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Research firm Dragonomics says real estate prices fell 4.9% in April from the prior year for nine cities in China. In 2010 prices in these nine cities went up by 21.5%, the increase in 2009 was 10%. Standard Chartered estimates China's second tier cities, such as Dalian and Tianjin, could have 20 months of housing inventory by the end of 2011. Standard Chartered says price declines of 10-20% can be expected. Government data understates the extent of the bubble and the drop in prices say analysts. Beijing real estate consultant, Soufun, confirms the slowdown in price increases, saying its data show average property prices went up by 5.1% in May over the prior year, compared to the jump in prices in 2009 and 2010. Prices of copper and steel are coming down after rapid increases. The price increases in the Chinese real estate market have put housing out of the reach of ordinary couples. In 2006 an average price of a new apartment in Beijing cost $100,000, by 2011 this had gone up to $250,000. It woud take 57 years of saving for an average person to buy the apartment at todays cost. The government's response has been to boost down payments on mortgages for second homes to 60% from 40%, prohibiting state owned enterprises outside the real estate sector from investing in real estate, and raising the reserve requirements of banks....

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Questions about whether the emerging market countries are looking ahead at a period of lower growth in the next decade. If the slowdown in 2013 is structural then these countries have to to make changes in economic policies that will help them return to higher rates of growth. If the slowdown is cyclical then this is temporary and emerging market countries will return to higher growth rates. Countries such as Brazil, Mexico and India need to improve infrastructure and educational systems, and invest in research and development to generate more growth. Turkey and India depend on foreign capital, which puts limits to growth, creating a need to boost domestic savings and investment for long term growth. Lower rate of about 7% compared to the 9-10% of the last decade in China are because the wave of investment in construction and infrastructure building through huge state investments is now slowing, says Peter Aslund of the Peterson Institute of International Economics. It is a positive prospect for China, according to Kalpana Kochhar, a deputy director of IMF, because of the asset bubbles developing in real estate. It is seen positively by China's new government as it tackles problems created by a rush to industrialization of widespread pollution of the environment, and lack of balanced development without attention paid to healthcare, worker wages and social security. Stephen Schwartz of BBVA bank, says urbanizaton will drive further gains, especially in India, which has lagged behind the gains made in China and is likely to follow the rapid urbanization seen in China. New elections in India in 2014 are likely to lead to more growth oriented government policies. A pause in the U.S. Federal Reserve's policy of withdrawing economic stimulus gives emerging markets, especially India, and opportunity to come up with new economic policies to restore growth....

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The crisis of late 2008 and early 2009 in the global economy saw huge stimulus programs, resposible economic management, and rapid recovery by the end of 2009 in developing countries. China put in place a large stimulus program, and in most developing countries, India, Vietnam, Brazil and other countries efforts were made to strengthen the safety net for the poor and to introduce stimulus for creating jobs. India and Indonesis saw the return of ruling party governments and in Brazil Lula da Silva had favorability ratings above 60%. So contrary to earlier fears in late 2008 their was both asense of political stability and asense of confidence in the developing countries. Capital is flowing into these countries and the IIF says that net private capital inflows to developing countries will double in 2010 to $672 billion. Russia which saw capital outflows of $50 billion in the first 9 months saw $20 billon of capital inflows in the fourth quarter of 2009. Half of the 140 million laborers working in Chinese cities returned home in early 2009, a fifth stayed there and another fifth counld not find work when they returned to the cities. But as the stimulus in China kicked in, and infrastructure development surged, (see link to the rail infrastructure spending) by the middle of 2009 jobless ness among rural migrant workers went down to less than 3%. This shows in the Pew Global Attitudes Project wth more than 40% of respondents in India, China and Indonesia saying that they were satisfied with their lives, in China this was 87%. In France, Japan and Britain the share is below 30%. In America 49% of those in the Pew pollingfelt that America should mind its own business internationally, 30 points higher than in 1964. When asked "Are you better off in free markets?" the respondents share fell in 2009 in Germany by 4 points, in Spain by 10 points. Shares rose in India and China, and stayed flat in Brazil and Turkey, so there is no backlash against free markets in developing countries....

