Jim Devine wrote:
me:
One of the problems is that financial assets are, strictly speaking,
nothing but claims on real goods and services (now and in the future).
John Vertegaal:
Exactly
me:
You don't want to "double count."
John:
Also true
me:
So it's best to keep real goods & services inflation or deflation conceptually
separate from asset-price inflation or deflation. <<
John:
Huh?
Isn't asset-price inflation the result of leakages from the current income
circuit?
it's true that saving (and other "leakages," i.e., the government
surplus (when it exists), and the trade deficit = capital inflow) pump
spending power into financial markets. But most of the trades in
financial markets involve selling of old (pre-owned) securities and
equities (or money) to buy new ones. Financial markets mostly involve
buying and selling stock magnitudes, not flow magnitudes.
The first issue at hand is one of solvency, or possible clearance of the
market in real terms; for the purpose of maintaining (or if adequate
natural resources allow for this, augmenting) our standard of living.
Then, the agreement that a necessary condition for the market to clear,
is either a stop of, or replenishment for, leakages from the process.
The underlying problem of our discussion though, is your unstated
assumption (axiom), that a stock magnitude has a determinate value, and
an agglomeration of those values depicts a solvency situation ex ante.
Once one agrees however, that a stock without a return is valueless, and
I don't think anyone can disagree with that, you at least don't seem to
do so when you say "that financial assets are, strictly speaking,
nothing but claims on real goods and services (now and in the future)";
there is no other way to *determine* the value of a stock but through a
flow. So, in order to be consistent: up until that flow has taken place,
all stock magnitudes are indeterminate. It is not such a big deal that
all economic equity signifies an unresolved debt, for that's the meaning
of a _claim_; or, at least there is no reason for it to be disconcerting
to those with a social conscience.
i.e. the supplement from outside the current income circuit, to
maintain a wages=prices identity; according to Keynes's prescription to
sustain full employment?
I have never heard of any wages=prices identity. Please tell me about
it.
You don't have to take my (non-economist) word for it. Here is a quote
from a recent EconoSpeak blog entry:
http://econospeak.blogspot.com/2008/05/back-to-school-on-money-illusion.html
"Back to School on Money Illusion" by Peter Dorman:
"The way I teach it in introductory macro, there are two types of money
illusion. In Type I you are aware of wage increases but not price
increases; you think you have more purchasing power than you really do.
In Type II you are aware of price increases but not wage increases; you
think that if only prices would stop going up you would have more
purchasing power than you do. Both are fallacies, since *wages are
prices*, or to put it differently, the money you spend for the things
you buy *all* ends up as someone’s income." [and] "The disproof is no
more complex than the old, familiar circular flow diagram." (Emphasis
are mine)
The way I understand economics, the identity would instead be
prices = wages + property income + indirect taxes.
But your understanding of economics is a non-circuitist approach. The
above linear equation rests on the assumption that it is possible to
independently determine, at any point in time, the value of all of those
factors. No?
And what specific prescription of Keynes are you referring to?
Insufficient purchasing power is to be augmented with newly created
income. Keynes thought that this process, as represented by increased
investment in the capital goods industry, restores equilibrium. I happen
to disagree with the details; but since I was mainly trying to arouse
the interest of those sympathetic to Keynesianism here, that approach
had to do for the time being.
An exercised claim from inflated disinvested
assets means an excess of available purchasing power for existing real goods
and services.
if you sell an asset (disinvest from it), you can use the cash to buy
another asset, including used physical assets (like most housing).
That's what day-traders and their kin are doing all the time.
Yes, but it does not necessarily depict an overall solvency of both
domains in terms of the current pricelevel. As I see it, one of the many
economists' tasks is to point out the why of billion dollar losses in
these so-called equity markets; which cannot be be done when such values
are considered to be determinate at the time of their creation and a
solid base from which to proceed.
There has to be at least a lagged but direct effect on the
latter's prices. If so, I fail to see the logic of conceptually separating
these two domains, as subject to both inflation and deflation; for that's
exactly where the "double counting" would come in.
there's definitely a connection between the (newly-produced) goods &
services markets and the asset markets. But the nature of this
connection is best understood if we first avoid conflating the two
sets of markets.
The two are too interrelated in terms of resolving flow and consequent
value determination to be able to be looked at separately.
when asset markets have gone up (during the late 1990s & early-to-mid
2000s in the US), the increased wealth seems to have allowed increased
borrowing (using assets as collateral) and spending. This is the
"wealth effect" of macroeconomics. To the extent that people use paper
values of assets (rather than something more fundamental) and
over-leverage, this spells trouble, of course.
This spells trouble indeed, but as I see it "of course" doesn't cut it
as an explanation. The critical point is under what circumstances does
debt get resolved, and regardless of your criterion for fundamentality,
all financial assets including money represent claims or a systematic
debt. There is no such thing as _net_ equity, or a stock of surplus
value from which to draw; only resolvable debt, given that a return in
terms of augmented living standard is sought. If already satiated and
that's not what they're after; screw the bastards and confiscate through
taxes/fees, because that kind of activity has only negative consequences
in terms of full employment and attainable living standard for everyone
else.
John V
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