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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Bilow who wrote (9793)	11/30/1997 5:54:00 AM
From: Bilow	Respond to of 18056

I found this link to a set of interesting comments on the markets and bond prices by an interest rate guru. Worth a read: pimco.com (thanks to Ardner Cheshire, Jr. over on the TXN thread:) Message 2838357 Got me to thinking an implication of the high savings rate of the "emerging market" countries. Remeber how Henry Ford said that he had to lower car prices so that his employees could afford to buy them? What if his employees wanted to save money instead of buy nice things (like we do in the U.S.)? The propensity to save eventually results in large bank account balances (and other financial assets) relative to GNP. This is essentially equivalent to the effect we have in the US when the rich get richer relative to the poor. The rich don't spend all their income, so the savings rate goes way up, and increases in the money supply results in higher asset prices rather than commodity prices. This is the usual reason for asset price inflation in the US. The rich don't need all their income, so they stuff it into the stock market. When companies at the same time have improving earnings, you get a big increase, which can sometimes inflate to a self generating bubble, as happened during the 1920s. Ravi Batra's best seller had some good charts showing that the rich people getting richer had the effect of causing asset inflation during the 20s, as well as the 80s. But a consequence of this sort of theory is that the emerging nations where the people have very high savings rate will suffer a much worse instability than the old capitalist countries will. That is, people will tend to save lots of money, driving up the prices of financial assets until stupid things start getting done with money. Bank balances, (unlike gold) is always someone's liability and someone else's asset. Either the federal reserve, or a lender had to take on debt to put money in that saver's account. When the money supply gets too high relative to the ability of assets to throw off earnings, those loans aren't going to be repaid. Thus countries with high savings rates are going to have deeper credit crunches (and also higher booms) than those with low savings rates. Now I want to chart GNP versus M2 for the last 75 years for the US and a few other countries. Maybe I'll go take a look at some fed numbers.... -- Carl