http://www.economist.com/printedition/PrinterFriendly.cfm?Story_ID=2461875 (subscription required)
Drug addicts get only a temporary high. America's economy, addicted to asset appreciation and debt, is no different
WHEN The Economist sounded the alarm about America's bubble economy in the late 1990s, what concerned us most was that share prices were no longer just a mirror that reflected the underlying economy, they had become its major driving force: soaring share prices encouraged a borrowing and spending binge. Although the stockmarket is lower today, in some respects the “economic bubble” has still not burst. The value of households' total wealth (in financial assets and homes) is well above its level before share prices started to slide in early 2000—and the American economy is more dependent than ever on asset appreciation...
..America (and other economies) have been enjoying a very different sort of wealth creation: the Fed is in effect printing it. Not only has it held interest rates unusually low, but the excesses of an asset-driven economy are being fuelled by artificially low bond yields (helped by huge purchases from Asian central banks trying to suppress the rise in their currencies) and hence mortgage rates.
Stephen Roach, the chief economist at Morgan Stanley, has long argued that the Fed is a “serial bubble blower”. Its cheap money is stimulating another round of irrational exuberance. America's property market certainly looks pricey: the ratio of house prices to incomes is currently at a record high, and about a fifth above its 30-year average. Share prices still look overvalued by many measures. Undaunted, investors have regained their appetite for shares with something approaching indecent haste. A net $60 billion was invested in American equity mutual funds in January, beating the previous record, which as it happens was set in February 2000, just before the stockmarket peaked....