Aggregate asset price inflation in the global economy a general review of trends in nominal wealth growth between 1900 and 2020
Abstract
The wealth/income ratio gives an indication of the size of an economy’s asset holdings relative to income, it can also be seen as a broad definition of the capital stock. It has its limitations however, as it is difficult to say if asset prices at any given point in time actually give correct indications on an assets real economic value. This is where the phenomenon of asset price inflation comes into play. Just as for consumer goods, asset inflation generally refers to nominal price increases without corresponding real changes in value. It is however far more difficult to measure, as an asset can yield profits, or non, over long periods of time, its value is dependent on future developments, it is thereby always uncertain to some degree. This can cause bubbles to inflate in asset markets as perceived value is largely dependent on the risk willingness and general optimism or pessimism of investors.
Before the actual reviewing of data and historical events, this paper lays out some general perspectives on economic relationships and economic theory. This is done in order for the
|Aggregate Asset Price Inflation in the Global Economy| Norwegian School of Economics
reader to more easily understand chains of reasoning and argumentation in later parts. The introductory part is in large part inspired by the writings of Hyman P. Minsky, especially his book titled “Stabilizing an Unstable Economy” (Minsky, 1986). In this book he conducts a general review of modern macroeconomic theory and policy. Among other things he deconstructs Neoclassical concepts and expands on the work and theories of John Maynard Keynes, which he sees as generally misinterpreted.
The review of historical trends begins in whit a look at the pre–Great-War global economic system. Followed by a review of the inflationary events both during and after the war. In this section the central role of the government in modern inflationary processes is demonstrated. Afterwards there is a quick look at the events before and after the Great Depression, and then the Second World War. In this early section there is an almost exclusive focus on West Europe and North America. This comes from the fact that they were the most developed regions of the world in this period, and therefore kept more records. There are simply not very many data available for other economies, something which partly stems from many economies not being fully market focused and capitalistic in this period.
After having reviewed the pre-WWII events, there is a brief look at the post-war international order, followed by a discussion of its breakdown in the 1970s. In the 1970s there is the stagflation and oil crises that are looked at. There is also a special focus on the UK and Japan, who both had more dramatic developments in their economies in this period than most other developed countries. In the 1980s there is the restraining of inflation and financial liberalization that is in interesting. Also in this decade the UK and Japan deviated from the rest.
When the mid-1990s arrive the special developments that have been defining recent decades start to set in. This paper focuses on the role of deflationary pressures stemming from the rapid trade expansion of developing economies, aswell as the cheapening of IT-technology as processing power grows exponentially, as some of the main drivers of low consumer inflation and low interest rates. There is also a look at how this deflationary pressure also drives growth in asset prices, and especially housing wealth, as spending is increasingly directed at relatively inelastic goods, such as housing, while for example merchandise goods become relatively cheaper. When interest rates are low the demand for housing increases further as buyers can service more debt.
There is also a look at how the building up of foreign exchange and bond reserves by Asian governments, as their currencies are rarely revalued, affect financial markets and government budget deficits, and their consequences, in other countries.
The paper is wrapped up with a brief look into the future as the thorough deconstructions of resent events are still fresh in mind. When looking into the future with new perspectives in mind it is important to remember that these insights are gained retrospectively and thereby have most value when applied retrospectively. The uncertainties about where things are moving into the future are still to a large degree as great as they have usually been before, as we learn about the past slower than present circumstances are changing.