Boom-Bust Capital Games

I’ve had many arguments with stock-market enthusiasts about “total return”. They see the stock market cap growing with GDP, say 6%, note that stocks also pay dividends, say 3%, and decide that their own stock of wealth can grow at 9% if they re-invest dividends, or, equivalently buy debt or the stocks of other firms with their dividends.

At this point, I try to explain that nothing can grow faster than GDP, over the long term. Like any outperformance strategy, dividend-reinvestment works only when not too many people try it.

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Boom-Bust Capital Games

Financial Repression and Savings Gluts

A Less Productive Open Economy

Suppose that purchasing the global capital stock earns a higher return than the domestic stock.  Then investors will sell domestic bonds and purchase foreign bonds, until the domestic interest rate increases, in real terms, sufficiently to match the foreign rate plus the rate of (domestic) currency appreciation vis-a-vis the global currency.

Forex adjustments cannot help here, as the outflows lead to depreciation, not appreciation of the currency.  As a result of the higher real rates, the domestic capital keeps being reduced up until it is as productive as the global rate. But suppose a reducion in the capital stock does not make it more productive?

Continue reading “Financial Repression and Savings Gluts”

Financial Repression and Savings Gluts