On the Macroeconomics of Asset Shortages

The world has a shortage of financial assets. Asset supply is having a hard time keeping up with the global demand for store of value and collateral by households, corporations, governments, insurance companies, and financial intermediaries more broadly. These shortages have been a perennial problem in emerging markets, where many of their economic perils and idiosyncrasies stem from this feature. But we are now seeing a shortage on a global scale. It probably began with the meltdown of a substantial share of Japanese assets in the early 1990s, it was exacerbated by European stagnation and the collective emerging market crises of the late 1990s, and it consolidated in the new millennium by the fast income growth of China and commodity countries, most of which have substantial asset demand needs but are not natural asset producers. In addition to these macroeconomic factors, there are microeconomic factors contributing to these shortages. In particular, the recent rapid pace of financial development has facilitated restructuring, innovation and economic growth, but because of their margin requirements they may well have been a net collateral consuming activity, at least in the short run. The equilibrium response of asset prices and valuations to these shortages has played a central role in global economic developments over the last twenty years. The so-called “global imbalances,” the recurrent emergence of speculative bubbles (which recently have transited from emerging markets, to the dot-coms, to real estate, to gold...), the historically low real interest