Heinz, that was beautifully stated. I am in the deflationist camp as well. The wealth effect of ever-rising share prices has been especially pronounced over the last few years. Net household investment has been negative. In other words, liabilities have been accruing at a higher rate than saving and investment:
(all charts courtesy of www.FreeLunch.com)
geocities.com
Also, as you pointed out, total home equity has been declining. And certainly more liabilities than investments have occured in household tangible assets:
geocities.com
Interestingly enough, the "statistical discrepancy", the difference between savings and investment, was negative on balance for 1949-1991, but then took on an upward bias:
geocities.com
In his early heterodox writings, Keynes noted that the difference between net savings and investment was significant since it indicated how wealth was being transferred within the economy. Is it any secret that the policies of the Fed have been, ahem, redistributionist?
On the one hand...
Institutional money funds:
geocities.com
Overnight and term repos:
geocities.com
And on the other hand...
Retail money funds:
geocities.com
Savings deposits, depository institutions:
geocities.com
The upshot, I believe, is that consumers have been using the equity markets and their homes as a form of high-yielding savings account. Except in parts of the South and California, the demographics appear to be against rapid appreciation in home prices over the next 20 years. And if the equity markets continue to underperform short-term treasuries? A return to savings? Yes, I think that the stage is set for a deflationary turn in the timeframe you mentioned. |
