Facebook Twitter LinkedIn

I have a visceral dislike of this sort of column:

We haven’t learnt as much as we should have over the past few years. But the one thing that is surely clear to all by now must be this: bubbles always pop. And so it is with this one.

It’s possible that bubbles always burst, although I greatly doubt it. But it absurd to argue that we’ve learned that from the last few years. Take the 6 major English-speaking economies (The US, Britain, Canada, Australia, Ireland, New Zealand.) All have experienced bubble-type rises in house prices, and yet only two saw the bubbles burst. The same is true in continental Europe, where there were many bubbles that haven’t burst. And Asia. And there are many major metro areas in the US that experienced sharp real house price gains in earlier decades, which are still holding up (San Francisco, San Jose, Manhattan, etc.)

Here’s more sloppy reasoning:

The other thing we have probably learnt is that when housing bubbles pop, economies crumble. Is that happening in China yet?

Again, this is simply false. The US economy did fine during January 2006 to April 2008 while the housing bubble collapsed. Only after NGDP collapsed in late 2008 was there a sharp decline in the economy. Unemployment was 4.9% in April 2008.

And comparisons with China are crazy on all sorts of levels. China is a poor, fast-growing economy with very high trend NGDP growth. That means there is little risk of the zero rate trap that has allegedly thrown our monetary policy off course. China may “collapse” (although I doubt they’d experience more than an ordinary recession) but it won’t be because of any housing bubble bursting, if in fact there is a housing bubble.

One thing that readers need to keep in mind is that past predictions of Chinese bubbles bursting haven’t just been wrong, they’ve been spectacularly wrong, indeed laughably wrong. I recall that when I visited Shanghai in 2001 many people were talking about a commercial real estate bubble in Pudong. That was 2001!! Today those predictions sound about like someone who claimed Las Vegas was overbuilt when the second big casino opened in the early post-war period. Eventually China will probably become overbuilt. But if the Chinese government keeps expanding NGDP at a healthy rate, and keeps reforming their economy, the most they have to fear is an occasional recession.

People also need to realize that bubble forecasters are never embarrassed by their false predictions. They don’t believe they are ever wrong, because if the bubble hasn’t burst yet, it eventually will. So they put no time limit on their predictions. Of course if one waits long enough any highly volatile market will have a dip. That’s what it means to be “highly volatile”–indeed it’s a prediction of the EMH.

Their other trick is to make predictions all over the map, hoping that at least one prediction comes true. Back in 2003 The Economist made a whole bunch of bubble predictions for developed country housing markets. The vast majority proved wrong, indeed far off base. Later they did an advertisement for their magazine bragging that these predictions were right. Most readers are too lazy to check, and having heard a lot about bursting bubbles in the US, Ireland and Spain, just assumed the ad was correct. But I am not too lazy to check, and I have a long memory.

Facebook Twitter LinkedIn

Tags:

This entry was posted on August 01st, 2012 and is filed under China, Misc.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



