The Economist Observes that Asset Prices are Being Propped Up by Unsustainable Government Stimulus
Bubble Warning
Jan. 7th 2010
Markets are too dependent on unsustainable government stimulus. Something's got to give.
THE effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.
While the linked article primarily focuses on financial markets, the same phenomenon applies directly to housing prices. Housing remains overvalued based on economic fundamentals and is only being propped up by extraordinary Government meddling. This intervention continues to fail other than slowing the inevitable resolution of the disconnection between market realities and housing prices. The housing stimulus is also unsustainable. Unsubsidized mortgage rates will rise, the FHA will fail and housing purchase, tax credits are likely to expire.
Jan. 7th 2010
Markets are too dependent on unsustainable government stimulus. Something's got to give.
THE effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.
While the linked article primarily focuses on financial markets, the same phenomenon applies directly to housing prices. Housing remains overvalued based on economic fundamentals and is only being propped up by extraordinary Government meddling. This intervention continues to fail other than slowing the inevitable resolution of the disconnection between market realities and housing prices. The housing stimulus is also unsustainable. Unsubsidized mortgage rates will rise, the FHA will fail and housing purchase, tax credits are likely to expire.
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