Welcome to the Bubble Economy, 2005.
There's the housing bubble and the commercial office space bubble. There's the bond-market bubble and its two progeny, the junk-market bubble and the emerging-market-debt bubble. That $2.50-a-gallon price you see at the pump has all the markings of an oil bubble. And the premiums being paid for all those corporate mergers and acquisitions is a pretty good indication of a stock-market bubble.
In fact, nearly every asset market you can think of is showing signs of bubblelike behavior. The reason is pretty clear: The global economy is awash in free cash.
Rising oil prices are reflected in the retail price of gasoline. Oil money feeds a growing global surfeit of cash.
(Ted S. Warren -- AP)
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Transcript: Steven was online to discuss this column.
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"There is an excess of liquidity around, and it is proving very hard to get rid of it," said John Makin of the American Enterprise Institute, using the term preferred by economists.
"The possibility of a liquidity bubble around the world concerns me," Citigroup Chairman Charles Prince told the Financial Times last week.
To some degree, this excess liquidity is what you'd expect as a giant baby boom generation reaches its peak earnings years and begins to save more for retirement.
And surely a good part of the story is the stimulative monetary policies of central banks around the world for most of the period since the Asian financial crisis in 1998. The Bank of Japan has been pumping out cheap money for years in an effort to revive the Japanese economy and slay the deflation dragon. In the United States, the short-term interest rates that the Federal Reserve controls have been below the inflation rate for more than three years.
The biggest culprit of all, however, may by the central bank of China, which, to prevent the appreciation of the Chinese currency, has had its printing presses working overtime to churn out the yuans needed to buy all those dollars earned through exports.
Fed Maestro Alan Greenspan has argued that nobody can really identify a financial bubble until after it has popped, which was one reason the Fed did little to try to prick the stock market bubble in the late 1990s. That sophistry was exposed last month when transcripts of Fed meetings from 1999 were released showing that Fed officials, including Greenspan, were quite aware that they were dealing with a bubble of immense proportions. And it is now belied, as it was then, by any number of objective indicators of the widening gap between the economic and market value of various assets.
Ray Torto, an old friend and real estate guru, has a report out showing how the gap between the monthly out-of-pocket cost of buying a home vs. renting it has been widening at an accelerating pace. Nationally, the gap is now 8 percent, while in hot markets like San Diego and San Francisco it is more than 50 percent. In Washington, it's 41 percent more expensive to own than to rent.
