Income versus Assets
Stephen Roach argues that the US economy has undergone a fundamental change over the recent past from being income-driven to being asset-driven. The punch line:
In the asset economy, the rules of traditional macro have been rewritten. Income-based metrics that have long been used to scale deficits, debt, and saving are depicted as irrelevant. Instead, the balancing act is now evaluated relative to asset-determined wealth. I must confess to being just as suspicious of this new paradigm as I was of another such scheme back in the late 1990s. As the bursting of the equity bubble should forever remind us, there is no guarantee of permanence to asset values and the wealth effects they spawn. That’s even more the case when assets are artificially inflated by unsustainably low interest rates. Saving-short, overly-indebted, and more reliant on foreign lending than ever before, the United States has pushed the limits of its asset dependency.
As is often the case, Roach speaks too easily in terms of absolutes and extreme changes, when any such changes that have happened in the US economy have more likely been changes in degree. But he raises the right warning flags, in my opinion: the seemingly very great dependence of the US economy on the behavior of asset markets has to make us wonder about the sustainability of the recovery, and about US growth prospects over the next few years.