Proposing an Asset Shortage Hypothesis
March 27, 2007
By Stephen L. Jen
Morgan Stanley Co. Ltd. International
We propose an 'Asset Shortage' hypothesis, suggesting that the world is suffering from a shortage of financial assets. The world's supplies of sovereign bonds and net equity issuance have indeed been very low in recent years. This may help explain the elevated global financial prices.
Robust economic growth in the past 15 years and the 'Great Moderation' helps governments consolidate their fiscal positions. The relatively low valuation of equities following the tech meltdown in 2000 and abundant global liquidity may have contributed to a 'de-equitization' process.
Sovereign debt outstanding has indeed declined. The world's outstanding stock of sovereign debt, excluding Japan, has declined to only 59% of GDP. Considering that the global financial markets and resources have grown disproportionately with respect to the global economy, the world has experienced a supply crunch on sovereign bonds.
Low net issuance of equities. Similarly, global net real (deflated by M1) issuance of equities has also declined sharply - by one-third in the past 11 years.
Non-intervention policy. Our 'Asset Shortage' hypothesis, in conjunction with the 'excess savings' argument, suggests that global supply of and demand for financial assets have been severely out of sync. Asset prices could stay misaligned with the real economic fundamentals. From the perspective of policy reactions, the right response is not to prick this bubble, but to focus on how best to manage systemic risk.