Housing bubbles and resource misallocation (page 1 of 3)

Let us start with a quotation from Friedrich Hayek, 'Monetary Theory and the Trade Cycle', London, 1933: '....to combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure which can only a lead to a much more severe crisis as soon as the credit expansion comes to an end.'

Because of a strong US dollar, a recovery in the stock market, further strength in the US housing industry, disappointing news from Europe, and rallying US government bonds, the super-bulls on the American wonder-economy are again out in force telling the world with great conviction 'We told you so'!

In fact, the more the audience that watches CNBC in the US declines (down 60% from the peak in 2000) the louder the voice of the bullish camp seems to become. But, let us look at some facts. Following a slump post year 2000, global semiconductor sales have rebounded strongly and are at about the level they were in year 2000.

So far so good! But let us now look at the details of these worldwide sales. For one, while sales have recovered - well understood after five years - to the previous highs, the earnings of semiconductor companies have not and hover around the level they were at in 1997 - eight years earlier.

In addition, while global semiconductor sales have recovered, in the US they have hardly moved up following the 2000/2001 slump. Maybe the US super-bulls should also notice that US semiconductor sales are no higher than they were in 1994!

But nor to worry, we know by now that the US economy is a service economy and does not need to produce anything to prosper except printing machines to keep increasing the supply of money (most printing machines are probably imported too).

Needless to say that the quality of US services is 'the envy of the world', as Mr. Bush, Rumsfeld, Cheney & Co. might articulate and - according to the Census Bureau's Economic Census - with the fastest growth being registered not in 'mundane' businesses such as biotechnology, nanotechnology and high tech industries but in high value added and intellectually highly demanding sectors such as lawn care, childcare providers, janitorial services and nail and hair salons!

Growth in Asia

If global semiconductor sales are up worldwide but down in the US and flat in Europe, where did they rise? Obviously in Asia ex Japan! Asian Pacific semiconductor sales have doubled to annually almost $100 billion since 2001.

And while we are at it, for the proponents of the 'Great American Empire and Economic Supremacy of the US' we should point out that Asian semiconductor sales, well understood ex Japan, are not only twice as large as US sales, but also larger than US and European semiconductor sales combined.

Now, I am not suggesting that semiconductor sales are a perfect economic indicator - although I would rather rely on them than on some forecasts by confused economists. Still, the composition of global semiconductor sales tells us something about the state of the current global economic recovery.

Following the economic contraction and stock market slump in year 2000, the Fed pursued an extremely accommodative monetary policy. Money supply rose rapidly and credit market debt exploded. In late 2001 and in early 2002, money supply was growing at annual rates of more than 20%.

Easy money policies and artificially low interest rates led to a credit bubble with the result that since year 2000, total credit market debt has been growing at more than four-times GDP growth and financed a gigantic boom in home prices, which in turn allowed households to extract equity from their homes through refinancing activity and spend it on excessive and conspicuous consumption.