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Monday, 22 September 2014

On Stock Bubbles and Why Companies Have Record Profits

From a recent discussion in the Austrian Economics group on Linkedin:

Question by a group member:
When I am explaining to someone that stocks are in a bubble and they respond that companies have records profits, and that's why stocks are so high... What's a good response?
Answer by Austrian economist Dr Pat Gunning
The prices of shares are determined by speculators' (1) expectations about future prices of shares and (2) expectations about companies profits. Both the prices of shares and the profits of companies, including banks, are buoyed by expansionary monetary policy. 
So long as that policy is gradual and mainly used to finance increased government spending, and so long as non-companies are in no position to effectively demand compensating pay increases; it can cause the profits of companies, banks and stock market speculators to rise faster than other incomes. In effect, the policy transfers funds from ordinary people (the "middle class") to the government and to those who are first in line to profit from receiving the new money.