The Most Splendid Housing Bubbles in America: Nov. Update

Author: Wolf Richter

Date: Nov 24, 2020

A pandemic of house price inflation.

House prices jumped 7.0% across the US, according to the Case-Shiller Home Price Index released today. Other indices have indicated similar price surges. House prices are going nuts despite a terrible economy. They’re being fired up by low interest rates, $3 trillion in liquidity that the Fed threw at the markets, fear of inflation that drives people into hard assets, work-from-home that causes people to look for a larger place, the urge to-buy-now before putting the current home on the market, and a shift from rental apartments and condos in high-rise buildings to single-family houses. And condos, as we’ll see in a moment, are not universally hot.

Los Angeles House Prices:
House prices in the Los Angeles metro in September jumped by 1.3% from August and by 7.7% from September last year. They’re now 12.9% above the peak of the totally crazy Housing Bubble 1, have nearly doubled (+93%) since early 2012, and having more than tripled since January 2000 (+209%):

The Case-Shiller index was set at 100 for January 2000 across all 20 cities it covers. Today’s index value for Los Angeles of 309 means that house prices have surged 209% since January 2000. This makes Los Angeles the most splendid housing bubble on this list.

For Los Angeles, the Case-Shiller Index provides sub-indices for condos, and for high-, mid-, and low-tier segments of houses. In the low-tier segment (black line) – where people can least afford price increases – prices shot up 10.2% from September last year, having nearly quadrupled since January 2000 (+280%). During Housing Bubble 1, the low-tier surged the most, and during the Housing Bust, it plunged the most, -56% from peak to trough. High-tier prices (green line) have risen 7.6% year-over-year and are up 186% from January 2000:

The Case-Shiller Home Price Index avoids some of the distortions inherent in median-price and average-price indices because it is based on “sales pairs,” comparing the sales price of a house that sold in the current month to the price of the same house when it sold previously, and it does so going back decades. Today’s release for “September” is a rolling three-month average of closings that were entered into public records in July, August, and September. So that’s the timeframe we’re looking at.

San Diego House Prices:
The Case-Shiller Index for the San Diego metro jumped 1.8% in September from August and was up 9.5% from a year ago:

This is “House-Price Inflation”: Loss of purchasing power of the dollar.
Because the Case-Shiller Index compares the sales price of a house in the current month to the price of the same house when it sold previously, it tracks how many dollars it takes over time to buy the same house. In other words, it measures the purchasing power of the dollar with regards to houses. This makes the Case-Shiller Index a measure of “house-price inflation.” And that’s all this really is – the loss of purchasing power of the dollar with regards to houses.

San Francisco Bay Area:
House prices in the five-county San Francisco Bay Area – the counties of San Francisco, San Mateo (northern part of Silicon Valley), Alameda and Contra Costa (East Bay), and Marin (North Bay) – rose 1% in September from August and 6.0% from a year ago. The index has more than doubled since 2012 and nearly tripled since 2000:

But condo prices in the five-county Bay Area fell for the fourth month in a row and are down 2.3% from a year ago, and are back where they’d first been in March 2018. Condo prices in San Francisco itself have fallen much further amid a historic all-time record condo glut, with the median price down 12.8% year-over-year. But the Case-Shiller Index covers a vast area around the Bay, including those where San Francisco refugees are moving to, and some of them are seeing rising condo prices:

Read the rest of the article here: https://wolfstreet.com/2020/11/24/the-most-splendid-housing-bubbles-in-america-november-update/

While Household Income Falls, Central Bankers Are Pushing for Higher Prices

Date: 11/16/2020

Author: Daniel Lacalle, Phd


Central banks continue to be obsessed with inflation. Current monetary policy is like the behavior of a reckless driver running at two hundred miles per hour, looking at the rearview mirror and thinking, “We have not crashed yet, let’s accelerate.”

Central banks believe that there is no risk in current monetary policy based on two wrong ideas: 1) that there is no inflation, according to them, and 2) that benefits outstrip risks.

