The bare bones thesis is that asset shortages exist and are largely driven by income inequality. And by ‘assets’ I mean both safe and risky assets. I’ve been thinking and tweeting about these issues for at least 7 years. And as I have, the linkages have become increasingly clear to me. But they’re complex and hard to boil down into the simple blog posts that I prefer. It’s probably why I have held off on trying to lay this out for so long. Nonetheless, here’s the simple version:
We had a phenomenal 30-year period of global growth, much of it turbocharged by demography, deregulation (finance and trade), and a massive global credit boom. Two industries drove the boom more than the rest: finance and technology.
These industries have an unusual feature in common: massively increasing returns to scale. To oversimplify, it used to be that to expand production you had to build a factory and hire a number of people roughly proportional to the desired increase in output, and this is manifestly not the case in much of technology and finance. Companies like Facebook, Google etc. have a marginal product of 1s and 0s that costs basically zero. In finance, the due diligence you need to do on a $10 million loan and on a $100 million loan is the same, but the fees you collect are ten-fold larger. Asset management has similar scaling.
The result is huge margins and profits that accrued to a very small number of people, producing vast fortunes. This, more than tax policy or Fed policy rates, drove the income and wealth inequalities that characterized the past 30 years—starting long before we could even spell QE or before embarking on the past 20 years of tax cuts.
The other reason we know it’s not primarily policy driven is that it’s been a global phenomenon. Yes, in the US, it’s 100% true that we have had policies that favor capital over labor—including a less progressive income tax code. And these polices have no doubt exacerbated the income and wealth disparities here. But it’s hard to argue these policies have driven the global phenomenon of increased inequalities within countries and decreased inequality across countries when we haven’t had common policies. What we have had in common, though, mutatis mutandis, has been an economic transformation driven by inequality producing technology and finance.
How do global income inequalities matter to the Asset Shortage theory?
If you think about ‘asset production’ as being correlated to GDP, it is easy to recognize that if income (GDP) is evenly distributed, the aggregate marginal propensity to consume (MPC) is higher and the marginal propensity to save (MPS) is lower. If unevenly distributed, wealthier people will consume less of their income and save more. Lower MPC and higher MPS translate into higher demand for financial assets for a given level of aggregate income. And, remember, we’re talking global, not just the US.
While this may be the most important driver of the Asset Shortage, to be more complete, it isn’t the only one. Central banks have contributed to the demand for assets—especially safe assets. Corporate buybacks have contributed at the margin too. More significantly, global financialization has produced insurance companies, pension funds and asset managers in countries where they didn’t exist 30 years ago, and they have grown massively in countries where they already did, increasing the demand for assets to match future liabilities and mobilizing the excess savings of the wealthy. If you take all these factors together, it makes—at least to me–a pretty compelling case for the Asset Shortage thesis.