1. It's hard to forecast turning points in capitalist economies.
2. I suspect that the conventional balance of payments accounts
misrepresent the international balance sheet position of the United States
and the changes in it because they track only current flows of value and do
not reflect changes in the values of assets. As a result income and saving
are understated because capital gains on existing assets are not included.
(In periods of falling asset prices, income and saving would be overstated
in the conventional accounts.)
This defect is particularly troublesome for the U.S. in the current period,
which is very likely acting as a financial intermediary. Some part of the
"huge capital flows" measured by the conventional BOP accounts are
effectively being reinvested abroad through the retention of capital gains.
The BOP accounts obscure this aspect of the U.S. financial position, and
make it appear that we are financing an enormous consumption binge off of
borrowed funds. While there may be some truth in this, the conventional
statistics overstate the case.
3. It's hard to value equities. Suppose we have an asset with a current
real yield y (earnings on a stock, for example), which is expected to grow
in real terms on average exponentially at rate g for the indefinite future,
and suppose that a "fundamentalist" values the claim to this stream of
returns by discounting at the real interest rate r. Then the fundamental
price of the asset is p = y/(r-g), or the price earnings multiple p/y =
1/(r-g). The problem is that the denominator is the difference two rather
small numbers, the real interest rate and the anticipated growth rate of
earnings. Small errors in estimating either of these can lead to very big
changes in the predicted price-earnings multiple.
4. It looks to me as though U.S. aggregate demand in the 90s has been
largely regulated by fluctuations in the long-term bond rate. I would be
more convinced by some evidence that this mechanism is on the point of
failure than by the BOP flow account ratios.
Duncan
Duncan K. Foley
Department of Economics
Graduate Faculty
New School University
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New York, NY 10003
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