Monday, April 29, 2013

Jane D'Arista on Asset Inflation and Wealth Effects

Jane D'Arista, sharp as always, argues that the recovery in asset prices cannot be expected to lead to a strong recovery, in particular becuase the positive wealth effects are too small when compared to the negative distributive effects. In her words:
"By March 2013, rising asset values succeeded in filling the $12.5 trillion hole in households’ net worth that developed in 2008. Quantitative easing appears to have played a major role in spurring that recovery. As in the period leading up to the recession, some think this rapid increase in household net worth is a clear sign that monetary ease is producing asset inflation rather than price inflation. But, unlike the previous period, the distribution of these gains primarily benefits upper and upper-middle income households. The largest increases were in their holdings of corporate stocks, mutual fund shares and pension funds, while growth in the values of residential real estate and households’ equity in non-corporate (small) businesses remains below pre-recession levels. Thus, what seems a resurgence of the potential for the so-called “wealth effect” to increase confidence and stimulate demand may be undermined by the further boost this uneven appreciation in asset values gives to inequality.

The benefits of the rise in households’ net worth are far weaker than in the past because there is no clear connection to employment. In addition, the fact that inflated capital market assets held in pension funds are not easily used to back new borrowing may have limited the effect on spending."
Read the rest here.

PS: On a related topic, the negative effect that higher bond prices might have on income distribution and the level of activity, see Tom Palley here.

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IMF Programs: Past and Present

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