Greenspan’s bullish, time to sell

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Stock mar­kets are boom­ing — not only in USA and Aus­tralia where eco­nom­ic growth is pos­i­tive, but even in economies still locked in the dol­drums like the UK and Japan.

Graph for Why the markets have decoupled from reality | Greenspan's bullish, time to sell |

Alan Greenspan observed last month that this augured well for the econ­o­my, since

the stock mar­ket is the real­ly key play­er in the game of eco­nom­ic growth… The data shows that stock prices are not only a lead­ing indi­ca­tor of eco­nom­ic activ­i­ty, they are a major cause of it. The sta­tis­tics indi­cate that 6 per­cent of the change in GDP results from changes in mar­ket val­ue of stocks and homes.”

This is the so-called “wealth effect”: an empir­i­cal rela­tion­ship between change in the val­ue of assets and the lev­el of con­sumer spend­ing which implies that an increase in wealth will cause an increase in con­sump­tion.

Greenspan’s sage sta­tus is some­what tar­nished post-2007, so I don’t think any­one should be sur­prised that his defin­i­tive state­ment involves some­thing of a sleight of mouth. The “6 cents extra spend­ing for every dol­lar increase in wealth” found in the research he allud­ed to was for the rela­tion­ship between changes in the val­ue of hous­ing wealth and con­sump­tion, not stocks. In fact the authors, Christo­pher Car­roll and Xia Zhou, argued that the wealth effect from stocks was “sta­tis­ti­cal­ly insignif­i­cant and eco­nom­i­cal­ly small”:

Read more: http://www.businessspectator.com.au/article/2013/4/1/markets/greenspans-bullish-time-sell#ixzz2PGi2ExQ5

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.