’s taper talk in June seemed to take the air out, but we will still have to wait and see.
The story on trade is hugely important since a reduction in the trade deficit will be the only way that the economy can return to full employment without large budget deficits. Stronger growth in Europe should be a small positive, but we will really need to see a further decline in the value of the dollar. The value of the dollar is far and away the main determinant of the trade balance. If it rises, as some are predicting, this will be bad news for the economy.
There is also some serious downside risk in the stock market. Its valuation is definitely high right now, although I wouldn’t necessarily say it is a bubble. Nonetheless, if people are expecting another year of large gains, then they must be smoking something strong. The real story is likely to be with the social media companies. When you have a start-up with no clear business plan, like Snapchat, that can sell for $3 billion, you know things have gotten nutty. Some of these companies will no doubt survive and be profitable, but it takes a lot of profits to justify a $3 billion market cap, to say nothing of the $34 billion for Twitter or $130 billion for Facebook. These prices will come back to earth, and 2014 is as good a year as any for it to happen.
