The Economy Is Again Under the Sway of Asset Prices

From the Wall Street Journal: The past two recessions were ushered in by a collapse in asset prices. The risk of a repeat is growing. After plunging in the aftermath of Britain’s vote to leave the European Union, U.S. stocks have hit fresh highs. Real estate is quietly doing the same: home prices are just 2% below the peak hit in 2007, while commercial property values have hit records.

The result is that net wealth in the U.S. now tops 500% of national income. Ominously, net wealth has reached that level only twice before: from 1999 to 2000 during the Nasdaq bubble, and 2004 to 2008 during the housing boom. The mere fact that asset prices are high doesn’t mean they are overvalued, or about to crash. But it is a sign of an economy structurally more vulnerable to sudden shifts of sentiment in the financial markets. Central banks have compounded that vulnerability by pumping up growth with low and even negative interest rates that have kept asset markets inflated.

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