Michael Brun wrote:
>Some possible explanations for the discrepancy beween US GDP growth rates
>and Stock Market average growth rates:
>
>(1) Since financial flows are more global than actual production, couldn't
>US stock market averages (especially of elite "blue-chip" shares) grow
>faster than the US GDP because of faster GDP growth elsewhere? E.g.,
>before the recent crisis, the money could have been made in Asia, where
>growth was around say 8% instead of the US 3%, but then invested in US
>stock markets because they're viewed as safer or more prestigious, giving
>the intermediate stock average growth rate of 6%.
What matters is profits, wherever gained, and there's no secular uptrend in the profit share of GDP. I just played with a couple of starting years, 1929 (the beginning of the U.S. national income accounts) and 1950, and a several canned Excel trendlines, and it's flat to slightly down.
Do you mean US profit share of US GDP or of world profit share of "Gross World Product"? Or in general, whose profits as a share of what? As long as money from outside the US is invested in US stock markets, it seems to me it's not just US profits and US GDP that counts. Consider, by way of example, a highly profitable Singapore firm deciding to "park" a certain proportion of its earnings in a portfolio made entirely of US firms (or, to match the GDP definition as opposed to the old GNP, firms producing entirely in the US). The Singaporean firm's action will tend to bid up those stock values, and thus raise returns in the form of capital gains, even though US GDP remains unaffected. It's at least plausible, no? I'm not asserting that's what happened because I don't have any numbers.
A related but somewhat different question: Regardless of profit rates, couldn't the opening of borders alone lead to a medium term bubble in US stock markets if there is a gradual net influx of foreign money away from other stock markets overseas? Although the tendency, at least in the short term, for markets all over the world to move together would seem to refute this idea, I can't be brought by that alone to abandon it for the medium term.
>(2) How about a "disposable 'market investment' income" concept: what's
>left over after taxes and consumption? If the marginal propensity to
>consume declines with income and the marginal tax rate does not increase
>enough to compensate, then a given percentage increase in income could lead
>to a greater percentage increase in stock market investment. Of course,
>the trend to greater inequality in income distribution would exacerbate
>this tendency beyond what aggregate income figures would lead one to
>predict.
But the consumption share of GDP hasn't been this high since 1940. There's no declining marginal propensity to consume at the aggregate level over time. Also, indiivduals have been, on balance, heavy net sellers of directly held stock for decades. The buying that's driven the market in the 1990s comes from mutual funds and corporations themselves, buying their own stock and that of takeover targets.
Thanks. You've taken care of that idea! So maybe I should be talking of the relation between firm income and firm propensity to invest in production (as opposed to putting money in the stock market) rather than personal income and personal propensity to consume. But according to standard Keynesian models, aggregate income is not a relevant independent variable determining aggregate investment; the causality is the other way around. I don't know the relation between firm income and aggregate income; I thought it had been increasing somewhat; but if not, if it's pretty constant, then one more or less can proxy for the other in this line of reasoning. So the link from income to stock values might be even weaker than I thought.
Michael