The great James Grant marks the 5th anniversary of the height of the stock market bubble in an essay in today’s New York Times, with an Austrian explanation of both the boom and the bust. An excerpt:
With no lights flashing red or even amber, investors sped through the financial intersections. They paid more for houses, office buildings and junk bonds than they would have if interest rates were not hugging 40-year lows. The proliferation of dollars helped to lift the stock market out of its doldrums — though the doldrums of 2002 were singularly shallow ones.
In comparison to earlier bear market lows, bargains were scarce on the ground (by March 2000, stocks were uniquely overvalued; never before had a dollar of corporate earnings been so costly to buy). At the checkout counter, inflation was well-nigh invisible. On Wall Street, however, it was — and still is — on the rise.
To hear Mr. Greenspan tell it in 1999, post-bubble damage control was as simple as cutting interest rates. He passed lightly over the possible consequences of the rates he cut. The list so far includes a bubble-like housing market (geographically localized but ferocious), an overheated debt market (this one spans the globe) and a steady depreciation in the foreign exchange value of the dollar.
Consuming much more than it produces, the United States emits hundreds of billions of greenbacks into the world’s payment stream every year — about $600 billion in 2004. The recipients of these dollars willingly invest them in American assets if the price is right. On the evidence of the dollar’s decline, the price — the available rate of return — is too low.
