Time for another crash?

9 January, 2018 at 12:52 | Posted in Economics | 4 Comments

shiller

On Black Friday 1929 market fundamentalist wet dreams of eternal growth took a serious hit. The stock market bubble exploded and crashed.

Today​ we have a stock market situation much reminding of that in 1929. The Shiller P/E ratio is now even higher than that year. Those of us who know our Keynes-Fisher-Kindleberger-Minsky and have not completely forgotten all about economic​ history are starting to worry …

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4 Comments »

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  1. Probably not yet. Money growth (my measure) was running at more than 14% on 1 November 2017 (the latest for which the calculation could be made). Usually a crash occurs when money growth is close to 0%.See the graph until October 2015: http://www.philipji.com/item/2015-12-05/the-fed-is-set-to-squeeze-during-a-monetary-contraction. Since February 2016 it has been rising.

    • My take is that the Fed has little control over money supply growth. Eurodollars are outside the Fed’s control, and the Eurodollar market is likely in the hundreds of trillions of dollars. Foreign banks create dollar-denominated assets and use private money markets to make good on dollar obligations. The Fed’s tightening is a signal but private players don’t have to listen as long as they have private sources of dollars they can tap. In a crisis, the Fed becomes the money dealer of last resort …

  2. We know how to deal with a crash: supply as much liquidity as needed. We should apply the lesson of 2008 to financing a basic income so individuals are somewhat insulated from the self-inflicted crises the labile private sector periodically creates.

    • I fully expect we are about to find out we do not know as much as we think.


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