BUBBLE ECONOMY

from Feb Dr Richebacher

In the late 1990s, the U.S. stock market bubble went global. The same has happened in the last few years to the property price bubble. According to reports, full-blown housing bubbles currently exist in many countries around the world. As explained, their common cause is obvious: Ultra-loose monetary policy and ultra-low interest rates. In due time, sharply rising house prices added to the interest incentive.

Under these monetary conditions, it made sense to buy a house.
But to repeat, the pivotal hallmark of a "bubble economy" is that the ballooning asset prices are widely used as collateral for a general consumer borrowing and spending binge. In the United States, mortgage borrowing by households during the first half of the 1990s increased by an annual average of $168 billion. This accelerated in the decade's second half to $296.9 billion. But after 2000, it virtually exploded to an average annual growth rate of $615 billion.

It is undisputed that the greater part of the escalating mortgage borrowing in the United States was for purposes other than house purchases. In short, it boosted consumption as a share of GDP at the expense of business investment and the trade balance. That is, it radically changed the U.S. economy's pattern of growth - actually an unsustainable pattern of growth.

Yet America's consensus, amongst it Mr. Greenspan and the Fed, categorically refuse to see any proof of a "bubble economy." A recently published survey article by the St. Louis Federal Reserve - Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms - made a most amazing statement in its conclusion: "We find little indication that booms were caused by excessive growth of money and credit, though 19th-century booms tended to occur during periods of monetary expansion. The view that monetary authorities can cause asset market speculation by failing to control the use of credit has been largely discarded."

To quote a commentator: "The complacency of the central banking fraternity and their academic standard-bearers is a wonder to behold."
Regards,
Dr. Kurt Richebacher
4 February 2005