Feldstein warns Fed's delay in raising rates is "dangerous."

In his essay in today's WSJ, Feldstein says, among other things, the following:

• "For price stability, the Fed since 2012 has interpreted its mandate as a long-term inflation rate of 2%. Although it has achieved full employment, the Fed continues to maintain excessively low interest rates in order to move toward its inflation target. This has created substantial risks that could lead to another financial crisis and economic downturn.
• "The S&P 500 price-earnings ratio is more than 50% above its historic average. Commercial real estate is priced as if low bond yields will last forever. Banks and other lenders are lending to lower quality borrowers and making loans with fewer conditions.
• "When interest rates return to normal there will be substantial losses to investors, lenders and borrowers. The adverse impact on the overall economy could be very serious.
• "With a margin of error that large, it makes no sense to focus monetary policy on trying to hit a precise inflation target. The problem that consumers care about and that should be the subject of Fed policy is avoiding a return to the rapidly rising inflation that took measured inflation from less than 2% in 1965 to 5% in 1970 and to more than 12% in 1980."

So Feldstein says the Fed should be worrying about speculation and inflation. The markets, and probably most Fed governors, are worrying about a lack of speculation and deflation.

Who is right? The monetarist Feldman or the Keynesian consensus? What I worry about is the possibility the central banks have created an unstable situation that they will at some point be unable to control.


Lincoln

Upsurge in China's housing market boosts its economy

There is a remarkable article in this morning's WSJ on A10, "China Housing Warms as Debt Clock Ticks," In the January to through April period, housing sales increase 61.4% yoy, property investment rose 7.2%, construction starts rose 21.4%.

This is after a multi-year contraction in housing/GDP. In 2013 housing contributed 22% to China GDP, which is about the same as in Spain and Ireland in 2007. This dropped to 19.8% in 2014 and to 15.1% in 2015. (Maybe 6% is something to aim at as a longer-term healthier number?)

This recent surge reminds me of what happened in Singapore, where we happened to be living during the Great Recession. The stock market went down and housing prices went up. The Chinese, who think multi-generationally, regard property as an investment and stocks markets as speculation. When they become leery of stocks, they buy property. In normal times Singaporeans speculate on stocks during the week and gamble on mahjong during the weekend. (In the local convenience stores the thick weekly books of stock charts are hot sellers.)

Here is a quote from the article: "'Leaving my money in the bank is meaningless and it will only devalue,' said Wang Hong, a 35-year-old office administrator who is looking to buy a second home in Nanjing." Holding fiat currencies is not considered a safe investment in Asia, where they do not benefit from the US dollar's strict stewardship.

Freudian slip? In decrying high debt levels in China, the Economist points out US and Europe are in worse shape

In a bit of possibly unconscious revelation, the Economist in its "Special Report" on finance in China, provided the graphic image below:

On the right you will note that debt levels have been rising rapidly in China and are now about the same as in the US and the euro area.  Everyone's debt level is too high, but the fact is that high debt levels are manageable in fast-growing economies like China's and a real problem in low growth areas like the US and Europe.  We all have a problem, then, but ours is worse.

I am reminded of this pretty smart passage from the Bible:

Matthew 7:3-5New International Version (NIV)

3 “Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? 4 How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye? 5 You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye."

Question to US investors: How safe is it to be invested in the world's most expensive stock market?

It's probably not very safe.

(Click on graph for full story in the Wall Street Journal.)

The ECB and Germany play a confusing blame game

German finance minister Schauble blames the ECB for the rise of populist parties, which he attributes in part to the ECB's easy money policy. He thinks they should tighten up.

In reply, ECB Chairman Draghi mostly blames Germany for Europe's woes and for making the ECB adopt an easy money policy. According to Draghi, Germany's high savings rate compared to its neighbors is somehow forcing the ECB to stimulate because Germans are refusing to go into debt and splurge on consumption items.

Meanwhile, Europe's first quarter economy grew at a 2.4% annual rate (0.6%) with no inflation. This is a great result and the previous quarter was also good. Draghi, however, is unhappy because the inflation rate is too low in relation to the growth rate. (WSJ, A14)

I find this all very Kafkaesque.

1st Q US GDP: Right for the wrong reasons

1st quarter US GDP was reported at +0.5% yesterday, which is weak but still positive. This graphic from the WSJ shows that consumer spending on services, residential investment, and state and local government have accounted for more than all the increase.



Here is are some factoids from the "Contributions to Percent Change" table of the BEA press release:



Without the housing bubble (thanks, Fed), Obamacare, and government spending, 1st Q GDP would have been down .82% This does not seem like a productive economy to me, or am I missing something?

What, after all, is truth?

From today's Wall Street Journal: