Word of The Day – Asset-Price-Inflation

Investopedia defines Asset-Price-Inflation this way:

Asset price 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. 

Investopedia adds this caveat:

Ordinary goods and services are excluded and do not count as assets in this sense. Most standard measurements of inflation, such as the consumer price index (CPI), do not account for rising asset prices.”

I don’t know about you, but for years I’ve been feeling that our whole economy is becoming more and more like a house of cards. The financial sector has doubled since 1947 from 10% to 20% of our American Economy. 

Millions of Americans work in this sector or benefit from it, but daily many of us feel poorer than ever before. This is particularly the case in big cities across the United States. 

Living in the most expensive area in this country, I’m saddened by seeing the prices of housing rise while friend after friend leaves this area because of its absolutely surrealistic housing prices.

A long time ago I owned a condo that I sold after a decade for four times the amount I bought it for.

The problem I faced then, was that by the time I paid for renovations inside, legal and other fees, and paid off the mortgage interest and equity on my loan, buying another property was out of reach for me. This is what happens when housing asset-price-inflation sets in.

How economists hide asset-price-inflation from us

What exactly are the “ordinary” goods and services that are not assets? And unlike ‘financial assets’ do get counted in our national GDP?

More specifically, how is it that we can call a house an asset, while we don’t usually call our wages assets?

Because that’s how economists and financial experts have viewed wages. Economists treat wages as a whole different category—both in Keynes’ famous formulas and in the calculations of non-Keynesian economists. 

Economists only look at wages as an expense. Wages are the expense billed to the Investors in corporations who pay us our wages. This is so one-sided it’s ridiculous!

The reality is that wages are a real asset to those of use who earn them. Wages are money that is put into our pockets in exchange for working. Wages are money we can spend. Wages spent on goods and services boost GDP!

But financial experts and economists define assets as being “only things which we buy with our wages (or sale of our assets) that puts more money in our pockets because we purchased those particular things.” 

The experts deem assets to be magical self-reproducing forms of wealth. Meanwhile “ordinary” goods and services are left out in the cold. They don’t count.

For example, let’s say I’m a self-employed person who buys a computer for my own business. My computer is an asset (that if I make a profit in my business, I can deduct its cost from my federal taxes.) My computer is worth something.  But you buy a computer for home use with your kids. Your computer is not an asset. It’s worth nothing.

Isn’t that ridiculous? How can a computer be both an asset and not an asset?

Face it! Twenty percent of our global financial sector is like one giant piece of bubble wrap. Every once in awhile the bubble wrap gets so big, parts of it pop! That’s when governments’ central banks all over the world step in and try to fix things.

That’s after the “house of cards” collapses.

The magic smoke and mirrors of asset-price-inflation 

How can scholarly experts call a house an asset? When we pay for that house out of our pockets every year and/or incur even more debt with a home equity loan!

How can experts only see wages as a liability? When we spend our wages! And items we buy add to our national wealth. 

Houses and and computers are objects that we buy. They are assets only when we use them to make money. Wages are a verb – wages earned by people who work for a living are used to pay for those objects we buy.

In this world of finance, we only value things, things that we can make money with, not people.

What we don’t value is labor, the efforts of the people who create goods and services—not after Karl Marx used that word to so upset the world of economists. 

This is why the CPI, Consumer Price Index, which is used for lifting the payments paid to workers and retirees every year, barely rises a couple of percentage points each year. Because we don’t add much value to the price of labor.

Meanwhile, financial assets grow wild on stock markets and in housing markets – rising 8 to 10 percent in price or far more each year and then plunging down when those market bubbles burst. 

The reason so many of us cannot afford to buy houses is that wage-price-inflation is way lower than asset-price inflation every year.

When the bubble rises, the purchasing price of the dollar buys less and less, so we get inflation, i.e. the rising of nominal “i.e., unreal” prices. 

When the bubble pops, we get deflation that can lead to stagflation, i.e., high prices and unemployment that can linger for years.

Investopedia points out that:

“Rising asset prices are potentially misleading signs of a growing economy. Even if the stock market grows or houses are more valuable, no real [my italics and bold] economic goods are directly produced. Those [unreal “nominal”] values are very sensitive and volatile, possibly [usually] creating the illusion of growth through asset bubbles.”

How asset-price-inflation hurts us

Asset price inflation is vicious when it destroys the hopes of a generation of people who would like to buy a house or rent during a housing asset-inflation-bubble. 

It’s even worse when that bubble bursts. Then people find themselves plunging downwards, going “underwater,” into debts they can’t pay off for an asset that becomes more and more worthless each day—an asset that they desperately need for survival.

In the Bay Area where I live, the housing bubble is already on a downward spiral. Even in cities a hundred miles away housing prices are dropping 3 to 4  percent. 

Nearly everywhere one goes in San Francisco’s East Bay cities one sees homeless encampments springing up on any patch of grass not being occupied by giant new apartment buildings— being built everywhere by contractors desperate to sell them quickly. 

That’s because construction of new housing all over the U.S. has been falling dramatically this year.

For most of us, houses are not an “asset”. Houses are “liabilties”. Until we wake up and realize that houses are made for people to live in, not to get “rich” with through the magic of asset-price-inflation, this situation won’t get any better.

Not until we value wages as assets which need to grow each year right along with other financial assets will we be rid of the scourge of extreme income inequality caused by financial sector asset-price-inflation—and its inevitable bubbles.

For a further explanation of wages See Wolf Street’s post “Victims of Inflation“.