Mike-
I read Richenbachers piece. The heart of his argument IMO is this:
Far more dangerous and far more enduring in their negative effects on the economy, as well as far more difficult to correct, are the distortions and imbalances that credit and debt excesses impart to the financial system and to the pattern of consumer spending and business fixed investment.
Their corrections are much more painful and much more protracted. The particular danger of asset price bubbles rests in the fact that the soaring asset prices inherently provide ever more collateral value for more and more borrowing and spending by businesses or consumers. "Backed" by the bubbling asset prices, credit excess feeds into higher and higher asset values. If monetary policy accommodates these excesses, the business cycle essentially develops into the self-feeding, precarious Bubble Economy. Prolonged credit and debt excesses of extraordinary scale, essentially, result in extraordinary imbalances in the economy and the financial system.
In his mind the big bad bogey man is/are credit excesses and I agree.
He doesn't mention hedonics directly. However, he does note:
The real shocker, however, is a comparison of inflation rates. While Alan Greenspan and Wall Street keep extolling American’s low inflation rate as one of the greatest attributes of the new paradigm economy. It is incongruously, the highest rate among the major industrial countries, now exceeding 3.5% and averaging 3% per year since 1995, as against a rate of persistently less than 1% during Japan’s bubble years. If not for the numerous downward adjustments in the consumer price index, the strong dollar and the huge import surplus, U.S. inflation today would be close to 5% at annual rate.
So, here he mentions that downward adjustments in CPI, which we know are hedonic adjustments, mask the true inflation rate. No mention of GDP hedonics...none...which you feel is far more grievous. The fraudulently low inflation rate simply entices investors to stay in the market. It helps sustain the bubble by giving investors a false sense of security. It is not the "cause" of anything.
What gets them in? Credit excesses:
It is the central axiom of Austrian theory that credit excesses – meaning a credit expansion in excess of available domestic savings – set in train unsustainable borrowing and spending binges implementing unsustainable changes in the pattern of demand and production which may not at all show in the inflation rate. But once the ongoing credit and debt expansion fails to keep up with the rapidly rising credit requirements of the economic and financial boom, the asset bubble and the distortions in the economy begin to unravel.
Credit creation is clearly at the discretion of Uncle Al and his cohorts for reasons known only to them. When they take the punchbowl away we know what happens. Compare to the Naz:
stls.frb.org
You ascribe too much power to "hedonics" where the market is concerned. It is not the "cause" of the current problems. It is more a "symptom" which lends a supporting role.
Is it economic poppycock?...Certainly. |