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Niall Ferguson, a history professor at Harvard, and Moritz Shularick, a economic history professor at the Free University of Berlin, coined the term Chimerica, to describe the Chinese export machine and the American overconsumption right down to negative savings. Now they call it an economic monster that needs to be given a burial. It does little good for America. For America its a 10-10 deal the authors say, 10% growth for China and 10% unemployment int the USA. The mood in the USA is no longer to go on with this arrangement they warn, and ask that the Obama administration take steps to end this arrangement. The USA should ask China to make a 30 % depreciation of the renminbi say Ferguson and Schularick. Krugman makes a similiar point and warns of dire consequences in aworld out of balance on the same page of the NYT, see the link. Ferguson and Schularick point out that unlike China, both Germany and Japan let their currencies appreciate by 60% for Germany and 50% in Japan, at a similiar period in their country's development. China's renmibi is pegged at 6.83 renminbi to the dollar, and China's government used $300 billion in reserves to keep the renminbi from appreciating this year. Throughout the 1980's and 1990's it was pegged at around 8.28 renminbi to the dollar. For the USA this has been very costly, with a distortion in the global cost of capital significantly reducing long term interest rates, and helping create the real estate bubble in the US. They point out that with Japan and Germany dollar reserves increased roughly in line with growth of American GDP at about 1% and stable before moving slighltly higher in the 1970's. By contrast China's reserves have grown from about 1% of Ameica's GDP in 2000 or $165 billion to 5% in 2005 and 10% in 2008 and headed for 12% in 2009 end. This is simply unsustainable any longer; carrying on any longer risks China losing the very basis of its economic success which is the open global trading system....

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Renewed warnings about the bubble in housing prices in China. Earlier warnings came from Krugman, Lardy, John Taylor. This one comes from Nomura economists Zhiwei Zhang and Wendy Chen. Could the government's action to curb rising housing prices not be adequate leading to a financial crisis as early as 2014, is the question posed by Zhang and Chen. They cite the rise of housing prices by 84% from 2001 to 2006, before the financial crisis of 2008 in the U.S., using the Case-Shiller housing price index. One problem- the government statistics may have underestimated the extent of the bubble. China's official index shows housing prices rising 113% in major cities from 2004 to 2012. Zhang and Chen say this is much smaller than the actual rise because it includes older, lower quality housing property. They cite an academic paper that adjusts for this and finds prices jumping by 250% in the period 2004 to 2009. Another problem is that China's housing prices growth slows after government action but then resumes the growth, leaving the risk exposure at the high level as before. Because the local governments are tied up in the housing bubble the problem would hit the banking system. About 14.1% of the outstanding bank loans are to local government financing vehicles, and 6.2% to property developers, according to Nomura economists. The declining potential growth rate in China means there is less room for bad loans to be absorbed by hyper growth levels than in the past. Errors in policy can magnify the risk including loosening monetary policy and exacerbating the bubble at the wrong time. In the absence of errors the risks still remain requiring the sale of public assets to bail out local governments and banks. The argument made by Krugman and other economists has been that China is not immune to the risks of a housing bubble going bad, in any way less than Sweden, the U.S., Spain and other countries, requiring bailouts of banks....

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Alan Blinder points out that the political partisanship that has emerged in 2010 has not served America well, as it has deprived the government of the fiscal policy tools, which would be more effective than the Fed's only mildly effective tool of buying $100 billion a month of medium and long term Treasury debt. The country he says is tied up in partisan knots that prevents the use of the fiscal policy tools, and leaves the Fed with the choice of doing something only nudging the rates on government and private securites a bit (by 30 basis points for Treasury debt and 15 basis points for private securities as an example, not enough for more than a mild impact on corporate spending). The fiscal policy tools are he says of a wide variety and pack a lot more power, and he cites three as examples: offering significant lasting tax breaks for job creation, large enough to produce results (larger and long term than the HIRE program), government hiring directly onto public payrolls and government paying local and state governments for hiring at the local levels, the government offering to compensate states for a cut in the sales tax for a year to stimulate consumer spending. Would'nt this raise the deficit though? Blinder points out that the deficit problem lies in the future. Right now there is so much slack in the economy, that public spending will not crowd out private spending. And with Treasury rates at an all time low, Treasury can finance the larger deficit in the short term. A depreciation of the dollar or inflation, he says, is not a worry, because now there is worry about deflation, and the USA needs a lower dollar to push exports up and rebalance its economy. This does not slight the deficit issue and the culture of poor budgeting among both parties, as Reagan Budget Director David Stockman pointed out in an op-ed piece, but accomodates the real dangers and opportunities of difficult policy choices. This is why he laments the advertising campaign and public relations campaign against the 2009 stimulus bill, and the expected paralysis of fiscal policy from the extremely partisan 2010 midterm elections, and public opinion consumed by fear of deficits. Leaving the Fed with the unenviable choice of using only mildly effective tools. Other experts and columnists mention the risks associated with the Fed's large scale purchase of securities, if this leads to another asset bubble and subsequent collapse, and another bailout needed for financial institutions. Peter Eavis in one column in the WSJ points to the lack of effectiveness of the first round of quantitative easing of $1.7 trillion. And Kelly Evans, in the WSJ, points to the risks of "bad" inflation, if another round of quantitative easing by the Fed leads to increases in the price of commodities such as oil and food (such inflation falling heaviest on lower income households).The US Financial Regulatory Reform bill has received low grades, and recent standards for reserve capital in worldwide banking reforms are stretched out over a long period, leaving fragility in the economic system, if something were to go wrong....

