Nobel Prize Winner Robert Merton Slams Fed for “Negative Wealth Effect” Policies

Nobel Prize winner* Robert Merton and Arun Muralidhar have charged ZIRP and QE happy central banks with economic malpractice. One of the main justifications for low interest rates is that they create a “wealth effect” by elevating asset prices. People allegedly feel richer and spend more, stimulating growth.

As we’ve pointed out, the first central bank to try the bright idea of lowering interest rates to spur consumption was Japan in the late 1980s. We know how that movie ended. Japanese banks and companies engaged in what was then called zaitech, or speculation, funded by being able to borrow 100% against urban land.** The result was to massively inflate already-large commercial and residential real estate bubbles, and to funnel Japanese cash into largely misguided and/or overpriced foreign investments.

Merton and Muralidhar charge that investors are smarter than central bankers and understand the first rule of finance, that what matters is free cash flow. As one wag put it,

We’re from Darien!
We’re invincible!
Living off the income
Never touch the principal

Super low interest rates lower incomes to asset owners, producing what they describe as a “negative wealth effect”. The Fed seems to think that retirees and others who live mainly off their assets will happily eat their seed corn, um, liquidate some of their capital gains to make up for the loss of income. Instead, people in that position who come up short most often curb spending.

Since the economists made their case in Pension and Investments (hat tip Pwelder and EM). It’s a curious choice of venue (one would assume Merton could easily get a comment in the Financial Times) unless the authors wanted to road test their argument before taking it to a bigger audience. Key sections:

We have each separately made the case that asset pricing theory and investment practice for funding retirement should focus on how much income the member has in retirement instead of the amount of wealth at retirement….

What does this have to do with monetary policy? Your recent editorial (“Damage of low rates,” P&I, Jan. 26) discusses the effect of low rates on pension funds, and we describe why those in charge of monetary policy should consider an additional cost/benefit analysis of policy as it relates to pension and retirement security.

A straightforward approach probably familiar to most chief investment officers is that the amount of retirement income that can be purchased by a given value of assets depends on interest rates. A higher interest rate implies that more income can be purchased for the same wealth (i.e., lower liability value for DB [defined benefit] funds). Alternatively, lower interest rates mean that more wealth will be needed to purchase the same income stream. So, with policies to change interest rates, central banks change the price of retirement income. One of the goals behind quantitative easing in the U.S., Europe and even Japan has been to pursue the “wealth effect” — pumping up the value of assets to make individuals richer, thus getting them to spend more and, thereby, prevent deflation. Furthermore, the belief that lower long-term rates leads to more investment has led the Federal Reserve, and now the European Central Bank, to depress long-term interest rates. However, if decision-makers for institutional and retail pension funds and insurance companies are not focused on wealth (as in the standard portfolio selection model), but instead on retirement income as measured by funded status, then the outcome desired by central banks might not be realized. By reducing long-term interest rates, the price of the same retirement income level goes up and the price of other assets measured in terms of income units declines — i.e., relative wealth (funded status) declines and investors are actually poorer, thereby experiencing a negative wealth effect. In a perverse way, lowering long-term rates has dramatically increased the liabilities of DB funds in the U.S., U.K., Canada and Europe (as noted in “Damage of Low Rates,” P&I, Jan. 26), and has lowered funded status dramatically in 2014. Lower rates also raise the cost of the deferred annuity that targets a specific retirement income affecting DC [defined contribution] investors..

Lower relative wealth means investors need to save more to improve their funded status, especially where regulations are strict (i.e., divert funds from the business to the corporate pension fund or raise contributions for DC investors), and it results in less consumption and investment, and may not remove the deflationary overhang. Alternatively, investors could try to earn a higher return to improve their funded position. However, from 2003 to 2007 — before the financial crisis — funded status declined for most U.S. funds due to declining long rates, and the data shows it possibly led to an increased allocation to risky assets, which ended very badly in 2008….

An alternate, more sophisticated approach to explaining why QE may not work to stimulate aggregate consumption is, perhaps, because the demographic mix of the U.S. (and most parts of the developed world) has shifted toward older people. Unlike 30 or 40 years ago, the enormous baby boomer generation, and even retirees, are much wealthier (including human capital) than in the past, and they are wealthier than current generations earlier in their life cycle. Since the older cohort would surely assign higher importance to funding retirement, the funded status effect is more pronounced. When long rates go down, baby boomers start saving more instead of consuming, driving asset prices even higher (especially for risky assets, but not housing assets which they already own). So the wealth effect does not lead to an increase in consumption and, potentially, has the opposite outcome…

We believe it is imperative for central banks and academia to examine this perspective immediately and develop a new monetary policy toolkit, because it would be tragic if the central banks’ attempts to improve economic security with the current orthodoxy leads, instead, to less consumption, less investment and greater retirement insecurity.

This is blunt by the standards of Serious Economists.

One of the ways the perverse effects of QE and ZIRP are playing out is via the devastation of life insurers’ balance sheets. For instance, the Financial Times describes how German savers may be hoist on the petard of central bank deflationary policies:

Tucked away in the International Monetary Fund’s latest analysis of global financial stability are a couple of pages of disturbing warnings — not about the crisis in Greece, nor China’s waning growth. This time, the bogeyman is Europe’s, and particularly Germany’s, normally low-profile but now high-risk life assurance sector.

According to the IMF, the failure of one life assurer “could trigger an industry-wide loss of confidence”, that in turn “could engulf the financial system”…

Lebensversicherungsgesellschaften — or life assurers — have been the bedrock of Germany’s long-term savings culture for two centuries, offering attractive guaranteed returns to millions..

Some of the challenges are common elsewhere — most obviously, the persistently low interest rates that constrain investment returns. But there are idiosyncratic pressures in Germany. A predominance of guaranteed long-term policies is doubly difficult for life insurers to sustain.

First, guaranteed rates far outstrip today’s meagre investment returns. Although new policy guarantees are capped by law at 1.25 per cent, the long tail of policies — which typically extend for 30 years — means average guarantees are still running at 3.2 per cent. Compare that with the 0.14 per cent yield on 10-year Bunds and the tension is becomes obvious. Second, there is a big mismatch between liabilities (due in 20 years on average) and assets (tied up for more like nine).

This situation is likely to worsen further…At the same time, assurers’ ability to grow their way out of trouble is constrained. New policy holders find the low level of guaranteed returns unappealing…

Regulators have sought to ease the pressure by instituting a Zinszusatzreserve, or ZZR: a requirement to set aside funds to meet long-term liabilities. Had this been introduced in the good times, it would have been sensible. Today, though, it is counterproductive. Because many assurers have had to cash in investment gains to fund the ZZR, it acts as a drag on longer-term performancee….

A Bundesbank stress test found that a third of the sector would be short of capital in the kind of extreme interest rate scenario that is already emerging.

“This might not be a 2008-style crisis in the making. But it could still hurt.”…

Germany is an extreme example. But it is not unique. From Norway and the Netherlands to Japan and Taiwan, similar issues are building.

The problem with saving is that they are someone else’s financial liability. Policies that focus on promoting savings rather than employment levels or incomes run the risk, as in the German case, of creating “savings” that turn out to be illusory, in that there aren’t enough reasonably sound parties who can provide the investment opportunities, as in liabilities. And the situation is getting worse not just by virtue of extreme monetary measures, but also by efforts to make the banking system safer without actually reducing risky product creation overall (as in prohibiting or severely restricting certain types of activities). The effect has been to drive more of this risk-taking into the so-called shadow banking system, and more and more, into retirement assets. For instance, in the US, regulators have put limits on how much leverage they will tolerate in acquisition lending. Private equity firms, which were already in the business of sponsoring debt funds to help finance buyouts, have expanded those activities as banks have been forced to pull back. And the biggest investors in private equity are…drumroll…public and private pension funds, with life insurers another major source of funds.

While Merton’s critique is welcome, it also comes late. The Fed, having helped mire the economy in low growth, clearly wants to raise interest rates but seems to have no idea of how to extricate itself, save by increasing them very very slowly, even assuming they dare begin. Can Merton help central bankers get out of the corner in which they’ve painted themselves?

* Yes, we recognize that this is a soi disant Nobel Prize…
** I am not exaggerating. I saw this happen routinely at Sumitomo Bank. And recall how inflated Japanese real estate was back then.

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  1. MikeNY

    Yes. My personal experience is as the authors describe: worried about low interest rates and having enough for retirement, and cautious about a stock market prone to manipulation and serial bubbles, I have chosen to save MORE. Unintended consequences and all that. Props to Merton and Murahlidar.

    1. fresno dan

      I think its something that has been said by a number of NC commentors.
      I know part of my retirement thinking was going to be 5K annually from treasuries that was to be for a yearly trip. Well, not even close – so no trips….
      And every year, my health insurance becomes more like an admission ticket to Disneyland – all it does is allow you entry (i.e., to the hospital) – if you want to ride, that is a another separate charge…

      1. Mark Alexander

        I know part of my retirement thinking was going to be 5K annually from treasuries that was to be for a yearly trip.

        That was pretty much my plan when I started saving like crazy 10 years ago, except that the interest was going to be used for food and taxes and utilities and other basics. But with treasuries on a race to zero, the plan changed to: just save like crazy, and not expect much in the way of dividends.

  2. cnchal

    In Ben Bernanke’s second blog post “Why are interest rates so low”, I found the circular logic quite humorous.

    When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings.

    I was concerned about those seniors as well. But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative. A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments.

    This is Vietnam level thinking. We had to destroy the village to save it. I think Ben rather enjoyed throwing seniors under the bus, and it was done to see if the back tires and suspension were compliant enough to roll over them, without sending the bus, which presumably Ben’s assistant was driving, into the ditch, where it ended up anyway.

    How is that return on capital working out now?

    Economists. Fire them all. They are the useless eaters.

  3. RAK

    The Fed can only do so much. The current political atmosphere is only conducive to monetary “stimulus”. In the US, Congress has been ordered by their patrons to only stimulate the economy via bank lending. Any fiscal stimulus is strictly forbidden. The best we could hope for currently is maybe a return to a lower payroll tax and an increase in military spending.
    Paul McCulley has written about cooperation between monetary and fiscal authorities. In the absence of fiscal authority cooperation, the slow muddle of the monetary authority remedies is the best we can do.

    1. susan the other

      If this were an experiment it would prove that monetary institutions cannot ever run governments. That in fact, both in the US and the EU, the financial crisis is/was driven by the stubborn belief that money can run the world. I say “was” because I think this experiment is over. Without fiscal there is no monetary. But, alternatively, without monetary, there is always fiscal. So we really bet on the wrong horse. And this post sounds alot like the one on the Saudis oil price war. A war against the stupid money. Which skews and then destroys demand. Like all the private equity robber barons. Bernanke is probably right, as far as the Fed’s ability to really accomplish anything goes. But the whole thing is so ass-backwards that only legislation will work now. If we had not gone for profit uber alles, we’d still have an economy to work with. And it wouldn’t take another 10 years of foaming the runway.

  4. financial matters

    This is an interesting problem. The financial crisis seemed to peak when money market funds were threatened and this also threatened the stability of other basic funds such as pensions and life insurance. We bailed them out but now the illusory nature of that seems to be coming home to roost. As Rob Parenteau has also recently pointed out now these policies are starting to backfire.

    I think we need to get away from 8-10% thinking for these types of funds. I think the Fed and other central banks could safely provide liquidity to these products in the 3% range. Also good employment strategy would provide a more secure foundation for this growth rather than looking at a stock market number.

  5. Steven Greenberg

    The way out of this mire is for the federal government to massively increase stimulus spending at the same time the Fed starts to boost interest rates. What are the chances that politics will allow us to follow that solution?

    The crash has taught me a valuable lesson for managing my retirement income. I used to follow a policy of maximizing my dividend income. I now realize that history says that a spending level of about 5% of your principle will allow your principle to last just about forever. I am barely able to manage that level of income now, but I do invest in companies with rising dividends, so my income is slowly rising since the crash, although my principle is rising much faster. With higher dividend rates in the future, my income will rise, but my spending won’t. I’ll maintain the 5% spending level, and reinvest the excess income.

    1. SpringTexan

      Amen on that is the answer! Unfortunately, as you state, they won’t do it. But it is perfectly possible.

      1. susan the other

        I seemed to me that they made that choice. They quit QE so they could keep interest rates ultra low for the long haul. And if interest rates are zirp, then making 2% on some investment isn’t so bad. And we wont go Minsky for 20 years and by that time we might have all new laws, and all new energy sources; maybe even a cleaner environment, scientific breakthroughs (I confess I believe in technology), and etc.

  6. GlenO

    Interesting how all the seemingly misguided policies of mainstream economists always seem to only benefit those at the top.

    1. fresno dan

      Pure coincidence!
      AND those capitalists just understand how efficient and effective those markets are!
      And so do those central bankers!!!!
      (Which is why those capital allocating geniuses had to be bailed out with TRILLIONS of dollars….uh, so they could continue their soooooo insightful allocation of capital….)

  7. Dan Lynch

    Agree with the author that QE (combined with deregulation) has encouraged speculative bubbles, but he lost me on ” the enormous baby boomer generation, and even retirees, are much wealthier than in the past.

