US financial markets are in a bubble, courtesy of the Fed’s long-running ultra-easy monetary policy. Equity markets are at record highs and at extreme valuations, even though US corporates are still in a profits recession. Credit markets are exhibiting 2007-style excess leverage and commercial real estate looks overstretched – something even Janet Yellen acknowledges.
As far as the economy is concerned, Wall Street rather than Main Street is the beneficiary of Fed largesse. Two per cent economic growth is the best it gets, but there are a host of structural problems – adverse demographics, income inequality, declining productivity growth, weak investment and a debt overhang from the last crisis – which are key challenges for the longer term.
In this sense, the economy can hardly be described as a bubble – but markets can easily derail the US economy. This time, the Fed is running out of ammunition to combat the next recession or crisis – unless you think Yellen is good at flying helicopters.
Henry Curr, US economics editor at The Economist, says No.
The most generous interpretation of this typically boorish Trumpism is that he is talking mainly about the stock market. Donald Trump thinks that the Federal Reserve has inflated the price of shares by keeping interest rates low.
But he ignores the underlying factors keeping rates down: paltry spending across the globe, flatlining productivity and rampant demand for safe investments like government debt, to name but a few. Yes, if rates rose sharply, stocks would fall, but that is because tighter monetary policy would be inappropriate for the economy and would catch out markets.
There is no sign of a bubble in the broader economy. Growth is modest partly because, unlike before the financial crisis, Americans are not bingeing on debt. Quite the opposite: household debt, as a percentage of GDP, has fallen every year since the recession. It is about 20 per cent lower than at the start of 2008. As usual, Trump’s version of reality does not fit the facts.