[lbo-talk] Fitch and Brenner

Mike Beggs mikejbeggs at gmail.com
Sat Feb 21 18:04:35 PST 2009


On Sun, Feb 22, 2009 at 12:32 AM, Ted Winslow <egwinslow at rogers.com> wrote:


> Mike Beggs wrote:
>
> This is not necessarily due only to manias and
>> irrational exuberance, but can in fact grow out of 'too much
>> saving/profits'.
>>
>
> How does this happen?


>
> "Saving" in a period in necessarily equal to actual investment in the same
> period, i.e. to the investment in new long-lived plant and equipment plus
> the change in inventories.

Ted, you already said this and I already replied. You are assuming I am talking about 'too much saving/profits' relative to investment, which, as I said, is not what I am talking about.

I am talking about 'too much saving' in the sense that it drives up the price of assets, financial and otherwise, beyond their value in terms of capitalised future returns. Obviously when the assets are actually bought the purchaser probably has a different implicit assessment of the likely future returns. My argument in the conversation with SA is that this can be partially driven by profit/saving rates (with these two linked with the familiar idea that savings out of profit tends to be higher than savings out of wages) exceeding the rate at which new real capital goods can be deployed at the going profit rate. When this becomes clear, expectations of the 'marginal efficieny of capital' change and assets are devalued.

This may or may not be a valid argument, but neither the accounting identity between savings and investment, nor the short-period equilibrium between planned savings and planned investment, have anything to do with it.

Cheers, Mike Beggs



More information about the lbo-talk mailing list