Wednesday, April 27, 2005

Wealth Cannot Be Printed

This editorial at MNDaily does an excellent job of taking down the idea that asset inflation is a substitute for a real economy. "For generations of economists, it used to be a truism that 'wealth creation' implies capital formation in terms of generating income-creating tangible assets.To indiscriminately put this label of 'wealth creation' on rising asset prices in the absence of any income creation is plainly a novel usurpation of this concept. It is in essence wealth creation through a stroke of the pen."

"Our general misgivings about 'wealth creation' simply through rising house prices has still another reason, however, and that is the way housing values are calculated. The conventional practice in America is to treat the whole existing housing stock as being worth the last trade. This contrasts wondrously with the tedious process of generating prosperity through saving, investment and production."

"Everybody knows the answer, but few want to admit it: Lured by artificially low interest rates and easily available credit, private households have stampeded as never before into the purchase of homes, boosting their prices. Artificially low interest rates and easily available credit are, actually, the key features that specifically qualify an asset bubble."


At 8:43 AM, Anonymous Anonymous said...

Like I've said before, people are stupid when it comes to investing, be it stocks or houses.

This is going to have a very ugly ending.

Can you imagine if we spent all the money that went into RE in building new plants and doing R&D ? We'd be RICH !

There is something ironic here: a lot of the initial investment in RE was driven by people's fear of the stock market. In a way, all of what we are now seeing is because of the stupid, stupid dot com bubble.

It is really too bad that traditional industries such as autos, manufacturing, etc. are getting hit because of the dot coms.

Stupid, stupid, stupid.

At 8:52 AM, Anonymous Anonymous said...


Agreed, it is said that traditional industries are being hit due to the dot bomb BS. Nice to see all those dot bomb scam artists make off with all the cash though. Now all the RE scam artists are doing the same.

And the meanwhile, traditional wealth producing industries are leaving our nation. R&D is currently on the way out - China and India's next target.

But our gov is happy about all the inflated US assets. Keeps the plebs happy...anyone for a day at the collosium?

At 9:03 AM, Anonymous Anonymous said...

I think the most important point of the article is about pent-up demand. Recession is a normal part of the business cycle, and during recession, people normally arent buying things that they want, creating pent-up demand. But that didn't happen in the "recession" we just had. Everyone has a new car and a new home now, in fact many have two of each. By lowering interest rates to near zero, we staved off the recession only to find ourselves devoid of the pent-up demand that will propel the economy forward. All we did was postpone the inevitable, and the fallout will be much worse now.

At 9:16 AM, Anonymous Anonymous said...

There is an ironic aspect to all of this.

Back in the dot com boom, everyone justified the price of stocks because of their ANTICIPATED earnings potential. In effect they said "so what if it is trading at 200x earnings right now... in the future the earnings will go up and the current multiple will be justified.

In the current situation, people can EASILY figure out the current and future earnings of RE. It is the rent ! Thus there is not the illusion that future earnings for RE are going to be higher. In fact, it can be argued due to demographics that future earnings will FALL.

In spite of this, people keep buying RE at higher and higher P/Es.

Stupid, stupid stupid !

At 10:17 AM, Anonymous Anonymous said...

fish in barrel alert:

At 11:15 AM, Anonymous Anonymous said...

We can no longer rely on the CPI as a metric for inflation.

I wish someone would stand up to the government and publish a true inflation indicator.

At 11:33 AM, Anonymous Anonymous said...

Snow is a mouthpiece. God knows who still takes him seriously.

I imagine we'll get someone similar as Greenspan's successor - someone too clueless to understand the trainwreck he'll be inheriting, or too amoral to care as long as he gets a nice paycheck. Bernanke doesn't strike me as dumb - he knows his economic theory is intellectually and morally bankrupt, useful only in stealing from the middle class to give to the rich. He'll let some other poor slob take the inevitable heat of deflating away some of Greenspan's excesses, before he steps in to save the day by rolling the printing presses again.


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