    Well I don’t know what he is comparing to but a lot of baby boomers are in a world of hurt for retirement, having lost most of their retirement savings in various layoffs. For most working class Americans, their biggest asset is still their home, if they are lucky enough to have a home.

    1. Yves Smith Post author

      Boomers are as a class wealthier than “in the past” (say a 15 years ago) due to:

      1. Aging. Age cohorts get wealthier over their lives.

      2. Recovery of asset values after the crisis. Stocks and bonds are higher than before the crisis. But housing overall is only back to where it was as of the early 2000s, unless you are in a hot market like San Francisco or Washington DC. And real estate is always and ever local. That means his statement depends on how long a time frame you consider.

  8. flora

    “Super low interest rates lower incomes to asset owners, producing what they describe as a “negative wealth effect”. The Fed seems to think that retirees and others who live mainly off their assets will happily eat their seed corn, um, liquidate some of their capital gains to make up for the loss of income. Instead, people in that position who come up short most often curb spending.”

    Yes. Yes. … and…. yes.

  9. RUKidding

    I’m a boomer, who is lucky enough to have a good paying job with benefits. Most of those I know – who are fortunate enough to be in a similar position – are working longer, most of us until at least 70, if not longer. And spending MUCH less these days. Well I always was frugal and lived more simply than most, but I see my relatives and colleagues saving more and more and planning to work much longer. As this cohort retires, I believe they will spend much less and be more frugal than retirees a generation ago.

    Citizens who have any common sense are leading much more frugal lives. What else can they do? And more citizens have become better educated about how to manage finances in retirement. They’ve witnessed some friends and relatives who are poverty-stricken seniors barely getting by. What’s not obvious about this? Because we are making almost nothing on our investments, the obvious answer – if possible – is to save even more and just have at least a larger “bank account” (or whatever) in the hope that it will see us through to the end.

    1. susan the other

      Seems to me they can do a lot else. They can issue food cards to all retirees, all students, and all unemployed. They can do single payer Medicare for All, and thus create jobs for many. They can put their fiscal powers to work and build a good network of trains and other infra we need for the future. Sustainable jobs, you know. Everything is based on “the budget” now, and it’s an idiot’s game. We should be basing everything on what we can actually do. Which is alot.

    2. Ed S.


      Interesting observation — I’ve speculated over the last few years that all of the noise around austerity – the idea of “reining in entitlements” (e.g. Social Security, Medicare, etc) has a perverse unintended consequence: since the government will not honor its commitments and we’re responsible for ourselves, the natural reaction is to “pull in our horns” — to save more and to spend less.

      I have only a passing familiarity with China but from what I’ve read despite the “communist” in the name, it’s piratical capitalism in reality. Individuals are expected to fund education, health care, and retirement personally. Which means that any reasonable person will consume as little as possible. So transitioning to a “consumer oriented” economy may be impossible. And the US is transitioning away from the consumer oriented society (except for the top quintile).

      I wonder if a great deal of the post-war boom was not only facilitated (in the US) by manufacturing pre-eminence but also by the fact that the government was supporting citizens through inexpensive education and preventing destitution in old age (colleges and Soc Sec) and many companies provided health coverage and pensions — both of which emboldened individuals to take financial risks. Today, since you’re on your own, yo’d better be prepared for the worse. Talk about inefficient and misallocation of resources!

  10. Trish Flanagan

    Low interest rates are not being used to create a “wealth effect”. That train long ago left the station. While asset prices may have been lifted and supported by low interest rates, only those in a position to cash out of their assets at high prices either by selling or borrowing against their assets would have experienced this wealth effect. As asset prices fell or stabilized, this wealth effect from low interest rates disappeared. Low interest rates are being used to prop up demand in economies whose economies have shifted from wealth creation (production) to wealth extraction (financialization, private equity buyouts). As economies have moved away from wealth creation, wage earners incomes have been squeezed and access to easy credit has been a buffer to hide the fundamental shift in economic reality. High private debt levels are now being used to extract more wealth from those who can afford it least and no these interest rates are not the the low interest rates of which you speak.
    Some of the assumptions advanced in this article, I find difficult are
    1. The assumption that savings are somehow virtuous and should be rewarded by a return that doesn’t diminish their savings. The reality is that many hard working people have no “savings” and many with savings have savings through luck or unsavoury activities.
    2. The assumption that savings create credit and not the other way around.
    3. And the assumption that the risk free return on savings should be anything more than zero.
    4. The assumption that retirees as a class have been most negatively affected by low interest rates. I think I know more retirees that have been able to create a nest egg from their homes as they sell and downsize to homes more suitable to their needs than retiree struggling to make ends meet on risk free investments.
    5.The assumption that some assets such as homes are overpriced. One need only look at the disconnect between valuation for insurance purposes and market value to realize that this is not the case.
    I would like to see more articles on what will happen to the financial sector, to the private sector, and retirees who rely on risk free investments when those pushing for higher interest rates finally get their way. I think that no interest rate will compensate for the risk premium that will be required to protect against financial losses.

