Are economies destabilised by the effect of stock market and property wealth on real activity?

- "Changes in stock market and property wealth have had increasingly pronounced effects on demand and real activity in OECD countries over time, which can be ascribed to:
• the growing market value of equities and real estate;
• the growing importance of market valuation in companies’ choices;
• the link between capacity to run up debt and wealth (above all in Anglo-Saxon countries)."
- "This has created the risk of a destabilising process: a decline in wealth reduces growth, which in turn reduces wealth. How could wealth and demand for goods and services be decorrelated?
• by analysing borrower solvency based on their income and not their wealth, a development that is definitely under way;
• in countries with funded pensions schemes, by trying to obtain a lower variability in the value of pension funds’ assets;
• by having more investors with a genuinely long-term horizon who would bring stock market valuation closer to the fundamental value of companies."

Natixis Flash Economics 389 20100804

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