Wednesday, October 28, 2009
Is the economy addicted to asset-price inflation?
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?