Getting out of the Jackson Hole

The Best political economy I have read on current crisis insofar.

« The Fed sees reasonably strong growth in the US, but weak growth everywhere else. So the monetary policy committee of the Fed, which meets on 17 September, is in a dilemma. Should it start to raise rates in order to ‘curb’ any possible future inflation as labour markets get too ‘tight’ and also restore control of credit markets; or should it wait until the rest of the world catches up or stops sliding back? »

Michael Roberts Blog

After the market turmoil last week, global stock markets have quietened down for now, although by most measures of stock price against corporate profits or earnings, stock markets are still ‘overvalued’.  Take one of the most perceptive measures, the ratio of the stock market value of the major companies in the US (S&P-500) versus previously booked profits (‘trailing earnings’ reported), i.e. the price to earnings ratio.  If we adjust that ratio for inflation and average it on a ten-year rolling basis, then the ratio is around 23, or some 25-30% above the historic average (see graph below).

US PE

So the stock market crash may have another leg yet.  That would be especially likely if the US Federal Reserve finally carries through its plan to hike its basic interest rate for the first time since the Great Recession began back in early 2008.  This basic rate is virtually zero and the Fed…

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