ANOTHER VIEW ON AMERICAN ECONOMIC
CRISIS
The problem, warns
33-year St.Louis Fed veteran Daniel
Thornton, is that "the financial cycle
is way ahead of the economic cycle." As Bloomberg notes, that's a worry given that the past two downturns were driven by
asset-price deflation.
Americans are about as wealthy as they've ever been - and that's a worry?
Yup, say veteran economists Daniel
Thornton and Joe Carson. They're concerned
that the swelling of wealth could prove unsustainable because it's far
outstripped the growth of the economy since the recession's end in 2009.
Thornton, who spent 33 years at the
Federal Reserve Bank of St. Louis before retiring in 2014, says in effect that we've seen this picture before. Household net
worth ballooned in the late 1990's and the early 2000's; in the first instance pumped up by rising stock prices, in
the second by expanding home values.
Both cases ended badly, with the economy falling into
recession after the bubbles burst.
Chart: Bloomberg
Just
as occurred in the previous two episodes, the latest expansion of wealth has been driven more by
rising prices of assets -in this case both shares and homes - than by improved
economic fundamentals...
Since
2009, households have seen their holdings of stock and mutual funds nearly double,
to $20.6 trillion.
Only
6 percent of that gain can be ascribed
to new flows of money into the funds or share purchases,
according to calculations by Carson, director of global economic research at
AllianceBernstein LP in New York. The rest
is due to price appreciation.
As the veteran economist sum up:
The problem, he said, is that "the financial cycle is way ahead of the economic
cycle.'' That's a worry given that the past two
downturns were driven by asset-price deflation.
"Nobody
knows what's going to happen," Thornton said. "But there's plenty of
reason to think that’s a scary graph."
Still, why worry, with stock valuations at 12 year highs (amid declinig earnings) and median home prices well above the prior peak, what could go wrong?
….
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