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The asset price bubbles developing in many countries in 2010-2012 with loose monetary policy.

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Greenspan testifes before the House Oversight Committee headed by Congressman Henry Waxman (D., California). Congressmen read back quotations from Greenspan where he talked about the resilience and efficiency of American free markets and defended derivatives and complex financial instruments. Some referred to the comments he made saying that housing markets would not collapse and the worst may well be over. Almost by 10 to 1 the readers responding to a WSJ poll say Greenspan was responsible for easy money for most of the decade and his lack of the most elementary safeguards for the economy instead defending derivatives and complex financial instruments, and considering the bubble in house prices as not the Fed's concern. Many used expletives deleted or the words "clowns" or "illiterates" for Greenspan and associates at Treasury. A congresswoman from Minnesota asked pointed questions about state effforts to stop predatory lending that were nixed by the federal authorites under Greenspan and Treasury's watch. She thensuggested that they the stewards of the economy try pragmatism and commonsense for policy decisions. Describing the present crisis he seemed so out of touch that when asked about rising foreclosures and need to stabilize home prices, he still was trapped in his libertarian ideology and impulses. He said transfer payments should be tried instead as modifying the mortgages would not be good in the long run when markets return to normal. He said this crisis has still some months to go. In these observations he showed that he has still not grasped the full extent of the crisis, as a realistic assessment of the economy suggests that the economic downturn has not really hit in terms of unemployment and drops in consumption, which will hit in 2009 and 2010 and years beyond. He looked old and worn out showing every bit of his 81 years, which begs the question how could he have been chairman for 17 years till he was nearly 80, as he was still Fed chairman just 2 years ago. There are term limits for mayors, and for President, how is it that there are no term limits for Fed chairman? Should'nt the Clinton administration or the Bush administration have made a new appointment to get fresh blood, fresh thinking, just as corporations do. Wells Fargo chairman Kovacevich is supposed to retire, even though he has good skills for accomplishing the merger of Wachovia having done this for Norwest. Bloomberg is fighting the term limits to stay on for another term and will need a special vote. Doesn't senility hit the best of us, and isn't there an age when people should have to retire from these positions, long before they get close to 80. An assessment of Greenspan watching him over the years would show that he loved data and data analysis, and trusted data as almost carrying infallible weight. As most of the data he looked at was for the postwar expansion of the USA economy, he saw as he himself testified this week data that showed the economy with small setbacks to be sure but on a constant upward trend. The way down he said in response to a question the data looks completely different, with fear and lack of trust and other things making this pattern have no relationship whatsoever with the way up. Greenspan and the nation's misfortune maybe that for too long the country's political leaders trusted over two decades a man who did not have the healthy skepticism of data even when it appeared to reflect certainty, and did not have the healthy impulses for safety and safeguards that surpass all ideological thinking, and a respect for basic ethics and common sense that goes beyond everything and puts it above everything else. This is a misfortune because these are qualities required for good leadership especially leadership entrusted with such huge responsibilities which can never be taken lightly. ...

