You claim that if rents are stable and housing prices go up, no one is mad. But you're apparently forgetting about a pretty significant group of people: those who currently rent but would like to own, which I imagine is a pretty large group of people, and probably over-represented in the urban millennial influential demographic.

Our system generally makes it cheaper to own than rent (partially from the risk premium for owning, partially from the mortgage interest tax deduction). So being locked out of the homeowner class due to rising prices on homes seems like real economic harm.

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You're taking the term "asset price inflation" a little too literally here. This term came about to describe the fact that despite the Federal Reserve pumping trillions of dollars into the markets via QE for decades and repressing interest rates below r-star, and that while the money supply has grown substantially, you haven't seen that show up in any form of consumer price inflation. However, what you have seen is asset prices rise substantially. To your point, this normally may be seen as a good thing. However, it's really only a good thing when they rise for fundamental reasons, in this case we have seen a broad reduction in risk premiums as the result of Fed (and global CB) policy. This has been taken to a bit of an extreme with valuations on US stocks approaching record levels and spreads very tight for fixed income products. This may not be the worst thing in the world if "traditional" inflation stays low permanently and the Fed will permanently hold interest rates low (I'd argue it's bad if the Fed is engaging in financial repression though). However, if you think that rates may rise at any point in the near future, all that you have done is form a massive asset bubble that will ultimately wreak havoc on the rest of the economy, and all you have done is cause inequality to rise in the meantime without providing any gains to "Main Street". Hence, you've seen a greater emphasis by other CBs globally such as the RBNZ and PBOC to pay attention to any distortions they may be causing in the financial markets, which I think the Fed should pay more attention to.

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I’m not sure I care what anyone calls it, but a broadly-based bubble forming in the stock market which could/will burst, erasing 10-20% of asset values across the board, is not a good thing. So the question isn’t really about something called “asset price inflation” but about the likelihood of another extreme market “correction” on the medium-term horizon.

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This is tangential to your main point, but it's not "just good" if home prices go up for those who would like to own a home but don't yet.

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I would claim that inflation is not bad per se, it is unpredictable and wild-swinging inflation that is bad. Low inflation is good for financial asset holders and banks. High inflation is good for borrowers since inflation will help you with the amortisation of your debt. Broadly speaking, low inflation is good for rich people, while high inflation helps the poor and indebted. As a middle-aged dude who has experienced inflation in the high single figures (with the odd year of double digit inflation) as well as very low inflation and borderline deflation, I much prefer the problems associated with the economy running hot (strikes, basically, and rich people having to protect their financial assets) over a low-inflation economy (persistent under-employment, and capital having a vise-grip over labor).

There is something odd over the present fixation over inflation. It is probably true that consumer preferences will shift when the pandemic is finally pushed back, but the most likely scenario is that consumers will shift their spending from home improvement to entertainment and eating out. The latter are simply not big spending items (and there might also be an overhang of people who has rediscovered the pleasures of home cooking). We didn't have a collapse in prices when the pandemic started. It is unlikely that we will have an explosion in prices when it ends. Most likely, savings will stay up.

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"But to characterize the zaniness as inflation misses the point — inflation is bad, and booming investment (including zany investment) is good."

I'm not sure that follows. My diagnosis is that there is too much money chasing too few good investments. This creates a lot of distortions that are bad (like empty housing in city centers) to terrible (bitcoin destroying the environment, smart people working on speculative non-problems rather than e.g. fixing the healthcare system.

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All I ask here, indeed I beg, is that no one try to convince me that the stock valuations of Elon Musk's various enterprises are in any way related to market fundamentals. I might die laughing.

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"But the “asset price inflation” hypothesis is that the value of owner-occupied housing goes up but the rent doesn’t.

So who’s mad about that? Nobody! It’s just good."

As an aspiring homeowner currently working in the CA tech industry, I do not see this as good!! I see it as a massive obstacle to the type of life I want.

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Asset bubbles don’t matter? Believe it or not, I’m actually old enough to remember the financial crisis and the dot com crash.

The problem with asset bubbles is that people are actually wasting their money in crappy investments, but the investments go up on paper for a while and when the bubble bursts you have a recession because the wealth evaporates. People are suddenly a lot less rich - or even broke in the case of housing which is highly leveraged- and they need to act accordingly.

Worse if it hits a sector that is prone to financial contagion- such as mortgages- we get another enormous crisis.

At the end of the day, loose monetary policy is a lubricant for good investments that are hypothetically possible but lacking in capital under tighter policy. Loose policy does not create more hypothetical investments. So once all the good investments are fully funded, all the capital will flow to bad investments and bubbles become far more likely.

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>> Now a situation that can arise is that rents rise by 7%, and therefore the price of owner-occupied housing also rises by 7%. This is going to be a tricky political situation, because it’s ruinous inflation for renters but homeowners will likely perceive it as a good thing.

See also: NIMBY

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If my pay goes up by 2% but the price of housing goes up by 7%...

This is nice if I am a homeowner. I like it. But if I am trying to enter the home owner market, I don't like it so much.

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So the argument here is... that speculative bubbles are always good, except maybe in the special case of housing?

That seems to be your thesis, and it also seems obviously false in the abstract. (Although it may be true that the *current* behavior of markets is more good than bad.)

Can we get a post about the dangers of speculative bubbles, and why you're not worried about those dangers right now?

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Before the housing crash, everyone assumed that if someone bought a house for $500k and it later fell to $250k, if they could still afford to pay the mortgage they would. It came as a shock when it turned out that if prices fell people who could still pay their mortgages didn't. In terms of the current bubble I haven't heard that risk being mentioned at all.

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“Three percent inflation is fine”

No it’s not. At 3% inflation you lose almost half the value of your money in 20 years. That’s horrible.

As for asset inflation. You might think it’s good for the value of your home to be going up fast. But what if you don’t already own a home. Say you are just starting out trying to build a family, and all the home prices are crazy high. How do you feel then?

Not to mention most people are horrible at math. They take advice from realtors and lenders telling them of course they can afford the home they really can’t. What happens then (see 2008)

As for stocks, a stock valuation should be seen as ownership in a future dividend stream. When stock prices rise (and not driven by earnings increases) what that really means is you are paying more and more money for that future dividend stream. IE, you are getting less of a return (and maybe a negative one). Given current PE ratio’s, if you are buying right now, you should expect a negative return over the next 7 years)

See GMO’s excellent asset return forecast


“But if Powell could give me $20,000 and you $20,000 and everyone else $20,000 without prices rising, that would be amazing. You could end poverty!”

No, no, no. Money is a claim on assets. If you just create a bunch more money, what you have done is devalued that money in relation to the same asset base. Printing money doesn’t create wealth, just more money.

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I understand that housing prices going up while rent stays the same is a win and not-loss for home owners and renters, respectively. But isn’t it a loss for renters who are in the market to buy a house? Isn’t this one of the reasons fewer and fewer youngish people are making the leap from renting to owning?

I’m just saying it isn’t a free lunch. There are still winners and losers in this example.

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The Fed's balance sheet doubled in 2009, then doubled again in 2014, and then doubled again in 2020. Ray Dalio said it best ... "Cash is trash." You need to decouple the "asset inflation" from the dollar devaluation. It's not that assets are more expensive today then say 10 years ago, it's that the dollar is worth so much less. P/E ratios could go to 50x in this environment - not because the fundamentals of the business are strong but because the shares are priced in dollars. It's weird to say this "is not a thing". This is *THE* macro move of our generation.


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