Tuesday, July 8th, 2014

A Unified Theory of Why Money Makes No Sense Right Now

A theory as to why the rent is too damn high and a potato salad is ten thousand dollars and Uber is ten billion dollars and you'll have to buy reservations for restaurants like concert tickets and tickets for Transformers 4 in IMAX are like twenty-five dollars so that it made three hundred million dollars its opening weekend:

Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

The phenomenon is rooted in two interrelated forces. Worldwide, more money is piling into savings than businesses believe they can use to make productive investments. At the same time, the world’s major central banks have been on a six-year campaign of holding down interest rates and creating more money from thin air to try to stimulate stronger growth in the wake of the financial crisis.

Tidy theories that explain an unruly world are rarely as neat as they purport to be, but they are comforting, aren't they?

6 Comments / Post A Comment

hershmire (#233,671)

The distortion of reality is based on a story of two economies: one consists of people who have so much money it's essentially meaningless, the other of people who have so little money it dictates every single thought and action in their lives. The former can donate $1000 to a joke Kickstarter for potato salad, the latter can't afford potato salad.

Ralph Haygood (#13,154)

@hershmire: Bingo! You left the comment I came here to write.

The thing about giving rich people ever more money is that they don't actually spend it – nobody can actually spend a billion dollars – they "invest" it. They "invest" in frothy nonsense rather than invest in sensible opportunities, because there aren't enough sensible opportunities to absorb anywhere near all the money currently sloshing around, because there aren't enough ordinary people with money to buy the goods and services sensible opportunities lead to producing. That's the basic reason for the phenomenon that "more money is piling into savings than businesses believe they can use to make productive investments." In other words, all this is symptomatic of the withering of the middle class.

hershmire (#233,671)

@Ralph Haygood French pessimists are saying bad things are coming, and we all know what happened when the French got upset about economic inequality. http://www.theguardian.com/commentisfree/2014/jul/07/capitalism-rich-poor-2060-populations-technology-human-rights-inequality

scrooge (#2,697)

What it is really boiling down to in the end is that the rich aren't as rich as they think they are. Fundamentally, the asset prices depend on cash flows. Cash flows depend on people spending money. If people have no money, there is no cash flow. Therefore the asset prices eventually have to collapse.

tdp (#5,491)

@scrooge Well, they would depend on spending money, but the Fed has distorted this market for years, and are not raising rates anytime soon. That is the truth about recent inequality gains. QE is a massive give-away to the 1% and anyone else who holds assets.

gaytheist (#929)

The "Everything (except for recorded music, which is now free) Boom"

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