Eco+Nomics

Asset values have been rising somehow intensively, following amid liquidity injection (QE) by major Central Banks over the last few years. A controversial, yet rather effective, policy choice. And this controversy, currently, derives from the asset bubble argument. In other words, the increase in the value of assets is a bubble, and, inevitably, it will burst. Is this policy controversy well justified? Perhaps, not very well. I will not argue whether asset inflation is a bubble or not. That is not the point I am trying to make.  I will argue, however, that the rising asset values is exactly how the whole policy should work! It is a key mechanism of transmitting monetary policy to the real economy. Not only for banks, but for households, as well. If you own assets, their value rises your net value rises, too, and, hence, you can borrow more or/and at a lower cost. Most importantly, households and businesses can remain solvent while deleveraging stops, and their liabilities rise...

I have been trying to explain for a long time why stock prices in the US have been increasing regardless the troubling recovery of the economy. This morning, I was browsing the Bagliano & Bertola (2004) book (a rather comprehensive with a fascinating subject if you ask me) when I saw an equation regarding the capital gains the profits and the short term interest rate. Extending this equation can very well justify the blooming US stock exchange. Let me elaborate on that. In equilibrium state the sum of operational-profits-to-assets and the capital gains equal the short term interest rate rate of government debt securities. It makes sense: if bond rate is higher demand for these securities increases, so does their price and subsequently interest rate falls; if the returns of the government debt is lower than the sum of profits-to assets and capital gains, demand decreases, price falls and subsequently interest rate increases. The following illustrates what happens when the short t...

When I read Feldstein's article at Project-Syndicate.org  where he was expressing his rigorous concerns about the low long-term US public debt yields, I admit I begun to worry about yet another bubble crush this time due to manipulation by the FED. Shortly after that my concerns faded away... On the one hand, increasing market prices of the Government issued debt securities partly depicts the continuous, though sluggish, increase of US real GDP since 2009Q3 and the decreasing public consumption and investment since 2010Q4 (US BEA). The result of this developments of the economic climate was the anchoring of the debt concerns and the subsequent increasing trends in bond prices. These trends, finally, intensified by the FED's Maturity Extension Program and Reinvestment Policy (MEP) resulting to a further decrease of the debt yields.  Bernanke gave a speech a month ago concerning the low long-term interest rates . Shortly, he attributes the decrease of the long-term yield...