Prices reflect existing scarcities. Still, important scarcities which affect underlying structural dynamics, aren't always taken into consideration. In particular, what sometimes appears as though "too high" asset prices, could instead be indicative, of scarce productive agglomeration. Why is the Fed getting this wrong? Scott Sumner echoed Tim Duy's concerns re excessive monetary tightening, and muses:
It seems to me, that the Fed is wrong about both inflation and asset bubbles...In recent decades, the Fed has pretty consistently overestimated the natural rate of interest. If the natural rate is lower than the Fed assumes, then both of these claims are true:Equilibrium asset prices, ultimately reflect how society values productive agglomeration, in relation to other resource potential. Housing - as a primary income destination - is one of the most important costs of economic access. Yet if broader economic complexity could be generated, what presently appears as "excessive" high housing costs, would eventually spread across new destination points for productive agglomeration. This would also serve as a relief valve, on the price pressure of today's most highly valued areas.
1. Equilibrium asset prices are higher than the Fed believes.
2. The Fed's current policy stance is tighter than the Fed assumes, and hence unlikely to deliver on target inflation going forward.
With too many individuals stuck on the economic sidelines, some institutions are attempting to "compensate" in ways that are confusing or even counterproductive. The Fed's insistence on normalization is disconcerting, as policy makers attempt to curb forms of inflation which have nothing to do with monetary representation - particularly as it is currently practiced. The relative scarcity of productive agglomeration, has yet to be recognized for its monetary implications. Meanwhile, some observers still believe too much money is being printed, which in term generates excessive housing costs.
In spite of an economy which needs substantial structural assistance, the Fed is beginning to unwind its balance sheet, even as IOR is left intact. George Selgin recently noted that if the Fed is serious about reducing its balance sheet, it would need to quit paying interest on reserves to banks. Yet the fact banks have grown dependent on this revenue source, suggests they are not ready to return to a real normal - one in which bank revenue revenue is derived from traditional sources.
Of course, the semblance of a normal life was lost for too many, with the onset of the Great Recession. Given the fact extensive nominal representation was lost, with nary a public explanation, this unfortunate circumstance might have served as a warning for tradable sectors. Could the Fed be counted on to maintain nominal stability, especially during negative shocks when economic stability was most needed? Lingering uncertainties such as this, likely contribute to the recent trend in maintaining increased cash holdings, which would allow quick adjustments in inventory when necessary. Even so, this is a simple form of institutional compensation for economic uncertainty, and one which is easier to understand, than IOR.
Thus far, governments have mostly "compensated" for falling labour force participation, by adding more burdens to their budgets. But what happens if they lose this option? Narayana Kocherlakota, in "Someday Congress Won't Raise the Debt Ceiling", notes that voters in both parties already oppose increasing limits on federal borrowing. He sums up:
My own prediction is that Congress will yield to the administration's demands and raise the debt ceiling sometime this summer. But the aging of our population means that the federal debt is only going to grow, and it would be surprising to me if voter concerns about the debt, didn't keep pace. If economists don't like the debt ceiling, they'd better come up with some other mechanism that allows voters to impose a credible cap on the size of the national debt. Otherwise, I expect that, sometime in the next decade, Congress is likely to yield to constituent pressures and not raise the debt ceiling, despite the attendant economic turmoil that is sure to ensue.Admittedly, it's difficult for me to imagine an alternate policy scenario that would suffice, given everyone's desire that governments run smoothly in the short run, yet also manage to maintain accountability in the long run. And budgets especially become difficult to manage, when too few citizens are meaningfully engaged in their economies. A gradually falling participation rate will need to be approached directly, if the above mentioned compensation measures are to ultimately be reduced. Even though it is difficult to address the need for full economic participation, ultimately it's simpler to do so, than dealing with the burdens of institutional compensation measures which fail to work properly.