Thoughts on Safe Assets & Net Worth

Posted on October 22, 2012. Filed under: Uncategorized |

Stephen Williamson looks at the world here. Krugman, bubbles, sectoral shifts.

Gov’t bonds are safe assets, but mean more wasted gov’t investment in boondoggles like Solyndra.
What is the ROI of gov’t investment? (What is the difference between gov’t spending and investment?)

Company “safe assets”, or AAA rated paper (=financial products), mean more company investment, and more production in the economy.  What is the ROI of company investment?

The problem, which is not simple to solve no matter what bozo Krugman says (nor is it solved by Sumner’s NGDP target), is that entrepreneurs are not finding US investment opportunities that they are willing to risk their time & assets investing in — because they don’t see high ROIs.

Also, there has been a huge reduction in Net Worth — a key, mostly non-modeled part of “money”.  Important for buying decisions.
People who make $100,000/yr, with a $800,000 house and equity of $400,000 will, for example, go pay for a haircut every 3 weeks or so.  In the pre-2006 house price bubble times.
After a 25% house price drop, they make $102,000 (2% raise in 2 years!), but with only $200,000 in equity in the same house which is only worth $600,000.
Now they pay for a haircut every 5 or 6 weeks.
And they reduce their optional spending in other small ways, too — only 2 weeks of summer vacation instead of 3, keep the car a year longer, fewer new clothes.

The “only” way back to the (unsustainable) 1995-2006 trend is to both increase Net Worth (back to 2006 level) AND increase the expected Net Worth trend (cannot now happen).
So, no way back to that trend.

The 1995-2000 dot.com bubble & pop was hiding and partially substituting for housing bubble.  After that dot.com pop, there was an investment move to more “real” assets, like real estate and MBS & CDS & CDO based on MBS.

A “bubble” is a trend that is unsustainable, yet decisions about the future are being made as if the trend will continue.

How sustainable is the Greek gov’t spending, gov’t borrowing trend?  What is the “long term natural rate” of interest?  Economists should be talking about the sustainable rate of gov’t spending, and the market interest rate at that gov’t spending level.  Talking about gov’t influenced interest rates separately from gov’t spending/taxing rates is much easier, but too simplistic.

The Greek gov’t is not on a sustainable trend.
The US gov’t might not be, either.


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