Wednesday, Oct 28, 2009

Is the economy addicted to asset-price inflation?

PIMCO / Bill Gross: Investment Outlook

Stocks, other assets, profits and nominal GDP used to rise together. From about 1980 we've had the cult of markets, leverage, securitisation, derivatives and the belief that wealth creation is a product of asset-price inflation. Before then economic growth was a bit higher than asset-price growth but since then, apart from recessionary lulls, that has emphatically reversed, and the US, UK etc. have hollowed out their productive futures in exchange for paper. Overall, since 1956, asset prices in the US have 'outperformed' nominal GDP by 1.3% p.a., or 100% compounded over that period. But what will fall into the vortex now that leveraging has given way to deleveraging? Has it become necessary to support asset prices to prevent GDP from sliding? And have recent asset rallies peaked?

Posted by icarus @ 07:11 PM (1163 views)
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1. chrisa said...

'and the US, UK etc. have hollowed out their productive futures in exchange for paper.'

Another way of saying that the US and UK and others have been suckered by the belief in Globalisation to lose their manufacturing base to China and the far East. Sold to their populaces by political criminals whose Agenda was to undermine their own countries to allow China to become the major power of the 21st Century. In its place they gave said countries a ponzi economy based on ever inflating house prices and celebrity culture as a distraction.

Wednesday, October 28, 2009 07:49PM Report Comment

2. shipbuilder said...

From the 1980s you say? That's news for anyone who thought this was a recent phenomenon or a single party problem. Successive governments of all types have failed to address this imbalance and while I'm sure others will beg to differ, I doubt many politicians were even aware of it, dazzled as they are by scientists, economists et al. - anyone brandishing the requisite numbers and graphs to tell them things are OK. I think anyone hoping for any government, anywhere, to reverse this trend is deluded.
I think people criticising the government specifically are living in a past where national interests mattered. There are the higher interests of global corporations to be served now and they care not for borders or local taxes, nor local social or environmental problems, nor unemployment or asset prices here, or anywhere else because with the globe as their market, they always win somewhere and it does not matter where that is. The UK could go down the toilet tomorrow and it is of no concern - UK politicians will take their places on boards, their jobs done, graduates and labour will come from somewhere else, probably cheaper, markets with more potential will be exploited beyond the west. This is why the conspiracy theories about environmentalism and population destruction are wrong in my opinion - there are still vast untapped markets for the mega corporations to move into before they are done with their current slash and burn, growth at all costs and wealth funnelling economic model.

Wednesday, October 28, 2009 08:18PM Report Comment

3. icarus said...

What thoughts on my headline question, or the quote from the article: "Asset prices (have become) embedded in the...growth rate of the economy. If they don't go up economies don't do well" (obviously a statement of fact as he interprets the facts, rather than a desirable state of affairs), or "policymakers...recognise that asset prices must be supported in order to generate positive future GDP growth...(because) the virus has infected too many parts of the economy's body, for too long, to go cold turkey" - presumably because he thinks asset/wealth deflation means recession via low aggregate demand (and that would be because real incomes have been stagnant for a long time because of the lack of a growth motor provided by industrial and commercial investment, so demand depends on credit and willingness to borrow, which in turn depend on support for asset prices - all aided by dollar dominance allowing the US to run up huge current-account deficits).

Wednesday, October 28, 2009 10:09PM Report Comment

4. shipbuilder said...

I'm not sure what he's saying in the final paragraph of the article, so please correct me if i'm wrong. QE and China's currency fixing have artificially compressed interest rates in order to support asset prices and avoid GDP collapse. Given low interest rates, the best a bond investor can expect is keeping out of deflation or move into riskier stocks, where the risks outweigh the rewards. Also, despite the low interest rates supporting asset prices, future rises in asset prices are unlikely to provide a high return.
So what does this mean - low interest rates for the foreseeable future and permanently inflated asset prices?

Wednesday, October 28, 2009 10:49PM Report Comment

5. shipbuilder said...

Essentially, as we know, GDP growth has been a fantasy, not based on increased productivity and therefore increased real wages, but on increased credit both fuelling and depending on inflated asset prices. So where do we go from here? If interest rates can be kept permanently low, but asset prices will not see significant growth, where will GDP growth come from if we haven't seen any 'real' growth for the last couple of decades??

Wednesday, October 28, 2009 11:01PM Report Comment

6. icarus said...

shipbuilder @4 - he seems to be saying that both policy rates and the rates that are influenced by QE and China's exchange-rate policy have those effects. If he's right the low bond yields would be a relief to governments, especially the UK's, but we'd be locked into a zombie economy.

Thursday, October 29, 2009 10:36AM Report Comment

7. Dunkindogdo said...


China does not have all the grossly complicated tax, planning & employment laws that the UK has, which saddle UK businesses with a huge burden in costs, particular in terms of labour.

This is why we cannot compete, not because politicians sold off the nationalised industries, which had been in terminal decline since the 1950s, were grossly old fashioned, utterly uncompetitive, and not to mention a huge drain on the tax payer because they were losing money hand over fist.

If we stil had persisted with militant unionistation, and the dreadful nationalised lame ducks, the UK be even further in the red than it is now.

Thursday, October 29, 2009 10:57AM Report Comment

8. mountain goat said...

Interesting article thanks. I think what he is saying is that GDP growth since 1980 has been achieved by asset appreciation and this will continue but at a slower pace. So we need to expect lower GDP growth and not a V-shaped recovery. If the Fed backs off we end up with out of control deflation. So 0% IR will be continued until about 4% GDP growth is achieved.

If he is right this is not good news for house prices though, because as he points out the Fed (i.e. BoE) can't let asset prices fall hard because this will kill GDP growth. So 0% IR here to stay...

Thursday, October 29, 2009 02:11PM Report Comment

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