The Federal Reserve Bank of St. Louis reported that US bank deposits have soared as the Federal Reserve has "printed money" (increased liquidity) since 2007 (see chart from the Financial Times Oct. 3rd 2017). Data from the US Census demonstrates that the U.S. trade deficit has expanded since 2008 (see chart). This appears to support ideas that stock market growth is limited to speculation in a few large companies and non-productive unprofitable entities like Uber. Data from the Small Business Administration shows that loans to small businesses have declined, while large companies have off-shored profits like Apple.
My interpretation of this scenario is based on the following assumptions: (i) the rise in market valuations in speculative growth episodes result from optimism about the future availability of funds for investment, and therefore about a low effective long-term cost of capital; and (ii) the boom in investment and growth during such episodes is a response to increased asset prices. The central question that arises under this interpretation is: How can the market be optimistic about the future abundance of capital when the economy is in a high investment equilibrium that, presumably, will lead to a decline in the return to capital? A key component of our equilibrium account is a feedback mechanism by which the future supply of
savings increases as a result of the conditions created by a speculative expansion, and ends up lowering the effective cost of capital.This feedback from growth to saving finds support in recent cross-country evidence that growth precedes saving rather than the reverse. Again, there are several mechanisms
that can support this feedback. For example, (i) the expansion might benefit disproportionally agents who have a high marginal propensity to save; (ii) when partial self-finance is required by financial constraints, the expansion might incentivize saving by increasing the likelihood of achieving self-finance requirements; (iii) when it is associated with major technological developments, the expansion might generate future external spillovers that increase the income of savers; and (iv) the expansion could increase government revenues and result in higher public saving if tax rates and spending are left unchanged.
Dear John: All good points to this complex and frustrating problem. Add to this the 2015 article by Jacobs and Shivdasani in Harvard Business Review "Do you know your cost of capital?" and found that about 80% of major businesses use discounted cash flow analysis or "the wrong cost of debt, tax rate or both." So we find that if this extends beyond the sample survey of 300 companies, a vast number of firms are exposed to significant risk at present.
I might add that a report by Credit Suisse has found that retail store closings are at an all time high. If one also looks at the historical view (see Phil Wahbra, May 31 2017) massive increases in store closings have occurred during the recent recessions but are dwarfed by 2017 figures. While ecommerce has been increasing, the increase over the same period has been modest. Combined with wage stagnation and low reinvestment the current situation looks like a recession with only equities showing improvement some what like the run up to the 1938 collapse.