Sunday, December 11, 2016

theory of financial bubbles


Noah Smith - a better theory of financial bubbles.

How about starting with the idea that money doesn't vanish on its own, and assets are priced in money?

Seriously, if you have a finite stock of assets (real estate, stocks, bonds and gold), and the total world stock of money has to own all of them all the time, wouldn't that explain asset appreciation?

I'm not just mixing up real vs nominal either, because there's nothing that says e.g. the nominal price of US real estate has to go up at the same rate as the nominal price of US consumer goods.

In fact, real estate appreciating vs consumer goods (combined maybe with the aggregate value of real estate in a period vs aggregate value of consumer goods consumed per period) would be an indicator of income inequality, wouldn't it?


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