Does anyone know of any research, or theory, that helps explain the phenomena where asset prices crash in economies that use fiat currencies? Japan, for example, has seen asset prices for real-estate and stocks decline for nearly 20 years, despite the fact that this nation uses a fiat currency and the government’s profligate spending (driving national debt to over 70% of GDP now). Japanese urban real-estate is down some 60% to 80% from it’s 1989 peak, and the Nikkei is down over 80% from it’s peak as well.
We are also starting to see asset prices in the US (and many other nations) fall in terms of their own fiat currencies. Stocks and real-estate are much cheaper in the US today than they were 2 years ago. So is oil, and many other commodities. My relatives who own a dairy in California are telling me they are dealing with some of the lowest prices for milk they have seen in ages. My brother, teaching at a snooty private middle school in Georgia tells me that the while they haven’t lowered list tuition prices, the school is now giving financial aid/scholerships to well over half of the student body (compared to something like 15% of students a few years ago), which is basically a price reduction.
How can prices, and asset prices especially, decline in nations that use fiat currencies? What explains this? And why is it that such price declines can seemingly persist for decades (such as we’ve seen in Japan)? Does Austrian economics have a cogent explanation of this phenomena?
It doesn’t seem to have anything to do with the money supply, per-se, since the money supply has been increasing constantly in Japan over the last 20 years, yet asset prices have languished nonetheless.
This is scary! No one seems to have any theories that can help explain long-term, across-the-board, asset price declines under fiat currency regimes. Is this a hole in economic theory? We have definitely seen such things happen, we just don’t seem to have any way to explain it.
It’s simple. The Central bank printed too much money that people could borrow. It’s called inflation. People borrowed way too much because they saw opportunity to speculate and earn / win free profits by rising prices due to inflation. Asset prices rise in dollar terms. People load up on a huge amount of debt to leverage their speculative bet. The only way to win those free profits (profit from speculation, not hard work or production) is to find a sucker to buy it from you at a higher price. The central bank has to print even bigger sums of money at lower interest rates to make the asset affordable for the next buyer. This washes out the purchasing power of the dollar. To prevent dollar hyper-inflation or collapse the bank has to raise interest rates. This creates the recession. But this time, everyone has loads of debt but are loosing jobs. They can’t pay. Everyone has to try and sell their assets at the same time to raise dollars to pay off their debts. As a result the asset price falls because of the flood of assets up for sale. Everything has to be liquidated at fire-sale prices. This isn’t “deflation”. It’s asset liquidation.
If we had no central bank (Federal Reserve) and instead had a stable money supply that bank’s couldn’t print & lend out at dictated interest rates (dictated by the Fed. committee), people would only be able to borrow what someone else saves. There is therefore no phony wealth in the economy. There won’t be a speculative boom and therefore won’t be a bust.
Do a search for Austrian Business Cycle Theory (ABCT). There is a free pdf book on this site that explains it very well. I believe it’s by Garrison, but it’s a combination of papers written by Mises, Rothbard, someone else and Garrison.
My theory is that the new money created by the central banks comes out of the real wealth stored in the economy. This stolen wealth is used almost entirely by the government to satisfy its needs and not by consumers to satisfy their needs. So, there is almost no real wealth relative to the consumers being generated, ONLY STOLEN. Investors see this and simply refuse to allocate capital as they can not tell what the future is as the government is in a constant process of distoring the value of money. So investors and savers simply store money in the lowest yeilding assets hoping to see a clearer future and never get one.
The problem is, you are equating an increase in the fiat money supply with a necessary increase in asset prices. Ceteris Paribus, an increase in money supply creates a proportional increase in assest prices. The market is not in equilibrium. This is a problem with the evenly rotating economy. Prices could go down for all sorts of reasons. Maybe the demand for the fiat money is low, so people use other means of payment under the table and such. I know that Japan is kinda “weird” and has a very strict interpretation of contracts. Gambling is illegal in Japan, but at the same time it is kinda not. See you do not play for money, instead you win metal balls that are then exchanged around the corner in an ATM like machine for money.
Asset prices won’t collapse to zero. That would suggest everyone wants to accumulate money and won’t want to consume anything, not spending a dime. We got to put gas in our cars. We got to replace our tires, brakes and cars when they wear out. We got to eat. We need heat, water and clothing. Prices will only fall to a level where we choose assets or things instead of choosing to posess money.
Asset prices will fall to a point where people choose the asset over holding money. Even a homeless jobless man would buy a house if it only cost him $10. Gov’t coming into the economy to prop up prices of houses will only fail. Gov’t can’t set peoples demand for things. They can only change the value of money and getting people to choose to hold things instead of holding money. This is difficult to do when everyone is cutting back to defensive - survival mode, in fear of loosing their job or facing a depression.
On the contrary, if everyone thought the world would end tomorrow (Asteroid hitting earth) their would run out and party up their last cent today. That would again drive prices up, but if the world didn’t end (asteriod missed us), we’d all be impoverished the next day.