>
> On the distinction between money and financial assets, I was with you right
> up until the end. You're right, there is a distinction between money and
> financial assets. But financial assets are just as non-scarce as money is.
> It's true that there has to be a rise in expectations of future income flows
> for the value of financial assets to rise. That's exactly what happens in
> bubbles. And bubbles, as you say, do affect the real economy. They might
> call forth more aggregate investment (i.e., "temporarily too much"). And
> they might reallocate investment toward a favored sector. But then, that
> would be an example of finance causing distortions in the real economy, not
> the other way around. I don't think we really disagree here.
I don't think financial assets are non-scarce in quite the same way as money. It's true that they take negligible amounts of labour and material resources to 'produce' and their value is not linked to these at all. But they are scarce because linked to anticipated future monetary flows. The creation of a financial asset means borrowing by the unit emitting the asset. So the supply of assets is limited by anticipated future income flows. Admittedly that is a flexible limit because, as you say, expectations fluctuate, as do required margins of safety.
I suppose you could argue that governments (at least those deemed creditworthy by the market) are in a position to borrow at will, because ultimately they can meet any future obligation by printing money. But this is a special case based on the non-scarcity of money, and in fact limited by different concerns - expectations of currency depreciation and inflation. Ultimately even fiduciary currency is scarce (in terms of its real impact on the rest of the economy) because of these factors, though the limit to which it could be pushed is unknown, and the praxis of the modern central bank and government finance has evolved since WWII to prevent those limits from even being tested.
> One point I'm dubious about is the idea of a global savings glut. Sure,
> there's been a glut of savings in China (and elsewhere), but this has been
> matched by a deficit in saving in the U.S. That's why there's been such an
> enormous transfer of saving from over there to over here. The only way I can
> make sense of the idea of "too much saving" on a *worldwide* basis is if
> global desired saving were to exceeds global desired investment. That would
> bring about a shortfall in total spending, and then (global) total income
> would decline - i.e., a recession would happen. That's exactly what's
> happening now, during the crisis, but obviously it was not the dynamic at
> work in the buildup to the crisis.
Yeah, I probably should not have used the term 'savings glut' since it is confusing and I didn't really mean what Bernanke etc mean by the term. I have been trying to work out exactly what I mean here and it's hard to phrase. Clearly ex post savings and investment are equal, and defined in Keynes' way they are exactly the same concept. So you're right to rephrase it in ex ante terms. But that's not really where I was going.
I guess what I mean is this: that to the extent that individual units save by purchasing financial assets, they are buying claims to future money, whether that be contracted in dated streams of interest plus principal at the end, on-demand (as with bank deposits), or through future sale in a secondary market, or however. To put it in Keynes' terms (from chapter 17), assets are valued partly for their expected yield (minus carrying cost, which is basically nil for financial assets), partly for liquidity, and also partly for their perceived safety (Keynes doesn't talk about risk here but probably should). It is theoretically possible for the demand for the available stock of financial assets to be such that the value is driven up such that the implicit expected yield, liquidity, safety is higher than that which in reality will bear fruit in future income streams (yield, safety) or when the asset is sold on a secondary market or redeemed with the institutional borrower (liquidity).
For this to happen, presumably the buyer of the asset has unrealistic expectations about yield, liquidity, risk. But I think it's not enough to think about this only in psychological terms. The ultimate income-expenditure flows of the productive part of the economy, on which the financial structure is based, can support only so much financial pre-commitment. It's possible for a dynamic to develop in which the size of demand for financial assets exceeds rational borrowing by productive units, putting upward pressure on the valuation of financial instruments such that the valuations get out of touch with their real potential future fruition.
This dynamic can develop regardless of individual short-period income-expenditure equilibria of the type Keynes focused on. In the General Theory Keynes neglects stocks of financial assets. In the money market he focuses on supply of and demand for the stock of money; the alternative asset 'consols' (i.e. bonds) is a residual which he doesn't look into. That's the domain I'm talking about, and thinking in the tradition of post-Keynesians like Victoria Chick and Minsky, who made this criticism/extension of Keynes.
Really though, I have to admit a lack of certainty about any of this... so it's great to have these conversations to work it out.
Cheers, Mike Beggs