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May 04, 2015 at 08:00 PM
The New York City metropolitan area produces around $1.6 trillion worth of goods and services annually, which makes it the world’s 11th largest economy, placing it above Australia and just below Canada. The fastest growth in recent years has been centered on Manhattan and surrounding neighborhoods. Real estate prices have rocketed: at the end of 2014, the average price per square foot reached $1,459, or nearly 20% above the pre-2008 peak. The city created over half a million private sector jobs in the decade since 2004—many of them high-skilled, high-paying ones in high-tech, construction and health care.
Optimism abounds. New apartments and office towers are rising on every city block and old buildings are converted to more profitable uses. It is a Mecca for tourists and has the most expensive hotel rooms in the nation, with occupancy rates approaching 90% despite a hotel construction boom. The city wants to attract 10 million more visitors by 2021, 18% more than last year. Consumer confidence stands at 88.7 in the city, compared to 81.9 upstate.
Yet, New York City real estate is a monstrous bubble and a prime candidate to be next in line to burst.
Blame the Fed
Look at Russia. In 2013, its nominal GDP measured $2 trillion and it was the world’s ninth largest economy. Not anymore. Oil, Russia’s main export, halved in price in the second half of last year, leading to a 45% ruble devaluation. This year, its economy will measure below $1 trillion, which is good for 15th place, below Mexico and almost level with the tiny Netherlands.
Oil markets have been in a bubble stage for a while. Prices dropped sharply in late 2008, but were almost immediately on the rise again, reaching pre-crisis levels by early 2010. Annual averages were above $100 per barrel through 2013, even though production was rising steadily and world economic growth—and petroleum use—lagged behind.
The reason for this was the Fed’s monetary stance of responding to the financial crisis with plentiful free liquidity. With stock and real estate prices still depressed and economic activity sluggish, commodities proved a good place to park that cash. That was when gold reached highs above $2,000 per ounce.
The Poor Fed. It was tricked by persistently low inflation and very low bond yields. While price stability was not in danger, it kept pumping in liquidity through a variety of quantitative easing schemes in order to take care of the second half of its mandate: to achieve full employment. Labor markets were recovering very slowly, and so the Fed maintained monetary ease for an unprecedented seven year stretch, ignoring concurrent asset price bubbles. With the U.S. economy picking up steam last year, the Fed stopped its QE programs. And with the unemployment rate inching toward the pre-crisis level, Janet Yellen has now started to talk about raising interest rates.
