Damn the Bubbles, More Printing Ahead

Fed Chair Janet Yellen was tooting her own horn today. Yahoo! Finance reports Yellen strongly defends easy Fed policies, cites U.S. labor slack

Federal Reserve Chair Janet Yellen gave a strong defense of the central bank’s easy-money policies on Monday, saying its “extraordinary” commitment to boosting the economy, especially the still struggling labor market, will be needed for some time to come.

In her first public speech since becoming Fed chair two months ago, Yellen cited the struggles of three American workers in backing the policies of low interest rates and continued bond-buying. She said there remains “considerable” slack in the economy and job market, a sign that further monetary stimulus can still be effective.

“I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policy-makers at the Fed,” Yellen said at a community reinvestment conference.

Property Bubbles and the Perils of Easy Money

Meanwhile, China Defaults Sow Property Cash Crunch Concern.

The specter of default in China’s trust loans market is deepening the distress of property developers that also borrowed in dollars.

Part of China’s $7.5 trillion shadow-banking system, trust financing has been key to fueling the nation’s 10 percent annual growth rate in the past decade by providing easy credit to companies considered too risky by banks. After trust loans to the property, solar, coal and other industries tripled in the past three years to 10.9 trillion yuan ($1.8 trillion), bondholders are becoming increasingly alarmed as the government reins in lending, housing demand cools and the economy slows.

Defaults Unavoidable

Cracks are already starting to appear. Closely held Zhejiang Xingrun Real Estate Co. collapsed earlier this month, less than two weeks after Shanghai Chaori Solar Energy Science & Technology Co. defaulted on its debt.

While China Credit Trust Co. was bailed out in January, Premier Li Keqiang has said some defaults may be unavoidable as the government shifts policy to tighten credit.

Home prices have soared 60 percent since the government provided 4 trillion yuan of fiscal stimulus in 2008 to bolster the economy after the financial crisis, prompting companies to borrow heavily to speed construction. Now, as China abstains from providing further stimulus for the economy, thousands of apartment buildings across the country sit empty.

Home Prices Up 60% Since 2008

Home prices in China rose 60% since 2008.

How much did that contribute to official inflation statistics? The answer is 0%.

Asset bubbles are ignored when calculating inflation. Instead central banks only factor in rent prices. Yet, asset bubbles spurred all sorts of financially untenable projects all dependent on Ponzi financing of debt to pay off existing debt. The party comes to a brick-wall halt the moment Ponzi financing stops or the moment the pool of greater fools runs out. Either or both can happen at any moment.

Mike “Mish” Shedlock