Floyd Norris of the New York Times posted a chart in his most recent article which I think fittingly illuminates how the bubble (inflation) process works.
This from Mr. Norris, (all bold highlights mine)
``IN the last eight years, home prices in the United States have almost exactly kept up with inflation. But it has been a wild ride.
``During the period, the Standard & Poor’s Case-Shiller 20-city composite index of home prices rose almost 21 percent. The Consumer Price Index also rose almost 21 percent.
``The period, from June 2001 through the June 2009 figures that were reported this week, can be separated into two periods: the five-year boom and the three-year bust. There are limited indications that prices have started to rally in some areas, but the overall index’s move in June just kept up with inflation.
``During the boom, home prices outpaced inflation by 10.7 percent a year for five years. During the bust, they plunged, trailing inflation by 13.6 percent a year."
The interesting observation isn't just "what comes up must go down", but instead "the degree of ascent is almost directly proportional to the scale of decline"...very much like Newton's third law of motion:
For every action, there is an equal and opposite reaction.
This "stages in a bubble" chart has been a frequent post here to underscore how the bubble cycle culminates...
Nevertheless Mr. Norris concludes, ``Now foreclosures are still rising, even as home sales and prices seem to have stabilized. If the worst is over, it will have been a wild ride that ended very close to where it began, but with many people much worse off for the experience."
Lessons:
1. Property prices fundamentally reflects on the degree of the impact from inflationary policies undertaken (extremely loose monetary policies, administrative policies promoting home ownership and tax policies encouraging debt or credit take up).
2. Bubble or inflation policies has had a net negative effect on society, (consumes capital), which requires a lengthy and painful period for healing or rebalancing.
This from Mr. Norris, (all bold highlights mine)
``IN the last eight years, home prices in the United States have almost exactly kept up with inflation. But it has been a wild ride.
``During the period, the Standard & Poor’s Case-Shiller 20-city composite index of home prices rose almost 21 percent. The Consumer Price Index also rose almost 21 percent.
``The period, from June 2001 through the June 2009 figures that were reported this week, can be separated into two periods: the five-year boom and the three-year bust. There are limited indications that prices have started to rally in some areas, but the overall index’s move in June just kept up with inflation.
``During the boom, home prices outpaced inflation by 10.7 percent a year for five years. During the bust, they plunged, trailing inflation by 13.6 percent a year."
The interesting observation isn't just "what comes up must go down", but instead "the degree of ascent is almost directly proportional to the scale of decline"...very much like Newton's third law of motion:For every action, there is an equal and opposite reaction.
This "stages in a bubble" chart has been a frequent post here to underscore how the bubble cycle culminates...
Nevertheless Mr. Norris concludes, ``Now foreclosures are still rising, even as home sales and prices seem to have stabilized. If the worst is over, it will have been a wild ride that ended very close to where it began, but with many people much worse off for the experience."
Lessons:
1. Property prices fundamentally reflects on the degree of the impact from inflationary policies undertaken (extremely loose monetary policies, administrative policies promoting home ownership and tax policies encouraging debt or credit take up).
2. Bubble or inflation policies has had a net negative effect on society, (consumes capital), which requires a lengthy and painful period for healing or rebalancing.
To quote Stephen Cecchetti, Marion Kohler, Christian Upper of Bank for International Settlements in a recent paper Financial Crisis and Economic Activity
``By altering attitudes towards risk, as well as increasing the level of government debt and the size of central banks’ balance sheets, systemic crises have the potential to raise real and nominal interest rates and consequently depress investment and lower the productive capacity of the economy in the long run. We looked for evidence of these effects and found that a number of crises had lasting, negative impacts on GDP. In some countries this was a result of an immediate, crisis-induced drop in the level of real output combined with a permanent decline in trend growth. In other cases, we find that the growth trend increased following the crisis but that the immediate drop was severe enough that it took years for the economy to make up for the crisis-related output loss."
Unfortunately yet, policymakers never seem to learn and continue to adopt short term oriented bubble blowing policies. This would lead us from one crisis to the next but transitioning towards a bigger scale, as the imbalances which needs to be adjusted will have simply been postponed. However, these are accumulated until the laws of nature will ultimately force an adjustment.
In essence, bubble policies are best signified by the idiom jumping out of the frying pan and into the fire.
Unfortunately yet, policymakers never seem to learn and continue to adopt short term oriented bubble blowing policies. This would lead us from one crisis to the next but transitioning towards a bigger scale, as the imbalances which needs to be adjusted will have simply been postponed. However, these are accumulated until the laws of nature will ultimately force an adjustment.
In essence, bubble policies are best signified by the idiom jumping out of the frying pan and into the fire.
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