Why do asset prices keep going up?

About this video

• Video Title: Why do asset prices keep going up?
• Channel: Garys Economics
• Speakers: Gary (implied, consistent speaker throughout)
• Duration: 00:28:52

Overview

This video explores the counterintuitive phenomenon of rising asset prices during economic crises. The speaker argues that traditional economic theories, which suggest a correlation between economic health and asset prices, are insufficient to explain current trends. Instead, the video proposes that large government deficits, wealth redistribution towards the richest individuals, and increasing inequality are the primary drivers behind the persistent rise in asset values, even amidst economic downturns and rising interest rates.

Key takeaways

• Rising Asset Prices Amidst Crises: Despite ongoing economic crises (e.g., Iran war, COVID-19, 2008 financial crisis), global asset prices, including stocks and gold, have continued to increase, defying conventional expectations.
• Interest Rate Theory Limitations: The traditional economic theory that lower interest rates drive up asset prices is questioned, as asset prices have risen even when interest rates have increased, particularly after the COVID-19 pandemic.
• Deficits and Distribution as Drivers: The speaker posits that government deficits, leading to a concentration of wealth among the richest individuals, are the main catalysts for rising asset prices. When governments run large deficits to manage crises, the funds often accumulate with the wealthy, who then invest in assets.
• Inequality as a Root Cause: Increasing inequality is identified as a core issue, leading to weakening living standards for the majority while simultaneously inflating asset prices. This phenomenon is described as a "crisis of distribution."
• How to React: Consumers are advised to recognize that rising asset prices are detrimental to ordinary people, leading to unaffordability of housing and reduced financial stability. The solution lies in addressing inequality through progressive taxation.

The speaker explains that in theory, there's a strong relationship between interest rates and asset prices. If interest rates are high, money saved in a bank account yields a good return. This makes other investments, like rental properties or stocks, less attractive unless they offer a comparable return.

However, if interest rates are very low, savings accounts offer minimal returns. This makes assets that provide real returns, such as rental property or shares in profitable companies, much more appealing by comparison, driving up their prices.

This theory, however, is shown to fall short in recent times, particularly after COVID-19. The speaker points out that asset prices continued to rise even as inflation spiked and interest rates increased significantly. This contradicts the traditional model, where rising interest rates are expected to decrease asset prices. The speaker suggests that other factors, like government deficits and wealth distribution, are more dominant drivers in the current economic climate.

A crisis of distribution, according to the speaker, occurs when the government can protect living standards by borrowing from the rich and redistributing those funds. This implies that the underlying productive capacity of the economy has not fundamentally decreased, but rather the allocation of resources is the issue.

In contrast, a crisis caused by a fundamental decline in production would mean that the actual ability to produce goods and services has significantly reduced. In such a scenario, the government would not be able to simply borrow from the rich to maintain everyone's living standards, because the overall wealth and resources available would genuinely be diminished. Therefore, a crisis of distribution is seen as a problem that can be managed through financial mechanisms and policy, whereas a decline in production signals a more severe, systemic economic contraction.