Eco+Nomics

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...

This post is an attempt to use my rather inexperienced and naive instinct in economics in order to respond to the allegations of the necessity of austerity and tight monetary policy. More specifically, I post  my reply to the arguments presented in "The Live arguments of austerity right now: A bestiary" by Mr. DeLong . Please, forgive me if I am wrong. The first group stresses the importance of tight monetary policy. "The Jeremy Stein argument" : Stein ignores the other element of GDP; the consumption. With lower interest rates households can more easily substitute future for current income. Secondly, risk premium is added to the risk-free rate both when the risk-free is 0% and when it is higher, e.g. 10%, and hence risky assets yield by definition higher returns regardless the level of the risk-free rate. Therefore, bank managers will always prefer more risky assets due to the higher returns they offer anyway. Thirdly, there is always the Basel Accord tha...