The idea that there is no inflation is untrue. There is plenty inflation in the goods and services that consumers really demand and use. Official CPI (consumer price index) is artificially kept low by oil, tourism, and technology, disguising rises in healthcare, rent and housing, education, insurance, and fresh food that are significantly higher than nominal wages and the official CPI indicate. Furthermore, in countries with aggressive taxation of energy, the negative impact on CPI of oil and gas prices is not seen at all in consumers’ real electricity and gas bills.

A recent study by Alberto Cavallo shows how official inflation is not reflecting the changes in consumption patterns and concludes that real inflation is more than double the official level in the covid-19-era average basket and also, according to an article by James Mackintosh in the Wall Street Journal, prices are rising to up to three times the rate of official CPI for things people need in the pandemic, even if the overall inflation number remains subdued. Official statistics assume a basket that comes down due to replicable goods and services that we purchase from time to time. As such, technology, hospitality, and leisure prices fall, but things we acquire on a daily basis and that we cannot simply stop buying are rising much faster than nominal and real wages.

Central banks will often say that these price increases are not due to monetary policy but market forces. However, it is precisely monetary policy that strains market forces by pushing rates lower and money supply higher. Monetary policy makes it harder for the least privileged to live day by day and increasingly difficult for the middle class to save and purchase assets that rise due to expansionary monetary policies, such as houses and bonds.

Inflation may not show up on news headlines, but consumers feel it. The general public has seen a constant increase in the price of education, healthcare, insurance, and utility services in a period where central banks felt obliged to “combat deflation”…a deflationary risk that no consumer has seen, least of all the lower and middle classes.

It is not a coincidence that the European Central Bank constantly worries about low inflation while protests on the rising cost of living spread all around the eurozone. Official inflation measures are simply not reflecting the difficulties and loss of purchasing power of salaries and savings of the middle class.

Therefore inflationary policies do create a double risk. First, a dramatic increase in inequality as the poor are left behind by the asset price increases and wealth effect but feel the rise in core goods and services more than anyone. Second, because it is untrue that salaries will increase alongside inflation. We have seen real wages stagnate due to poor productivity growth and overcapacity while unemployment rates were low, keeping wages significantly below the rise of essential services.

Central banks should also be concerned about the rising dependence of bond and equity markets on the next liquidity injection and rate cut. If I were the chairperson of a central bank I would be truly concerned if markets reacted aggressively on my announcements. It would be a worrying signal of codependence and risk of bubbles. When sovereign states with massive deficits and weakening finances have the lowest bond yields in history it is not a success of the central bank, it is a failure.

Inflation is not a social policy. It disproportionately benefits the first recipient of newly created money, government and asset-heavy sectors, and harms the purchasing power of salaries and savings of the low and middle class. “Expansionary” monetary policy is a massive transfer of wealth from savers to borrowers. Furthermore, these evident negative side effects are not solved by the so-called quantitative easing for the people. A bad monetary policy is not solved by a worse one. Injecting liquidity directly to finance government entitlement programs and spending is the recipe for stagnation and poverty. It is not a coincidence that those that have implemented the recommendations of modern monetary policy wholeheartedly, Argentina, Turkey, Iran, Venezuela, and others, have seen increases in poverty, weaker growth, worse real wages and destruction of the currency.

Believing that prices must rise at any cost because, if not, consumers may postpone their purchasing decisions is generally ridiculous in the vast majority of purchasing decisions. It is blatantly false in a pandemic crisis. The fact that prices are rising in a pandemic crisis is not a success, it is a miserable failure and hurts every consumer who has seen revenues collapse by 10 or 20 percent.

Central banks need to start thinking about the negative consequences of the massive bond bubble they have created and the rising cost of living for the low and middle classes before it is too late. Many will say that it will never happen, but acting on that belief is exactly the same as the example I gave at the beginning of the article: “We haven´t crashed yet, let´s accelerate.” Reckless and dangerous.