  11. PJKar

    Nobel Prize winner* Robert Merton and Arlin Muralidhar have charged ZIRP and QE happy central banks with economic malpractice.

    Well I guess if there is anyone who knows about economic malpractice it is Robert C Merton. He was a partner in LTCM whose own form of economic malpractice almost brought the global finance system to its knees in 1998. Ironically it probably would have done so had the Fed not intervened.

    Some people just have no sense of gratitude.

    1. Yves Smith Post author

      Merton has had the good grace, unlike LTCM founder John Meriwether, as well as the other LTCM Nobel prize winner, Myron Scholes, not to start post LTCM hedge funds.

      Meriwether started another that cratered, and was remarkably able to raise funds yet one more time and drive that fund into the ditch too. Scholes did that only one time.

  12. Lambert Strether

    Am I right in thinking that low interest rates screw municipalities with higher-rated (but once low) bonds, encouraging asset stripping and — this is the fun part — increased human suffering through lack of services? And, if so, what’s not to like? Or do I have the finance part wrong?

    And then there’s the other big question: With rates at historic lows, why the heck aren’t we borrowing for infrastructure? We could get away with this even without minting the coin? The elites disinvesting the country, or something? Or do I have the finance part wrong where too?

    1. NotTimothyGeithner

      Atrios use to beat this drum pretty regularly.

      I think part of the problem is an uncreative elite. Obama’s line about not paying people to dig ditches demonstrates this problem. I’m confident it was you pointed out ditches could be used for underground power lines, carbon sinks, rail improvements and so forth, but Obama and our political elite can only operate through a limited scope imposed by vested interests such as highway construction outfits. They aren’t ready to win those contracts, and they don’t want the pie to go to competitors.

      The elites don’t know how to spend the money because they don’t have any vision. Hillary is on a listening tour. She’s only had designs for at least 16 years and announced her status as co-President in 1992, and her best idea was to ride around in a van doing her impression of the Queen having tea with vetted commoners.

  13. Jim Young

    I still marvel at the Oct 23, 2008 exchange between Paul Salmon, Paul Samuelson, and Robert Merton (as well as Robert Solow) at

    Part of which grabbed my attention in TIPS:

    …Merton described his portfolio as “almost perfect — you just have to get short.” The Harvard economist, who won the Nobel Prize in economics in 1997 for his study of stock options, later revealed that the bulk of his portfolio was in a Global Index Fund, Treasury Inflation-Protected Securities, and one hedge fund. He said he had been invested in a commercial real estate fund until recently, but dropped that when its value rose too quickly for his comfort…

    1. cnchal

      “A lot of wealth is gone, and there is no reason for it to come back.”

      That was the summation of Robert C. Merton, one of three Nobel Prize–winning economists who joined intellectual forces last week at the School of Management’s three-day Future of Life Cycle Saving and Investing Conference. Merton, along with Robert Solow and Paul Samuelson, took questions about the impending retirement savings crisis from PBS NewsHour correspondent Paul Solman at an October 23 after-dinner panel discussion, What Retirement Means to Me, that will be aired in part on the public television program.

      I believe this is a permanent decline,” said Merton. “I do not think this is a liquidity event.

      Waaayy ahead of Larry Summers in stating the obvious.

  14. craazyman

    we were saying this in the peanut gallery 5 years ago. they’re finally catching up.

    holy smokes, it’s amazing how lost they all are. a wandering band of straggling mind knaves in torn burlap shirts with bags of mental junk piled in sacks tied to bony donkeys nibbling patchy tufts of dried theory grass in the parched and lifeless dirt of dogma. we should hire an airplane and drop a few cannisters of food and bottled water. wow. It could be a human rights mission! Somebody here must be a licensed pilot. not me. that’s for sure.

    1. NotTimothyGeithner

      They are growing worried that the under 45 crowd is poor and likely to stay that way. I saw a commercial from a realtors lobby telling Americans it’s time to be bold and take out a 30 year mortgage. 30 years is insane. The army let’s you out with half pay after only 20 years.

