September 20, 2015

The Global Monetary Madness

A weekend topic on some comments in today’s Bits Bucket. “I told you a couple years ago that low rates are here for a long time.”

“As the perpetual cycle of this bubble continues, your risk for a realized loss goes up. Luckily, some of us bought at the almost bottom of a deflationary cycle, so we protected ourselves, in a demand region. With us, worse case scenario, we’ll break even.”

“There will be no financial meltdowns as long as money can be printed. They would not let anything fail today.”

From Bloomberg. “Manhattan’s growing inventory of ultra-luxury condominiums has another big developer seeing signs of a glut. Toll Brothers Inc., the largest U.S. luxury-home builder, is zeroing in on smaller apartments with lower prices in Manhattan after watching expensive units sit on the market, said David Von Spreckelsen, the New York division president of the company’s City Living unit. Its latest project, at 55 W. 17th St. in Chelsea, will have an average asking price per square foot less than at new buildings in the rest of the borough.”

“‘The days of super pricing and of raising prices every other week, I think, are probably past,’ Von Spreckelsen said in an interview. ‘Supply has started to catch up with demand. We’re starting to see an oversupply of really large units and really expensive units, and we think those are sitting on the market’”

The Real Deal. “Despite market factors that might suggest otherwise, luxury home sales in Miami-Dade County dropped during the second quarter of 2015. Data from the Miami Association of Realtors shows that in the luxury market — homes priced at $1 million and above — a total of 277 single-family homes were sold during the months of April, May and June. Compared to the same quarter in 2014, that number has fallen by roughly 10 percent, from 310 single-family homes.”

“Meanwhile, a growing number of luxury houses are entering the market, partly due to growing prices feeding the confidence of homeowners. A total of 739 luxury houses were listed in the second quarter, up from 638 during the same time period last year. On top of that, the total inventory of luxe single-family homes has grown from 1,046 to 1,227 during that same time period, according to the report.”

“And a huge amount of new listings are entering the market. Owners listed 824 condos for sale during the second quarter, up from 676 units in 2014, according to the report. That brings the total number of luxury condo listings to 1,661, which has grown considerably from the 1,256 condos on the market during the second quarter of 2014.”

The Jakarta Post. “China has been the focus of global economic interest since a recent devaluation of the yuan followed by turbulence in its share exchanges. As other stock markets experienced their own bouts of volatility, policy makers and investors around the globe blamed China for their own woes. For the most part, China is the author of its own ongoing economic and financial distress. However, it is also a victim of the global ‘monetary madness’ engineered by the 3 largest central banks, i.e., the Bank of Japan, European Central Bank (ECB) and the US Federal Reserve.”

“Alas, China is not alone in being victimized by the monetary central planners of these countries. The rest of the world may also suffer from what may someday become known as the ‘Mother of
All Corrections’ due to imbalances and distortions arising from so-called ‘unconventional’ monetary policies.”

“Consider that zero interest rate policy and creating oceans of liquidity (i.e., quantitative easing) have induced investors to take increased risks and acquire mountains of highly-leveraged debt. For example, total global debt grew by US$57 trillion to $199 trillion since 2007, an increase of over 40 percent. The ratio of total debt to gross domestic product (GDP) hit 286 percent in the second quarter of 2014, up from 269 percent in the fourth quarter of 2007. And government debts grew by $25 trillion since 2007 with the share of GDP for 10 countries exceeding 100 percent.”

“It would be difficult to argue that either expansionary monetary policy or massive and persistent budget deficits have sparked strong economic growth. It is easier to see that the primary effect of unconventional monetary policy instruments has been to inflate bubbles. Central bankers have become increasingly adept at blowing bubbles while denying that they have been doing so. This is because the primary metric of central bankers to determine whether monetary expansions have gone too far is the rate of increase in consumer prices. As long as consumer price indices remain tame, it is full steam ahead with pumping more money and credit into the financial system, perhaps joined by endless rounds of fiscal deficits.”

“Their myopia about the impact of extremely-loose monetary allowed them to ignore the other consequences of an inflated money supply.”

“But make no mistake about it, an inevitable market crash will be blamed on the usual suspects, all of which are actually symptoms rather than causes. When the bubble in financial assets bursts, fingers will be pointed at shrinking corporate profits, competitive devaluations, falling oil prices, geopolitical tensions, Greece, etc.”

“Now the monetary central planners are being held hostage to a series of financial bubbles of their own making. The Fed knows that it cannot keep interest rates so low forever. But it wants to execute an orderly ‘exit’ from its follies. History and theory provide reasons to doubt that central planning, whether of monetary matters or of entire economies, can be successful.”

“Therefore, the planned exits from unconventional monetary policy will almost certainly not be orderly. Indeed, it is most likely that there will be an ugly, disorderly rout as market forces begin to assert themselves. A stampede is likely to occur once there is a general loss in confidence that the monetary expansion process will not go on forever. As the credit expansion process slows down or halts, stock punters and bondholders will find themselves amidst a mad crush as they all head for the exits at the same time.”

Christopher Lingle, Guatemala City, Guatemala - Opinion - The writer is research fellow at the Centre for Civil Society in New Delhi and visiting professor of economics at Universidad Francisco Marroquin in Guatemala.

Bits Bucket for September 20, 2015

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