Inflation is not a social policy. It is daylight robbery.

What Drives Progress: The State or the Market?

Author: Ethan Yang
Date: November 11, 2020

Publication: American Institute for Economic Research

The famous American author, Mark Twain once said, “History never repeats itself, but it does often rhyme.”

A little over a hundred years ago President Woodrow Wilson kicked off a drastic expansion of government power and scope with the general assumption that the state can scientifically plan society. President Franklin Roosevelt greatly expanded on this idea with more government programs that promised to solve all sorts of societal ills and bring a level of centralized progress that the market couldn’t provide. This sparked caution and critique from those who favored market-based mechanisms advocated by economists such as Ludwig Von Mises.

Those like AIER argued that the market was far superior to the state in organizing society. This is the story of humanity, a struggle between the individual and the state. Those who believe in statism and those who believe in liberty.

Some thought that the free marketeers won the intellectual argument against the Keynesian statists in the 1970s. This is when stagflation completely upended the assumption that inflation and unemployment are always inversely related. It turned out that simply using expansionary monetary policy to drive economic growth was not as good of an idea as people thought. Post World War Two, Keynesian and big-state thinkers more generally braced for economic turmoil as spending dropped and people returned from war. The exact opposite happened as we learned again that the state does not drive economic growth. In the latter half of the 20th century, sweeping market reforms brought prosperity to countries all around the world. Another blow to the idea of state-run industry.

In 2013 Dr. Mariana Mazzucato, a leading economist of the Keynesian persuasion, published The Entrepreneurial State, which makes the case that the public sector can do far more than it is currently doing. That the private sector necessarily needs generous guidance and intervention from the state and in many cases is equal if not superior to the market in generating efficient and innovative services to society.

Well, here we go again.


Mazzucato and her allies posit that society can be so much better if we ditched market-based principles and delegated more responsibility to the state. Think people like Senator Elizabeth Warren.

This is why it is so necessary that economic heavyweights Dr. Deirdre McCloskey and Dr. Alberto Mingardi teamed up to write The Myth of the Entrepreneurial State. In a perfect world, one should read Mazzucato’s work as well, but doing so is not necessary to understand this book. The book can surely stand its own as the debate between the market and the state is a timeless conversation. The book also serves as an outstanding work of economic history and elaborates on many relevant economic topics, making it well worth anyone’s time, not just those closely following this debate.

The Idea of the Entrepreneurial State
The authors quote Mazzucato when they note that she remarked,

“Mainstream policy conceptions and prescriptions” are “normative postulations for a permanent state planning for more markets, mainly organizing ‘deregulation cum privatization’ rather than deliberate sets of conditional recommendations based on pondering alternatives and paths.”

Essentially this suggests that mainstream economic thought is dominated by ideas put forth by those like Milton Friedman who advocate for more privatization and deregulation to create growth. Mazzucato believes that this is unpredictable and suboptimal. Rather we should allow experts to ponder better alternatives with a scientific level of precision. Mazzucato likes to reference government programs like DARPA and The Manhattan Project as examples that the government can be very innovative.

This is an odd assertion, as I would agree that many economists hold the belief that privatization and markets are good. However, McCloskey and Mingardi point out that

“In the past century, government expenditure as a percentage of GDP drifted up towards 50 percent, compared with its pre-Keynesian level of 10 percent”… “ Democratically elected politicians, and behind them their constituents in the voting public were finally convinced that budget balance carried little or no normative weight.”

Contrary to Mazzucato’s point, there is no widespread consensus about the wonders of privatization amongst policymakers, just sloppy never-ending spending, and expansion.

This is how government works, especially democracies. It’s sloppy, it’s imprudent, it’s cumbersome and utterly desensitized to important market forces. If you empower the state to take on more and more planning of society, this problem will only exacerbate.

This is why the traditional economic consensus is that the government should stick to prescribed collective action problems and the private sector is where most activity should be conducted.

