Download The Macroeconomics of Asset Shortages

The Macroeconomics of Asset
Shortages
Ricardo J. Caballero
MIT and NBER
http://web.mit.edu/caball/www
Fall 2007
Overview

A conjecture…

Excess demand for (financial assets) store of value
and collateral by households, corporations,
governments, insurance companies, financial
intermediaries


No direct evidence…(both supply and demand are very
hard to measure)
But the implications of this single ingredient are
consistent with many of the main macroeconomic events
of the last decade and more (Occam’s razor )…

Dark matter…
Overview

Equilibrium response of asset prices and
valuations have macroeconomic implications


“Global imbalances”
Recurrent speculative “bubbles’’ (emerging markets,
dot-coms, real estate, gold, commodities, emerging
markets…)




Flight to quality episodes
Low long real interest rates
Low inflation and deflations
Rebalancing is a response to changes in the
location of asset production
Emerging Markets

Capital’s ability to produce output is only
imperfectly linked to its ability to generate assets


Weaknesses: Institutional, macroeconomic, political,
liquidity
Result: Asset shortage is a chronic feature. Cycles of
capital outflows (store value abroad) and domestic
bubbles (store value in fragile coordination dependent
assets)
Collapse in Capital Flows to SE Asia in the Late 90s
Synchronization of Boom and
Bust in Capital Flows
Capital Flows to SEA-5*
(in millions of US dollars, last four quarters)
(in % of GDP, last four quarters)
80000
Asian Crisis
60000
Bust
Boom
40000
Average 1984-88 peak 1996
vs
vs
trough 1998
peak 1996
20000
0
-20000
peak 1996
vs
2002
Thailand
9,7
-22,6
-11,2
Indonesia
2,6
-21,9
-7,0
Korea
6,4
-14,5
-3,2
Philippines
8,0
-10,3
-14,8
Malaysia
6,1
-5,7
-10,9
SEA-5
6,1
-15,0
-9,4
-40000
-60000
Jul-02
Sep-01
Nov-00
Jan-00
Mar-99
May-98
Jul-97
Sep-96
Nov-95
Jan-95
Mar-94
May-93
Jul-92
Sep-91
Nov-90
Jan-90
Mar-89
-80000
*SEA-5 includes Indonesia,Korea, Malaysia, Philippines and Thailand
Source: Calvo et al (2006)
The World Economy

Globalization transfers local asset shortages to
the world at large



Asset crashes around the world (Japan, EMs) reduced
the supply of assets (today…)
Large asset shortages in China and commodityeconomies
Anglo-Saxon economies, and the US in
particular, are the main asset producers

Large capital gains and flows to producers of scarce
assets

The so-called “global imbalances” is a symptom
of asset-scarcity

Capital gains and losses are very heterogeneous
across the world

Low interest rates

It is one of the market mechanisms to create assets
(increase value) out of the few ones it has
Low inflation is another

It is the market mechanism to increase the value of scarce
nominal assets
38
33
Percentage change in consumer prices

28
23
18
13
8
3
-2
1990
1992
1994
1996
World
1998
USA
2000
2002
EU
2004
Japan
2006
The World Economy: Bubbles

… and yet another market mechanism (recall
EMEs) is high valuations or speculative bubbles
The World Economy: Bubbles

Bubbles in “the small”:



We tend to focus on (be distracted by?) risk-shifting,
regulatory problems, etc.
Most recent example: sub-prime
My view: these are mainly stories of “location”

Instead, the real story is what creates the
environments that are conducive to speculative
behavior…


Shortage of assets…
(btw, central bank supplied liquidity is endogenous…)
The World Economy: Bubbles

The environment is much harder to deal with
than a specific problem in a specific market…



Trying to chase and prick bubbles may lead to lots of
instability and very limited success… (conservation
law)
Bubbles are providing a useful service
Problems:


They introduce volatility / location (huge problem for
EMEs)
May distort allocation of factors of production (e.g. real
estate)
The World Economy: Bubbles

Solution: ???

Short run: (science fiction…)




Try to spread them
Concentrate them on non-resource consuming / input
assets
In any event, interest rate policy has little to do with this,
aside from the “divine coincidence” (excessive
aggregate bubbles lead to inflation)
Long run: financial development in the South…
Flight to Quality

Shortage of assets leads to high valuations and
the emergence of speculative bubbles with
uncertain location

In turn, these factors lead to financial innovation
and effectively uncollateralized leverage, which
leave the economy exposed to flight to quality
episodes (Knightian uncertainty)
$250 Billion

1% change in the stock market > $250 billion

Why has this created a credit crisis?

The Dow fell from near 14,000 pre-crisis to a low of
13,000 on 8/16
7% fall = $2.1 trillion of loss in wealth

8X the subprime loss !

Uncertainty

Newness




Short historical record
Past prices for statistical analysis?
How do securities react in a stress event?
Who is exposed?
“ When confronted with uncertainty, human beings invariably
attempt to disengage from medium to long-term commitments
in favor of safety and liquidity”
-Alan Greenspan after the 1998 Crisis
Flight to Quality

Regulator’s incentive is to impose larger
collateral holdings



Costly in an environment with asset scarcity
If F-to-Q doesn’t go away, or too much
regulation, the cost will be large since frozen
assets exacerbate the asset shortage. Nonrecessionary interest rate is much lower…
Hope: where will these savings go in the
medium run? Not many options at the aggregate
level… this is one of the main reasons we are in
this environment…
World Rebalancing

The dollar has depreciated about 20% relative to
the Euro over the last year, and even more
relative to some EMEs… why?




Loss of growth advantage vs Euro area and Japan
Sub-prime crisis
Emerging market bubbles are being reignited
Prices (exchange rate) change faster than
quantities
Summary

A simple ingredient, a shortage of store-of-value
assets, can explain the main global
macroeconomic phenomena of recent years


Global “imbalances”, low real interest rates and
inflation, emergence of speculative bubbles, flight to
quality episodes…
Volatility, associated to financial markets
phenomena, is an intrinsic and unavoidable
feature of an environment with such shortage
The Macroeconomics of Asset
Shortages
Ricardo J. Caballero
MIT and NBER
http://web.mit.edu/caball/www
Fall 2007