I’ve been thinking a lot about assets, recently. In the old days, assets were
things like factories, shops and land – things that you could do things with.
Things that you didn’t buy so that you could sell them again, but things you had
so that you could make or sell other things. An asset’s worth was what you could
do with it, not what somebody else would pay you for it.
At the other end of the scale are assets that have value and yet have no use.
Gold, for example. Apart from looking pretty and having some applications in
electronics and dentistry, it’s a quite useless metal. It actually costs money
to own it, because it has to be stored so safely. Its yield, therefore, is
negative. Its price is soaring. The mantra in the gold markets has always been
that it is priced on the ‘greater fool than I’ principle: you buy the stuff
because you think that someone somewhere will be even more foolish than you were
and offer you a greater price.
In the middle of all this are financial assets. Those that have a yield of
some sort have a value that can be related to that flow of income. They also
have a value that can be related to the price that someone else is prepared to
pay for them. A £100 bond yielding 5% a year will fall in value if interest
rates rise, as more attractive income streams are on offer elsewhere. But the
bond still carries on paying £5 a year.
The shift of the balance of economic weight, from value as determined by
usefulness or production and value as determined by the ability to find someone
else to buy, is intriguing. The current collapse in the price of financial
assets represents a collapse in the amount of cash that someone else is prepared
to put at risk by buying them. It is quite a lot less related to the future flow
of income generated by those assets. It takes financial assets towards the gold
end of the spectrum. But the point is that the collapse of the price of an asset
does not affect its usefulness in terms of its ability to generate income.
This may be a near-meaningless distinction, akin to taking a jar that is half
empty, putting a lid on it, turning it upside down and saying that it is now
half full. But it is why I still feel reasonably confident that the economy is
not about to collapse. This feels like a balance sheet recession, not an income
statement recession. Clearly it’s not as simple as that: if financial assets
fall in value then consumers may feel that more saving and less spending is
called for. Tighter credit may mean it’s more difficult to get someone else to
pay for your purchases. But the mangling of banks’ balance sheets still seems
like a much worse problem than anything that most consumers are facing at
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