The authors are less shy about explaining their issue with Mazzucato’s grand idea when they write,

Mazzucato, a loyal daughter of the left, is suspicious of private gain, of the sort you pursue when you are shopping, say, and is therefore suspicious of people doing things for a private reward. She wants the State, advised by herself, to decide for you.

In essence that is what the idea of the entrepreneurial state ultimately boils down to. A rationalization of leftist political economy that has politicians and university professors jumping for joy. A very mild form of central planning that says that great things are possible as long as I am in charge.

What Drives Innovation
One of the main premises of those who believe in an entrepreneurial state is that public investment drives innovation. Mazzucato contends that the government should exert a sort of directionality over private businesses to drive them towards some optimal point determined by experts.

However, this is a false view of how innovation happens. Innovation comes from the bottom up, not from the top down. Free people acting in spontaneous and self-interested ways create the innovative products of tomorrow. Private firms jockeying for supremacy in handheld communication gave us the genius of the iPhone. Tesla produces some of the most advanced electric cars in the world available for mass consumption. Tesla CEO Elon Musk is the antithesis of the pondering bureaucrats that Mazzucato believes drive innovation. A man who offers four car models named S, 3, X, Y, sells flame throwers, privatized the space race, and now just launched a line of tequila.

If anything Elon Musk’s personality might be the ideal representation of how innovation happens. Not by deliberate planning by experts but by the rambunctious and oftentimes chaotic enterprise of free individuals.

Mazzucato and others like her contend that the state drives innovation. The authors disagree and state that

“The spring, we say, was the liberal idea and its emancipation of human creativity.”

As statists lament over the alleged “normative postulation” regarding privatization, McCloskey and Mingardi feel exactly the opposite. Getting the state out of the way of free individuals is the driving force behind innovation.

Does Government Investment Contribute to Innovation?
One of the convincing arguments made by Mazzucato and others like her is that the advanced military research agency known as DARPA invented things like the internet. Therefore, the state may be capable of impressive feats of innovation. If we invested more, then we would get better results.

The authors offer a rebuttal that can be summarized as “important if true.” They write

“The question is whether the American government envisioned anything like the internet. The answer is obvious: of course it didn’t. There was no “mission-oriented directionality.” The investments by the military look like Christopher Columbus’ voyages: the entrepreneurial State discovered the West Indies having left for the East Indies.”

Furthermore,

“In the 1960s the Air Force considered how a decentralized communications grid distinct from the traditional telephone might operate. But the Department of Defense then terminated the research and took no action.”

The authors also go on to point out that one of the leading developers of ARPANET, the technical foundation for the modern internet, observed that

“DARPA “would never have funded a computer network to facilitate email” because the telephone already served person-to-person communications perfectly.”

This shows that government contribution to creating things like the internet was not only unintentional, it may have been detrimental. Innovation is a chaotic endeavor that requires testing in the marketplace rather than the approval of experts. If invention and progress rested on the opinions of whether a room full of PhD’s thought it would be productive, we might not have made it past the horse-drawn plow.

One famous example is the advent of airborne flight, which government officials and many others understandably believed after a failed test that air travel was not obtainable. Looking back, these comments seem comedic but if we allow the state and its army of experts to impose “directionality,” innovation would grind to a halt.

In fact, in 1903 the New York Times predicted that flight was approximately 1-10 million years away. Then just a couple of months later two bicycle mechanics, Wilbur and Orville Wright made the first functional airplane in their garage, proceeding to change the world forever.

Innovation happens in the absence of state direction. It’s not innovative if it was completely planned.

The authors go even further to point out that oftentimes innovation takes place to outmaneuver the state as regulations bog down progress in various industries. This can partially explain things like the emergence of private equity over public equity in the world of finance. One of the key benefits of private equity is not having to abide by the cumbersome regulations that govern public financial markets.

