Assets inflation

Assets inflation is an economic phenomenon denoting a rise in price of assets, as opposed to ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods.

Overview

Under free market capitalism, assets inflation has particularly affected the financial sphere (e.g. derivatives, dot-com bubble, boom and bust, etc.). However, it is also spilling over into the 'real' economy, particularly the housing market. This is the result of the following changes to the world economy:

* deregulation
* globalisation
* financialisation

The first allows the 'freeing' of many resources which were henceforth not readily tradable (or liquid). The second establishes a world-wide market for these (either at the level of the resources themselves or that of their sellers/purchasers). The last, and most important, firmly embeds the whole occurrence within the money-based part of the economy (hence the term "monetisation" for the transformation of many things, tangible or not, into money - usually of the ‘virtual’ kind).

Price inflation and assets inflation

As inflation is generally understood and perceived as the rise in price of 'ordinary' goods and services, and official and Central bank policies in most of today’s world have been expressly directed at minimizing 'price inflation', assets inflation has not been the object of much attention or concern. This is unfortunate because assets inflation (widely believed to be the exclusive affair of the financial exchanges and other places - people and institutions far removed from the everyday economy) does, by necessity and at some point of time, spill over into the real economy. The best example is the housing market, which concerns almost every individual household, where house prices have over the past decade consistently risen by or at least near a two digit percentage, far above that of the consumer price index. This in turn, reduces, often substantially so, the disposable income of 'ordinary' households, even in the absence of price inflation, but with the same outcome in the end.Many people find it bizarre that, while general inflation is seen as "bad", house price inflation is seen as "good".

Possible causes

Some political economists believe that assets inflation has been, either by default or by design, the outcome of purposive policies pursued by central banks and political decision-makers to combat and reduce the much more visible price inflation. This could be for a variety of reasons, some overt, but others more concealed or even disreputable.

Possible results

It is likely that assets inflation was a contributory factor in the 2007 Subprime mortgage financial crisis.

References

* [http://www.mises.org/fullstory.aspx?control=1579 Robert Blumen's Debt and Delusion in the newsletter of the Mises Institute]
* [http://www.financialsense.com/series4/part1.html James Puplava 4 part essay on "The Great Inflation", part I]
* [http://www.safehaven.com/article-8057.htm Charles Zentay on central banks (un)concern with assets inflation]