Wednesday, December 16, 2009

Article on Asset Price Bubbles

In my opinion, the existence of asset price bubbles is of paramount importance.

I have recently written a few posts on the subject. I would now like to comment on a Wall Street Journal article from Monday titled "Economists Warn of Asset-Price Bubbles." Here is the link:

First, I would like to reiterate that I believe there are many bubbles in existence right now. This is in contrast to the commonly held theory that bubbles may form in the future if low interest rates and other stimulative measures are maintained.

Second, from the article, I completely disagree with the following excerpt with regards to "don't appear to be taking any chances":

"Although global growth and financial markets are rebounding more quickly than was expected last summer, the Fed and the European Central Bank don't appear to be taking any chances."

I base my disagreement on several factors. In my previous writings I have extensively written about the potential perilousness of interventions, moral hazard issues, asset bubbles, etc.

Third, I strongly disagree with this excerpt:

"The usual warning sign of new bubbles, rising inflation..."

Assuming that "inflation" refers to inflation as measured by CPI, I disagree that rising inflation is definitely one, if not the key, warning signs of new bubbles. Without writing extensively about this, I would point out that two of the largest bubbles of the recent past (as well as from a long-term historical context) were created in periods of low (CPI) inflation: the housing bubble and the surrealisticly absurd internet stock "hyperbubble."

I will be commenting further upon bubbles as time progresses...

SPX at 1107.93 as this post is written

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