Lots of liquidity.
Have you seen the latest (or very recent) Businessweek cover story on the low low (interest) rate world we live in? The point is that liquidity abounds and investors don’t know what to do with it. I sold my house in mid 2005, as part of an in-state relocation, and didn’t buy another house expecting that prices would drop about 25%-35% in real (inflation-adjusted) terms by the end of the decade.
But now I’m not so sure. There really is a lot of liquidity due to several of the reasons mentioned in the Businessweek article (mostly tech iinovations in finance and globalization). At the same time, due to the billions of willing workers in Chindia, prices of consumer goods don’t increase in response to the increased liquidity (as they would have in the past). As a result, only what is really limited (real estate, gold, oil, etc.) increases in price, but not consumer goods because there’s a nearly infinite supply of low-wage labor.
As I wrote elsewhere, ‘supply and demand’ applies to dollars too: if greenbacks are more plentiful, then their value falls. Hmmm, and back in 2005 I thought that my house had doubled in value in the few years that I owned it. Perhaps it was the dollar that lost half its value and not that my house doubled…! Only we don’t see that inflation reflected in consumer goods because of Chindia.
What matters in microeconomics is not so much whether an item’s price is $3 or $200. What matters is its relative price. I can see that the relative price of gold, land, etc., has gone up enormously given the entry of emerging markets in the world economy. Perhaps Greenspan wasn’t as far off as I initially thought when we blamed the recent bubbles on the fall of the Berlin Wall.
Quite a conundrum. I can’t wait to see how this will resolve. But we won’t know for several years. In the meantime, it looks like interest rates will remain unusually low for years.
But, OTOH, Jim Jubak (msn finance guru) cautions that current difficulties in the finance sector (where the mortgage bust is only another component) will result in a credit crunch where the highly liquid investor (like me who sold a house) will be king.
