Let us examine the differences between the "real
economy" and the "asset inflation economy" more closely.
The real economy is typical of people's daily lives,
their income, and their spending. If there is a boom in
the real economy, wages and prices will tend to increase
and the increased demand will be met by corporations'
increased capital spending. The overheated economy
eventually brings about a slowdown or a recession,
because money becomes tight irrespective of the central
bank's monetary policies. The recession then cleans up
the system and allows the next expansion to get under
way. Put very simplistically, this is the typical
business cycle.
In the asset inflation economy, we are dealing with a
totally different phenomenon. The higher the asset
markets move, the more the increased asset prices can
create liquidity. Let us assume an investor owns a real
estate or stock portfolio worth 100 and that his
borrowings are 50. For whatever reason (usually easy
monetary conditions), the value of the portfolio now
doubles to 200. Obviously, this allows the investor, if
he wants to maintain his leverage at 50% of the asset
value, to double his borrowings to 100. With the
additional 50 in buying power, the investor can then
either spend the money for consumption (as the US
consumer has done in the last few years) or acquire more
assets.
economy" and the "asset inflation economy" more closely.
The real economy is typical of people's daily lives,
their income, and their spending. If there is a boom in
the real economy, wages and prices will tend to increase
and the increased demand will be met by corporations'
increased capital spending. The overheated economy
eventually brings about a slowdown or a recession,
because money becomes tight irrespective of the central
bank's monetary policies. The recession then cleans up
the system and allows the next expansion to get under
way. Put very simplistically, this is the typical
business cycle.
In the asset inflation economy, we are dealing with a
totally different phenomenon. The higher the asset
markets move, the more the increased asset prices can
create liquidity. Let us assume an investor owns a real
estate or stock portfolio worth 100 and that his
borrowings are 50. For whatever reason (usually easy
monetary conditions), the value of the portfolio now
doubles to 200. Obviously, this allows the investor, if
he wants to maintain his leverage at 50% of the asset
value, to double his borrowings to 100. With the
additional 50 in buying power, the investor can then
either spend the money for consumption (as the US
consumer has done in the last few years) or acquire more
assets.