Key Takeaways
This debate between whether or not the state can be a competent and worthy driver of innovation is a necessary one. Although the state continues to grow regardless of who wins this intellectual argument, it was thought that proponents of limited government had won this discussion in the late 20th century when the world experienced a sweeping wave of liberalization.

Today we find ourselves at a crossroads, with much of the Western world embracing or starting to consider a view of government that sees it as much more than just a steward of our rights. They see the state as a force of positive and competent change in a capacity that McCloskey and Mingardi believe is only possible through the market. That a more powerful and unrestricted government can reliably be a steward of society.

The idea of an entrepreneurial state as proposed by Mazzucato is a romantic one. It’s an idea that people can come together and through sheer will can make innovation happen. That some very smart people with fancy degrees and prestigious titles can steer society to an optimal location. The only problem with that is just about everything.

Mises Explains Why Socialism Fails

Author: Fabrizio Ferrari


One century ago, Mises began the socialist calculation debate, publishing his essay Economic Calculation in the Socialist Commonwealth (1920) and his subsequent treatise Socialism: An Economic and Sociological Analysis (1922). Later, Mises included his antisocialist arguments in Human Action 1949 , his magnum opus, especially in Sections III (about economic calculation) and V (about the economic impossibility of socialism).

Mises question on socialism is straightforward and simple: Can a socialist economy allocate resources efficiently as the free market does (cf. Mises [1949] 1999, p. 691)? In order to answer, we need to understand (1) how does a free market economy work, (2) the importance of economic calculation and entrepreneurship, and (3) the reason why socialism is intrinsically incompatible with the very idea of economy.

How does a free market economy work? It’s a system of human interactions wherein human beings make their choices of consumption and production—efficiently allocating different privately owned means (scarce resources with alternative uses) to satisfy different ends (consumptive wants). Since human ends (consumptive wants and desires) are subjectively valued, the means conducive to their satisfaction (production goods) are subjectively valued as well—according with the ends they satisfy, i.e., the consumptive goods and services they produce. Of course, a free market economy features human beings freely exchanging both consumptive and productive goods and services. Such exchanges occur at freely agreed ratios (prices), which express the essence of economy: satisfy (directly—via consumption—or indirectly—via production) chosen ends while giving up other less preferred ones.

It’s therefore clear that the concept of economy is linked with the idea of exchange—thus economics, the science concerned with economy, is more aptly labeled catallactics, i.e., the science of exchanges, from the Greek verb katallassein, meaning “to exchange” (cf. Mises [1920] 1990, pp. 15–16). But exchange requires previous estimation and calculation of pros and cons, assessing whether what we give up is actually worth less than what we gain (cf. Mises, [1949] 1999, p. 230).

In a free market economy, productive choices are governed by the profit and loss mechanism, whereby sovereign consumers signal—through their consumptive choices—which entrepreneurs they are willing to “reward” and which ones they are willing to “punish” (cf. Mises, [1949] 1999, pp. 295–97). When entrepreneurs supply consumers with desired consumptive goods (ends) at affordable prices (i.e., when they employ scarce productive means effectively and efficiently), they are rewarded by consumers with entrepreneurial profits—thus increasing entrepreneurs’ net worth, their capital (cf. Mises [1949] 1999, p. 231). Otherwise, consumers “punish” entrepreneurs through losses—decreasing entrepreneurs’ net worth, their capital, and turning their investments into malinvestments.

Thus, we understand the pivotal importance of entrepreneurship within a free market economy. Entrepreneurs, indeed, are the transmission belt between consumers’ wants (consumptive goods and services) and the means conducive to their satisfaction (production goods). Hence, entrepreneurs are the central cog of the economic choice mechanism. They (1) forecast, or speculate, which wants consumers are eager to satisfy, (2) perform the economic calculation establishing whether such wants can be efficiently satisfied, and (3) employ their own savings—skin in the game—while investing and buying production goods.

It’s hence evident that entrepreneurs are both speculators (they envisage future possible scenarios) and savers-capitalists (they save and accumulate the capital they later invest).

