If Interest Rates Rise, Wealth Will Fall
Posted January 3, 2015
There is a broad consensus among financial market participants that interest rates will rise in 2015. If they do, the stock market and the economy are likely to suffer a severe blow. The Macro Watch video uploaded today, Finance Capital, explains why.
In the previous two videos, “Capital: A Crash Course” and “How Capital Grows”, I defined Capital as being synonymous with the stock of fixed assets. Wealth, however, is comprised of more than just fixed assets. There is also the value that the market assigns to those fixed assets. I use the term Finance Capital to describe the gap between the market value and the book value of the stock of fixed assets.
Finance Capital is volatile. In recent years it has expanded sharply. It now accounts for a much larger share of all wealth than in the past. In this video, you will see that falling interest rates, rapid credit growth and Quantitative Easing caused Finance Capital to expand.
I won’t keep you in suspense about my conclusions. With credit growth weak, QE 3 over and the ratio of wealth to income unusually stretched, if interest rates now begin to rise, Finance Capital (i.e. the value placed on stocks and other financial assets) is very likely to contract.
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