> It’s hard to sustain a bubble for four years.
I don't think so. The housing bubble that popped in 2008 lasted a lot longer than 4 years.
The Bubble Question
41–50 of 95 posts
Re: The Bubble Question
#42Earlier quoted context omitted.
Deflation will be bad because nobody will by something today when they think it will be cheaper tomorrow.
This is standard excuse trotted out. Of course it is incomplete at best and grossly misleading at worst. Deflation is the opposite of inflation. One is an increasing value of currency, and the other is a decreasing value of currency. People deal with deflation every day - both in their own national economies and internationally - when your currency is rising (gaining value) why would you purchase something today when…
What people actually mean when they say "buy something" is "invest in something".
When an investor chooses whether to invest in something, the question they ask themselves is "will this make more money than the best alternative investment on offer to me?"
When the value of currency is falling, it becomes relatively more appealing to invest in things that are not currency. For example, new machines for the local factory - those machines make widgets, and with 2% inflation those widgets are worth 2% more every year.
When the value of currency is rising, it becomes relatively more appealing to invest in things that are currency, like keeping my money in the bank. Glad I'm not one of those suckers who invested in the widget factory, because of the 2% deflation those widgets are worth 2% less every year.
Me, I think our economy would be better off with more invested in manufacturing and less in financial services.
Re: The Bubble Question
#43Well, this chart focuses on tech but Robert Schiller also thinks the overall market is bubbly. I'm amazed that interest rates could have been held down so long and this is the real danger: how the heck can they ever normalize? If they do it will wreck havoc so the fed is trapped between the proverbial rock & hard thingy. Lo interest also hurts older people who rely on savings (But theyre not going to be here long any…
>If they do it will wreck havoc
No they won't. Rates don't magically rise in a vacuum; rising rates coincide with improved economic conditions or rising inflation. Or, most likely, both.
The Fed Board of Governors, unanimously, predicts interest rates of ~4% beyond 2016[0]. They certainly are not infallible, but they have the tools and the mandate to get there. Do you claim the market isn't pricing this in already?
>Lo interest also hurts older people who rely on savings
If anyone is to blame for the financial wrongdoings and shenanigans of the past 20 years, it's these same old people. I'm not terribly sympathetic. Besides, no one has ever said you're entitled to a magic return on your cash for glorified mattress-stuffing (savings account). This is a capitalist society, put your capital to work.
>I was astonished to find that they're now a quadrillion!
Notional value.
[0]http://www.federalreserve.gov/monetarypolicy/files/fomcprojt...
Re: The Bubble Question
#44I generally agree with fred that monetary policy is driving valuations. However, I think it's not quite as simple as he describes (although he may be intentionally simplifying for his audience). It's true that financial assets compete with each other for investors. So when the Fed reduces the yield on Treasurys or MBS, the marginal investor will rotate to a riskier asset. This will create a chain reaction that eventu…
>investors would rather hold scarce assets such as equities and real estate than a rapidly diminishing percentage of the money supply (i.e., cash)
Do you have any data to back this up? It is my understanding that the demand-for and holding-of cash (specifically the USD) reached epic proportions in 2008 (as happens during financial crises, hence the need to print) and remains very high.
Re: The Bubble Question
#45Earlier quoted context omitted.
Deflation will be bad because nobody will by something today when they think it will be cheaper tomorrow.
This is standard excuse trotted out. Of course it is incomplete at best and grossly misleading at worst. Deflation is the opposite of inflation. One is an increasing value of currency, and the other is a decreasing value of currency. People deal with deflation every day - both in their own national economies and internationally - when your currency is rising (gaining value) why would you purchase something today when…
>savers vs creditors.
Savers and creditors are the same people.
