Capital markets, monetary policy, fiscal policy. The extent to which these three factors intertwine is of no small consequence to the American economy.
On one hand, loose monetary policy generally enables the politically-desired fiscal policy—big deficit spending—by lowering the cost at which governments borrow. Loose money also enables rising asset prices through compression of cap rates—a shorthand valuation method wherein discount rates to future cash flows (which are themselves subject to increasingly fantastical projections as interest rates decline) are lowered, thus increasing present value.
In turn, rising asset prices provide political cover by creating a wealth illusion—a politically useful context in which high asset values belie weak fundamental performance in the main street economy. Thus, governments receive less pushback on price inflation and profligate government spending while Americans are distracted by increasing brokerage account balances.
These three factors—capital markets, monetary policy, and fiscal policy—are interdependent as practiced today in our bureaucratically-controlled economy, relying on interplay to prop up an economic mirage. This mirage briefly vanished after Fed Chairman Powell’s December press conference, providing a glimpse into the workings of this interdependence and its lurking fragility.
Number Go Up
The US stock market averaged more than one new all-time high every week in 2024. Despite poor breadth, valuation multiples are as high as they were during the peak of the dot-com bubble of 2000. Alternative assets like cryptocurrencies are experiencing massive increases in dollar-bound prices. Home prices are at all-time highs and inventory is low, indicating little chance of broad price decreases. In the commercial real estate markets—once you look past record levels of distress—negative leverage is pervasive, indicating unlevered returns that fall short of the cost of debt required to finance them. Imagine taking a loan at 10 percent interest to invest in a bank CD that only pays 5 percent. […]
— Read More: mises.org
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