But speculation requires calculating tools—the price system. How does it emerge? Prices can emerge only while exchanging, buying, selling, purchasing, etc. (cf. Mises [1949] 1999, p. 202). Prices are, indeed, the ultimate expression of economic action—gaining something (say, a T-shirt) while foregoing something else in exchange (say, twenty dollars). Absent exchange, prices cannot originate: they would be not only impossible, but even inconceivable. Prices are, in fact, ratios (or tradeoffs) at which given exchanges are performed—if exchanges are abolished, prices will follow suit. Thus, were exchanges for particular goods (say, production goods) to be abolished, these same goods would cease to feature market prices.

Saving and capital accumulation , on the other hand, require private ownership to be in place: it’s indeed thanks to private ownership over their own capital—i.e., production goods—that entrepreneurs enjoy profits and suffer losses (cf. Mises [1949] 1999, pp. 254, 302–04, 704–05; and Mises [1920] 1999, p. 37), thus allowing the profit and loss mechanism to function properly and to steer productive activities on consumers’ behalf.

Here comes socialism: collectivizing production goods’ ownership, socialism abolishes entrepreneurship via two logical steps. First, entrepreneurs are “directly” abolished as capitalists, since they are legally forbidden from privately own and accumulate capital—i.e., production goods. Second, being all production goods now owned collectively, they can no longer be exchanged, bought, sold, etc.; hence, prices cannot emerge any more for these goods, and entrepreneurs can no longer compute costs of production while choosing what to produce and how to produce it—thus, entrepreneurs are “indirectly” abolished as speculators.

What about the fashionable critique of socialism proffered by Hayek and Robbins, i.e., that socialism is impossible because the central planner would lack (1) the knowledge and/or (2) the intelligence necessary to plan production? Hayek and Robbins, indeed, ground their critique of socialism on the central planner’s incapability of (1) obtaining all the relevant information necessary to plan production and/or (2) computing and calculating the optimal level of production (cf. Salerno 1990, pp. 57–64).

But central planner’s knowledge and intelligence are not the relevant argument for Mises. By means of abolition of entrepreneurs (the pivots of free market production choices), socialism itself gets incompatible with the very idea of economy—economize available means to attain desired ends.

If, indeed, production goods are collectively owned by a single entity (government, State, folk, etc.), how would it be possible to trade, to exchange, to sell and purchase them? It would be impossible—hence, there wouldn’t exist a market for them. But, without a market, how could prices emerge? Of course, they couldn’t (cf. Mises, [1920] 1990, p. 4). But again, without prices for production goods, how to compute costs of production? And profits and losses? Of course, it would be impossible as well (cf. Mises, [1949] 1999, p. 701). And, without profits and losses, a socialist economy has no tool conducive to efficient allocations of production goods.

Thus, without knowing whether revenues are higher or lower than costs (because costs cannot be computed), how would the socialist central planner know whether production is being carried out according to consumers’ desires? Of course, that would be impossible to know (cf. Mises, [1949] 1999, p. 209). A socialist central planner, in fact, even knowing which consumptive goods are desired most, would know neither which ones could be profitably produced, nor how to efficiently produce them (cf. Mises, [1920] 1990, p. 21). Absent market prices for production goods, no profit nor loss can be computed—hence, producers have no “compass” guiding them through production choices. Economic calculation is impossible for goods with no market (cf. Mises, [1949] 1999, pp. 215, 230).

So, why does socialism fail? It fails because it’s the very negation of the idea of economy—economizing man. Abolishing private ownership for production goods, socialism abolishes the market for them and makes it impossible for market prices to emerge and for costs of production to be computed—thus impairing the profit and loss mechanism. Socialism does not necessarily fail, as Hayek and Robbins thought, because the central planner lacks the knowledge and/or the intelligence needed to plan production; it fails, instead, because it abolishes entrepreneurship and economic calculation.