As I exit Pace University in Lower Manhattan where I teach, I can look across City Hall Park to the west side of Broadway to see the terra-cotta Woolworth Building, an early skyscraper built in 1913 If I gaze upward, there atop the building I can view the iconic green tower containing the nine-story penthouse that is now on the market for $110 million. But that is not the most expensive piece of residential real estate currently on the booming Manhattan market. That honor goes to the triplex penthouse condo at 520 Park Avenue on the toney Upper East Side, which is still under construction and lists for $130 million. The 30 one- and two-floor condos in the same tower list for between $16.2 and $67 million. And it is not just the very high end of the market that is a-bubbling. It was reported that in the second quarter, the average amount of time that a property remained on the market was 96 days, down 46% from a year ago, despite the fact that the number of properties on the market was up 18% year over year. The buyers were largely foreign, especially Chinese. More evidence that the bubble is expanding can be found in the global art market. In the year ending July 2014, sales of contemporary art at public auctions reached $2.046 billion, a 40% increase over the previous year. China surpassed the U.S. to take in 40% of the total sales proceeds. Not surprisingly, the number of financial commentators issuing dire warnings of an imminent collapse of the real estate and stock market bubbles increases every day. Unfortunately, most are unable to articulate a coherent case for the their forecasts because they are unacquainted with the Austrian theory of the business cycle. A notable exception is Michael Pollaro, who bases his forecast of an increased risk of economic collapse on the sharp deceleration of the TMS monetary aggregate (formulated by Murray Rothbard and myself). Pollaro points out that the year-over-year rate of growth of TMS--or what he labels TMS2--was 7.9% in August, which is down 780 basis points or 50% from its August 2011 high. According to Pollaro:
The data support what the Austrians teach – monetary inflations create booms which result in deflationary busts once the rate of monetary [growth] turns down in a significant and sustained manner. The 1995 to 1999 monetary surge, then subsequent monetary deceleration gave us the Technology Boom-Bust. The 2000 to 2006 monetary surge then ensuing monetary deceleration gave us the Housing Boom-Bust turn Credit Bust turn Great Recession. And what of the latest monetary extravaganza which began in earnest in August/September 2008, the one that has given us new all-time highs in the S&P 500. . . . Well, that monetary surge has in fact rolled over and is clearly heading down.
While arguing that growth of the money supply is “the foundational starting point to consider when determining the downside of a monetary induced boom-bust cycle,” Pollaro recognizes that it is not the only factor one needs to consider. Thus Pollaro concludes
Equally important (and often discussed) are things like the level of debt in the economy, the level of leverage in the financial markets and the amount of government intrusions in the economy and markets, not to mention the amount of as yet unresolved economic malinvestments caused by prior boom-bust cycles. All of these things serve to increase the fragility of the economy and markets. Unfortunately (or fortunately depending on your bullish/bearish view of the economy and markets), all of these things are arguably worse than in previous two boom-bust cycles. And that suggests a bust could very well ensue at a higher rate of monetary inflation. How much higher? No one really knows, not even the Austrians.