Re: The Bubble Question
#46I generally agree with fred that monetary policy is driving valuations. However, I think it's not quite as simple as he describes (although he may be intentionally simplifying for his audience). It's true that financial assets compete with each other for investors. So when the Fed reduces the yield on Treasurys or MBS, the marginal investor will rotate to a riskier asset. This will create a chain reaction that eventu…
> investors would rather hold scarce assets such as equities and real estate than a rapidly diminishing percentage of the money supply (i.e., cash) Do you have any data to back this up? It is my understanding that the demand-for and holding-of cash (specifically the USD) reached epic proportions in 2008 (as happens during financial crises, hence the need to print) and remains very high.
Well, to be clear, an asset purchase transaction (ex the Fed) does not change the number of "dollars outstanding" (the money supply). To be more precise in my language, investors prefer holding assets to cash at a specific asset price. The evidence for this is in the rise of asset prices (even more specifically, the rise of multiples, since underlying values change over time). The specific phenomenon you are referring to during the crisis itself is a flight to safety/liquidity, which is unrelated.
Re: The Bubble Question
#47I generally agree with fred that monetary policy is driving valuations. However, I think it's not quite as simple as he describes (although he may be intentionally simplifying for his audience). It's true that financial assets compete with each other for investors. So when the Fed reduces the yield on Treasurys or MBS, the marginal investor will rotate to a riskier asset. This will create a chain reaction that eventu…
> investors would rather hold scarce assets such as equities and real estate than a rapidly diminishing percentage of the money supply (i.e., cash) Do you have any data to back this up? It is my understanding that the demand-for and holding-of cash (specifically the USD) reached epic proportions in 2008 (as happens during financial crises, hence the need to print) and remains very high.
The key here is the context of inflation risk. In an inflationary environment, his point holds with the rational investor. Most people would rather invest in something than effectively lose money by holding cash.
Re: The Bubble Question
#48I generally agree with fred that monetary policy is driving valuations. However, I think it's not quite as simple as he describes (although he may be intentionally simplifying for his audience). It's true that financial assets compete with each other for investors. So when the Fed reduces the yield on Treasurys or MBS, the marginal investor will rotate to a riskier asset. This will create a chain reaction that eventu…
> investors would rather hold scarce assets such as equities and real estate than a rapidly diminishing percentage of the money supply (i.e., cash) Do you have any data to back this up? It is my understanding that the demand-for and holding-of cash (specifically the USD) reached epic proportions in 2008 (as happens during financial crises, hence the need to print) and remains very high.
At the same time as this tech boom, S&P 500 companies are (I'm told) busy borrowing fistfuls of money in order to pass it on to shareholders through dividends and share buybacks. That seems to suggest that investors are happy to have cash right now; it also puts the complaints about excess or wastefulness against the current SV boom into some perspective ...
Re: The Bubble Question
#49The _really_ scary thing is that as rates are moved close to 0, inflation seems to slow down. This is true both in the US (almost 0 rates, low inflation) and in the EU (a bit higher rates, but almost 0 inflation in the last few months). If deflation kicks in, then this flood of free money will evaporate very quickly.
Economics aren't discontinuous around zero. All this evaporation would either happen approaching zero or not happen. Deflation does not mean spending money is a bad idea. If I have $100 and there's 10% deflation, in a year, it's worth $110 of today's dollars(or some other number because I can't math, but in that general direction). But if a company is experiencing 100% growth and is worth $100 today, it's still a goo…
Re: The Bubble Question
#50Earlier quoted context omitted.
This is standard excuse trotted out. Of course it is incomplete at best and grossly misleading at worst. Deflation is the opposite of inflation. One is an increasing value of currency, and the other is a decreasing value of currency. People deal with deflation every day - both in their own national economies and internationally - when your currency is rising (gaining value) why would you purchase something today when…
What people actually mean when they say "buy something" is "invest in something". When an investor chooses whether to invest in something, the question they ask themselves is "will this make more money than the best alternative investment on offer to me?" When the value of currency is falling, it becomes relatively more appealing to invest in things that are not currency. For example, new machines for the local facto…
>because of the 2% deflation those widgets are worth 2% less every year.
Also, the value of your loan increases in real terms, as does the labour-share of input costs (because the workers aren't going to give back wage gains in times of deflation). Your return is hampered.
These are some of the problems with deflation.