« Is There an Inflation Lobby? | Main | My God How the Money Rolls In... »

"Too Much Capital (Again?)?"

posted by Buce

I guess I have been one of those pushing the meme that there is just “too much” capital sloshing around out there, chasing too few deals, and with no completely obvious reason (aliens?). I am therefore happy to introduce Thomas Palley, proprietor of “Economics for Democratic and Open Societies,” who offers no fewer than eight alternate explanations for asset price levels. The whole piece is superb reading, a marvel of concision and exposition (link). But here are the takeaway points: 

Factor #1: increased income inequality. ...

Factor #2: increased profit shares. …

Factor #3: taxation policy. … [B]etween 1978 and 1999 top marginal tax rates fell significantly in every OECD country for which statistics are available. …

Factor #4: export-led growth. It is now widely recognized that China and much of East Asia have adopted export-led growth, a key ingredient of which is undervalued exchange rates. To keep their exchange rates under-valued, East Asian governments have been accumulating U.S.  and European bonds, resulting in lower interest rates that have in turn fostered higher equity and real estate prices.

Factor #5: lower central bank interest rates.  … 

Factor #6: credit market innovations. The last twenty years have also witnessed tremendous credit market innovation. In the corporate sector, the 1980s saw the introduction of junk bonds, and such financing is now the favored vehicle of leveraged buyouts that bid up asset prices. Additionally, the emergence of private-equity funds allows the super-rich to pool their funds and leverage them. …

Household credit markets have also changed as evidenced by home equity loans and the advent of interest-only mortgages. These innovations have liquefied homes and increased the volume of money chasing real estate assets.

Factor #7: demographic trends. Another widely recognized development is the aging of the baby boom generation, which is now in the second half of its work life. That places baby boomers in their period of heaviest saving for retirement, which has increased asset demand.  …

Factor #8: mania.…

(Hat tip:  Economist’s View, your one-stop shopping site for good econ reading (link))

Comments

My parents live in China, and I just got back from there for the holidays. For a long time China was pegging their currency (remenbi or 'yuan') to the dollar as a deliberate way to keep their exports up. Now that they've unpegged it, which is somewhat recent, not much has changed and the yuan is still about 1:8 to the dollar which is what is was before.

The comments to this entry are closed.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF