The dynamics of assets, liabilities and consumption…or GDP

We seem to be overly dependent on leverage and over optimistically dependent on asset class returns for future growth. Building up asset values while ignoring the dynamics of the universe is a risk to the universe itself.  

I am working through an idea that suggests that rather than being positive, the build up of vast amounts of financial assets is a sign of economic imbalance and weakness, and not a sign of strength at all.  An economy should be a well oiled, well balanced machine, operating both in the present and the future and the build up of excess financial assets a sign of an inter temporal obstruction. 

Consumption, production, saving and investment need to be optimally weighted and distributed.  I have used US data to highlight aspects of this important growth dynamic.  This is where we are at!



The graph shows the relationship between the increase in nominal GDP and the increase in total asset values over 10 year rolling periods.   It shows a disconnect between the increase in asset values and the increase in expenditure growth (GDP) economy wide. The two should be related.

In order to grow we need consumption and investment: consumption of goods and services (consumer) and expenditure on investment.  Just looking at consumption, consumption of goods and services is facilitated from income sources (labour and capital) less saving and capital depletion (which is a transfer between savers and consumers of capital), which means the rate of growth of consumption depends on what we earn from our labour, our capital and the amount of capital we end up consuming less the income we save.  

Given that the returns on labour, and the share of the returns on labour for a large part of the population, have been falling, and significantly so for some time, there is therefore a greater dependence on the returns on capital and the consumption of capital for a significant portion of the machine. 

But, the wider the disparity in the distribution of wealth, the smaller the impact of capital consumption on GDP growth – the more you have the less you are likely to consume as a % of your overall capital.   An optimally allocated machine would pay attention to the allocation of capital to present and future consumption.

If saving is reduced, and less of what is saved in total is ultimately consumed (assets sold to younger savers), then the growth rate will likely decline.  This is also more likely if saving is channelled to unproductive investment, or if unequally distributed monetary assets become more portfolio/asset focussed. 

The problem is that the value of assets depends to a great extent on future demand.  The fact that we have large asset values supporting the economic balance sheet is not a reason to be confident, but a reason to be concerned over the path of future consumption and hence growth and the returns on capital.  

We seem to be overly dependent on leverage and over optimistically dependent on asset class returns for future growth. I think we may have dynamics in hand that will limit future asset value appreciation and which will also limit the amount of growth that can be driven by leverage, given that leverage is dependent on asset values and the returns to both those investment capital and human capital. 

Capitalism is consuming itself.  The machine is not properly balanced between current and future consumption/production, saving and investment, and worse, these imbalances have been accentuated by consumer debt (a symptom of the imbalance) and global structural economic imbalances (that may well have impacted the distribution of income and capital). 


And besides, even with more efficient distribution of income and capital, there is a limit to the growth rate of consumption.

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