QE4?
Two or three times a year I try to completely unplug for a week at a stretch. Last week my family and I were able to escape to the West starting in Roosevelt National Park, then to Glacier National Park and ending up in Banff National Park across the Canadian Border. I return to discover that the stock market -- the cardiogram of this nation's superficial prosperity -- has officially entered "correction" territory with a 500+ point selloff in the DOW this past Friday.
I give as much credence (or derision) to those that tie day to day changes in the stock market to macro trends as I give those who use daily fluctuations in the weather to solidify their thinking on climate change. These are massively complex systems with infinite feedback loops. Those of you that have been reading this blog for a while know how skeptical I am of those who pretend they can fine tune complex systems from the top down.
Still, there are many (including many in this audience) who believe that -- while those in the planning and engineering profession may have an "expert problem" and be quite mortal in their professional abilities -- those practicing in the realm of economics, an area of expertise bound at the hip to politics, somehow possess wisdom beyond their station. I don't join you. I'm equally skeptical of anyone who asserts that, when it comes to complex systems, they have a simple analysis and an even simpler set of solutions.
Paul Krugman is an easy target in that regard. Combining simple analysis with flamboyant rhetoric (did I mention economics is bound at the hip to politics, a form of public theater) he routinely reaches conclusions that are both provocative and soothing such as his column last week titled Debt is Good. To quote from that article:
Issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates.
To many -- myself included -- those deficiencies aren't so "obvious" as Krugman would suggest. Now I could say that he is an economist not an engineer/planner as I am (because many of you are going to say the opposite about me), but that misses the point. We could blow a bunch of money on orderly but dumb infrastructure projects and get incredibly low returns on our investments yet it would still juice our economy for a while. I've never argued otherwise. Is this the stuff a strong economy is built upon or is this just how we kick the can down the road a little further?
Let's look at housing. I think we have fairly universal agreement across the economic and political spectrum that we had a housing bubble that burst around 2008. Note the term: housing bubble. That means that housing prices were higher than they should have been and a correction was needed to bring them back into line.
Of course, that correction was devastating for many reasons. Not only did a lot of families find themselves in a difficult financial situation -- even those who were not dependent on a refinancing to stay afloat but just those who found themselves underwater -- but a large percentage of our economy shrank, shed jobs and struggled in the aftermath.
The Case Shiller Index tracks homes prices across the United States. Here's a chart of that index since 1987.
Note the increase (dare we say "bubble") that began towards the end of the 1990's. At the time there were some very smart people offering that housing prices were already overvalued. Nonetheless, the expansion continued until the correction. We've been living with the aftermath, which is to say that some of the air was let out of the bubble and then prices started to climb back to pre-crash prices.
Has this helped the economy? I can argue that it has, that whatever combination of zero interest rates, quantitative easing, housing programs and the like have helped families stay in their homes, helped them sell and move when the opportunity arose and provided equity for people to borrow against and spend, also a stimulant to the economy. This has also helped local governments which are largely dependent on property values, permit fees and increasing consumption.
Now another, more important, question: Has this made the economy stronger? Even Krugman in that silly column acknowledges that we have a "still-fragile recovery", this after more than $7 trillion in new federal debt, trillions more in municipal debt, $3.5+ trillion in quantitative easing (capital which continues to revolve) and eight years of zero interest rate policy. These are all unprecedented financial measures, steps never taken -- or really even contemplated -- before recent times.
There are many like Krugman who believe that, without all this financial intervention to prop up the market, things would have been far worse. In fact, if we had only done more -- taken on more debt, done more of those "obvious" projects and printed even more money -- things would be even better today. Heck, maybe housing prices would be all the way back to 2008 levels.
Call me simple, but I don't yearn for another bubble. I know the pain that will eventually come from that. What I want is a world that is real, one with a solid financial foundation that we can use to build strong cities, towns and neighborhoods.
Apparently, the People's Bank of China agrees more with the Federal Reserve and Paul Krugman than with me as the Wall Street Journal reported late yesterday that China intends to "flood the market with liquidity" so that businesses and individuals take on more debt. When economies are this huge, there is a lot of road left to kick that can down. Jim Rickards and his book Currency Wars is looking less and less like a radical, and more like a prophet, each day.
The DOW might drop sharply again today. As I finish this up the Asian markets are down in expectation of that. To me, the interesting thing will be to watch how policymakers respond to the wealthy and influential and the dumb money hostage trap they have created. We can't lower interest rates so, if the stock market refuses to climb, then QE4 is likely to be right around the corner. For those wanting the red pill and not the blue, that is quite depressing.