      The wealth effect means very often there won’t be buyers when it’s time to sell excuse young people aren’t saving anything with which to buy or take out a reasonable loan.

      1. flora

        Amazing isn’t it. Capitalism requires stong markets, which require a sound customer base. Yet the Powers that Be have embraced their inner Hobbes and decided that austerity for the many is just the ticket.

    2. craazyman

      Holy High Finance, craazyman! This econ dude is on to something. If interest rates were higher, you could afford a pair of $1000 Edward Green shoes…and a matching man purse!!!

      And you could pay cash – you don’t need to take out a loan! WTF? That’s like magic!!!!

      I sure am glad we got economists around to explain these things to us.

      1. craazyman

        where have these guys been? It’s like Rhianna’s lyrics:

        Where have you been,
        All my life, all my life
        Where have you been, all my life
        Where have you been, all my life
        Where have you been, all my life
        Where have you been, all my life

        Where has this dude been for the last 5 years? Where have all these dudes been — where they see things that aren’t real and see almost nothing that is? I wouldn’t even know what word to use to describe where they’ve been & where most of them still are. What word makes it all real — where they’ve been for five years? What word? I don’t know. Maybe: “Coma”

  15. craazyman

    shit this is the longest word i’ve ever seen in my life. How can anybody make a word this long?


    How many syllables does that word have? You can’t even tell by looking at it. Or at least I can’t. You don’t even know when to breath. If words were all that long language would cease. It’s the verbal equivalent of zero interest rates. Zero interest rate words make letters accumulate in pools that get too big to use. you can’t wade or swim or even sail a boat. it’s like each word is an ocean without waves or fish. It’s just an insurmountable obstacle to action. you can’t even say a word like that. Try it! See. That’s the problem with low rates, the capital pools into oceans of immobility and stagnation and just sits there in lifeless empty vacuuums of potential. it’s like the seas on the surface of the moon. they”re not really seas. they’re just vast expanses of nothing. Just like pools of capital. Vast empty expanses of something that demarcates an absence more than a presence. Like a sea on the moon. That’s weird. just like words that are too big to ever say or use. people forget about them and they disappear.

  16. Ed Walker

    But, but, Krugman assures us low interest rates are a big nothing for savers. Over and over again.

  17. Christer Kamb

    A small comment on “wealth effects”.

    What is the real purpose of equity-markets and stockprices?
    Answer: To allow corporations to fund themselves. Higher stockprices means cheaper financing.
    Transfer of ownership is primary a valuation-tool. Secondarily for ownership-transfers.
    So why is the share of cash equity-financing(ex new listed corps) getting smaller and smaller(not to mension corporate buy-backs)compared to debt financing(long before Zirp)? If corporations are not using this facility. Why do “we” promote higher stockprices? If there is not a thrue direct correlation between stockprices and direct-investments in the real economy at home or through the current account(not indirect via M/A´s)then there is no thrue motive for a stockexchange? Or is high stockprices more of a tool in the finance-industry to rehypothecate in a Ponzi-way? I would strech to say the term “Shareholder-value” is the new norm of “Ponzi-financing” crowding out long-term investments in the real economy? Savings is investments but if real investments is continuously stagneting since the 80s together with higher stockprices and debts I would say that should worry our leadership, including the FED´s.

    Just a thought!

  18. Curious George

    Just curious:
    Why do you say, Yves, that Merton’s Nobel Prize is “soi disant”?
    I thought I knew what that meant, but now I’m somewhat unclear.

  19. the restive citizen

    I am a tail end baby boomer and I don’t see things as most of you. In my mind, the financial system of these last ~46 years is set to crumble. After the transition off of a tangible link (gold conversion to balance international trade/inter nation spending), nations around the entire world have turned on the fiat spigot in various ways. This has corrupted the financial system and more recently the entire political process, and now there is no stopping it. The various nations are competing against one another to see who can screw those saving in their fiat dollars worse, and extract more general wealth from their unaware citizenry. It may now appear you are “making money” on stocks, but when you need to access the purchasing power in those instruments it is doubtful it will be entirely available to you. This thing must run its course. Such events have happened many times in human history before, but never on this scale. The end game resolution can likely not be made pleasent or even comfortable for most. And no, gold won’t save you this time. Dig a garden and hope you have enough fiat to pay the property taxes until the system can no longer afford to pay the enforcers to sieze it or collect more taxes. Real inflation in tangible hard goods for business production is already well ahead what we read.

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