oldfart
Older than dirt
In a recent article Robert Schiller made a side mention of how an economy with a surplus of desired savings (i.e. in a liquidity trap, suffering from inadequate demand) could result in asset bubbles of existing real assets.
Parallels to 1937 by Robert J. Shiller - Project Syndicate
The article was basically about something else and this insight only got a couple of lines, but I find the insight fascinating.
We are in a liquidity trap with interest rates at the zero lower bound. The financial system is awash in savings people are trying to invest. Presently this is mainly being soaked up by government bonds, but the yield on short-term Treasuries is close to zero so people are looking for alternatives. Now if three year Treasuries (TIPS) were yielding a real rate of, say, 6%, then a lot of people would be content to hold them. But you don't make much progress on your retirement account compounding at 0.5% (it takes 124 years to double!), So there is a great interest in finding something, anything, with a better yield.
So where is the money going now? Obviously a big hunk is in the equities market and equities derivatives. Is the market oversold? Not as long as prices keep going up at double digit rates and there is an ample supply of new savings seeking investment. If nothing else, corporations will fuel the market by borrowing at rock bottom rates (or give up some of their hoarded cash) and buy back their own stock. This process can continue for quite a while (but not forever), and the more oversold the market, the bigger the Minsky moment when the music stops. But maybe large corporations have become so much more profitable in this depression that their capitalized profit flow keeps the ratios looking good. Is there a limit to cost savings and technology advances?
I guess some of the money is also going into real estate. With the overhang of unsold repossessed property, prices have just started a good recovery in the last year. Some money may even be going into commodities. Gold anyone?
So my question is this: When real interest rates are so low does this encourage the formation of asset bubbles, and what kind? How long will they last and how will they resolve, gradually or with a crash?
Parallels to 1937 by Robert J. Shiller - Project Syndicate
The article was basically about something else and this insight only got a couple of lines, but I find the insight fascinating.
We are in a liquidity trap with interest rates at the zero lower bound. The financial system is awash in savings people are trying to invest. Presently this is mainly being soaked up by government bonds, but the yield on short-term Treasuries is close to zero so people are looking for alternatives. Now if three year Treasuries (TIPS) were yielding a real rate of, say, 6%, then a lot of people would be content to hold them. But you don't make much progress on your retirement account compounding at 0.5% (it takes 124 years to double!), So there is a great interest in finding something, anything, with a better yield.
So where is the money going now? Obviously a big hunk is in the equities market and equities derivatives. Is the market oversold? Not as long as prices keep going up at double digit rates and there is an ample supply of new savings seeking investment. If nothing else, corporations will fuel the market by borrowing at rock bottom rates (or give up some of their hoarded cash) and buy back their own stock. This process can continue for quite a while (but not forever), and the more oversold the market, the bigger the Minsky moment when the music stops. But maybe large corporations have become so much more profitable in this depression that their capitalized profit flow keeps the ratios looking good. Is there a limit to cost savings and technology advances?
I guess some of the money is also going into real estate. With the overhang of unsold repossessed property, prices have just started a good recovery in the last year. Some money may even be going into commodities. Gold anyone?
So my question is this: When real interest rates are so low does this encourage the formation of asset bubbles, and what kind? How long will they last and how will they resolve, gradually or with a crash?