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Andrew Stuttaford's excellent review of a book on the hyperinflation of Weimar Germany. In early 2010, the out of print book, "When Money Dies," by Adam Fergusson was trading for four figure sums. It describes life under hyperinflation in Germany and the events leading to it, the efforts to find a solution, and the collapse of the German economy with the worldwide great depression. The book describes the death of the German mark, with 20 marks needed to buy one British pound in 1914, going to 310 billion in late 1923! The story starts with the onset of war in 1914, and the fateful German decision to fund the war effort largely through debt and the printing presses. What exacerbated the situation was the relatively shallow capital markets in Germany, the creation of 'loan banks' funded by a printing press used by the central bank, and the muffling of all information. The stock markets were closed during the war and foreign exchange rates were not published. The destruction of the war, revolution, protests, imposition of reparations by the victorious powers, and terrotorial occupation worsened the situation. The efforts of central bank president, Rudolf Havenstein, to prevent mass unemployment by devaluing the currency to keep exports competitive, worked only for a time. In the end, says Fergusson, the music stopped. Lacking a reliable pricing mechanism and faced with huge strains, including the onset of the worldwide depression, the whole German economy stopped functioning at even the most basic level. The whole economy was reduced to barter. Rent was payed with butter and lumps of coal were bartered for something else. The only time an economy was reduced to barter in recent times (in the last 2 decades) was the situation in Argentina after a sharp devaluation. The Russian economy also faced a trying period in recent years with the collapse of communism and a collapse of the currency. And the Asian economies faced a difficult period during the 1997 Asian financial crisis. But nothing compares with what happened in Weimar Germany. The book was originally written for a British audience at a time of rapid inflation in the 1970's, and it reminded readers of the connection between the quantity of money in circulation and price stability. Financial crises play out in different ways in different periods, but it is a sobering warning for the need for prudence in financial affairs, avoiding excesses, the need for global cooperation and a measure of peaceful coexistence in world affairs that enables financial systems to work. With excesses in asset bubbles of the stock market or housing kind, bad loans in the financial system, overleveraging in the financial system, lack of reserves, or huge trade deficits, posing the new types of risks in today's environment. Bad loans in the financial system caused problems in Japan in the past and pose risks in China today, overleveraging caused problems in the US in 2008, lack of reserves in S. Korea in 1997, a collapse of the currency in Russia in the 1990's, and a sharp devaluation with a lack of reserves in Argentina. Too much money in the system, as in China today with the sharp increase in bank lending as part of the stimulus following the 2008 crisis, can distort the functioning of the financial system with excesses in real estate speculation and overproduction. The nature of the crises are different but all have a common factor of tolerance for excesses over a long period and a lack of prudence, exacerbated by international tensions and wars that weaken a country's finances. The twin wars in Iraq and Afghanistan are estimated to cost a trillion dollars each and this can only exacerbate the finances in the US, when coupled with other factors such as bad real estate loans in the financial system, and huge trade deficits....

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The importance of time and compound interest in investing cannot be overstated. Over long time horizons steady saving and investing using index funds such as Vanguard with low expenses can take advantage of compound interest to generate good returns. This happens for a strategy of dollar-cost averaging into broad indexes over longer horizons. The longer horizons help overcome fluctuations and volatility, even bubble behaviours, as compound interest plays a larger role. Investing based on timing is not viable because no one is prescient about the market. It is risky if this route of timing is taken because the investor ends up staying out of the market for long periods thus missing out on the power of compound interest to generate good returns. One way of looking at this is to take a $100 investment and see what happens by the sixth year on a calculator if it is invested at 10%, in the sixth year it generates 16% on the original $100.

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Macroprudential policies of central banks in S. Korea, Indonesia, China, Canada, and other countries, as concerns grow about a housing and credit bubble.

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Spain's central bank was lauded for macroprudential supervision before the housing bubble burst. Will China's central bank and financial authorites which have managed the housing bubble upto this point face similiar problems? Can China be the sole exception even as housing bubbles burst with wide repercussions in the U.S., UK and Spain? Nicholas Lardy, of the Peterson Institute of international Economics, says urban housing stock makes up 41% of Chinese household wealth in 2011. The same figure for the U.S. is 26%. Chinese buyers invest in homes because low interest rates on savings accounts cannot keep up with inflation. Real estate investment was 13% of GDP in 2011. Home ownership is a recent development in China, only since 1990, Chinese have never experienced large price declines. Household debt as a percentage of disposable income has increased significantly in recent years, up to 53.6% in 2011 from 31.3% in 2008, according to Lardy.

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Elelven of twelve Fed Governors support the U.S. Federal Reserve's decision to keep rates low till unemployment falls below 6.5%, as long as inflation remains subdued at 2-2.5% and inflation expectations are low. Only the Fed governor of Richmond expressed a dissenting vote. The Fed in its policy statement said it was addressing the problems of the last three years in housing and joblessness. Charles Evans of the Chicago Fed put it this way in a Sept 2011 speech- suppose the inflation rate was 5% when the target was 2%, then central banksers at the Fed would have acted as if their hair was on fire to tackle inflation, then why shouldn't the Fed do the same for unemployment. He succeeded in convincing Bernanke, Yellen and other Fed governors. Bernanke emphasized the enormous cost in human potential and productive capacity of the U.S. economy from high unemployment and people dropping out of the labor force.

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Huge inflows of capital into emerging markets because of low interest rates in the developed world, and the bubble effects this causes. Risks for emerging market countries as bubbles develop.

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The Economist points to a second hit from bad debt in the post 2008 stimulus binge of spending in China. This is after an earlier hit, that was absorbed as a result of high growth rates and high savings. About $420 billion was injected into 5 state owned banks since 1998, according to one estimate, as a result of the first hit to China's banks from bad debt. In this second round of bad debt, covered in more detail by David Barboza in the New York Times, and merely alluded to here, many bad loans to infrastructure projects were rushed through by local governments. The Economist considers this one of the successes of the state directed banking system, that loans were quickly made and projects started in the post 2008 crisis period; and expresses the view that this hit will be absorbed just like the last hit. However the more detailed account by David Barboza and in Business Week, points to the working of a system of incentives gone astray in a capitalist system without the necessary controls or regulation. Local governments used investment companies to take on loans, which were then used to prepare properties to be auctioned off at a profit and speculative prices to state owned companies in different industrial sectors. This is part of rampant speculation in China in real estate markets. Can China with its high savings and growth absorb a second hit? This depends on the magnitude of the hit and the size of the bad debt, which depends on how long this speculative market continues to operate, and how bad debt is hidden in the books. The difference this time is that large state owned companies in different industrial sectors are engaged in this speculation. The other difference is that the high growth rates in China depend on continued large trade deficits with the USA and Western Europe, something which is not likely to continue for long, as consumers in Europe and the USA with high debt are becoming cautious spenders. This suggests that China, like the US with the mortgage crisis, faces the same effects of unregulated or uncontrolled speculative behaviours, that can endanger the banking system....

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The author Li Congjun, is head of the Xinhua News agency, official press agency of the People's Republic of China. He calls for rebalancing the global economy with China depending more on domestic consumption, efforts to restrain the excesses of property and asset price bubbles, and renewed focus on technology and investment.

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Malkiel says both sides in the investor debate are right. Those saying the CAPE ratio in the U.S. at 25, well above long run average of 15, are right to point this out. So are the others in the debate who point to the lack of alternatives for investors when the 10 year Treasury bond is at 2.4% and short term rates essentially at zero. Stock prices reflect the discounted present value of future cash flows from dividends and capital gains. This discount rate in 2014 has to take into acount the rate on low risk securities such as 10 year U.S. Treasury bonds and and a premium for riskiness of the stock market. Add three or four percentage points to this and one gets a low discount rate for future earnings that helps support reasoning for higher stock prices, says Malkiel. On the issue of low interest rates Malkiel's view is that they will be around for a long period because the unutilized productive labor capacity and low growth are likely to persist for a long period. Here he supports Fed chairwoman Yellen's view based on the U6 labor utilization. He also sees the long run equity returns from today's prices to be much lower than the 10% long run average. By accomodating both sides Malkiel supports a broadly diversified portfolio with adequate room for emerging markets and international stocks....

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Using caution with bubble type internet stocks, stocks with no profits, real estate with large price jumps is suggested by experts. Models and methods have been developed to detect bubble type activity. Sornette at the Financial Crisis Laboratory, Swiss Federal Institute of Technology and the Bank of Finland's Taipalus have developed models to detect bubbles, including the bubble activity in internet IPO's and stocks in 2014. Chancellor at Boston asset manager GMO and Utkus at the Vanguard Center of Retirement Research have also come up with methods to detect bubble activity. Utkus says investors could reduce allocation by 10-20% in the case of stocks with bubble activity. Investors were doing this by reallocating in April 2014 from biotech and internet stocks to safer large cap stocks, because internet and biotech stocks had seen sharp increases of over 25% in a short period.

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Kenneth Rogoff, Harvard University economist, author of the well researched book on the 2008 financial crisis, "This Time Is Different," gives his thoughts on the economic prospects for the U.S under the new Trump administration. He says 4% GDP growth and 3% inflation is possible temporarily for a while with stimulus policies, less regulation, and increased private investment. After 8 years of not investing in much needed infrastructure because of concerns about the deficit, the timing is right for such investments, especially as the economic effects of the crisis of 2008 gradually fade.  This is about taking advantage of ultra low interest rates to invest in infrastructure. He says it helps that Trump policies are pro-business. He sees drawbacks as the stimulus program adds a 25% increase with extra debt, adding $5 trillion over 10 years, but adds that for many years Nobel prize winning economist Krugman and others have said that there is good reason to increase borrowing to invest, and this is now being tried. Inflation remains an uncertainty- if there are large quantities of underutilized and unemployed resources it would raise prices less than its effect to increase output. The reverse would apply if the U.S. economy is closer to full capacity. One factor that would help- increasing confidence for business and increasing investment. Against this what he calls optimistic view or spin, is the idea of mistakes under a Trump administration, errors made and a degree of incompetence which he says is a real possibility. Overall his view is that some risks are appropriate now, and from his deep study of financial crises sees the slow growth of the last 8 years a result of a financial crisis that now begins to fade, creating the possibility of higher growth under prudent policies.  ...