Yes, but when the stock becomes overvalued, it does not hurt the underlying real economy. Overvalued stock even helps investments in true capital.
Overvalued stocks do real damage to the real economy in several ways:
There are also opinions, that this was also about land market.
A great depression is a bastard of many fathers, and I would be surprised if persistent stock price inflation didn't also inflate real estate prices. But the major contraction in the money supply and the major contraction in aggregate demand both arose from stock writedowns.
Of course they are comfortable, because land values always rise. As long as there is education, developing infrastructure and population growth. No Einstein is needed to cash in land market.
Face values go up, but inflation-adjusted prices don't necessarily go up. And even when they do, you won't necessarily be better off buying than renting. That depends on tax codes, interest rates, rents, inflation and a lot of other variables. One such analysis can be found here, courtesy of the always great khanacademy.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Not in the long term. But you can't always say the same from a certain stock. Also playing "waiting-game" always wins in the land market. You don't lose market share (or wealth) doing it. But when we talk about "bubbles", land market is always a true "Eldorado" for banks and speculators.
"And even when they do, you won't necessarily be better off buying than renting. That depends on tax codes, interest rates, rents, inflation and a lot of other variables. One such analysis can be found here, courtesy of the always great khanacademy."
If you seek quick profits, of course you never rent anything. In this article is a graph about land and housing prices from last years:
http://www.moneyweek.com/investments/property/house-prices-expect-the-worst.aspx
Not in the long term. But you can't always say the same from a certain stock. Also playing "waiting-game" always wins in the land market.
Only if you can afford to wait that long. Real, inflation-adjusted land prices may easily be higher today in many parts of the US and UK than they will be again within my lifetime.
When prices do a random walk, if you can wait long enough you can recoup any loss of book value. That's just another way of stating the Gambler's Ruin: If you have the (sufficiently) bigger bank, you can't lose unless the game is systemically tilted against you.
But very, very few people in the real world can afford to wait for arbitrarily long lengths of time. As Keynes famously said, "the market can stay irrational longer than you can stay solvent." In other words, even when there is a bias in your favour, you may not always be able to wait long enough to make a profit. Nevermind the case where prices are a random walk.
Real land prices (land values) can only be higher today than tomorrow, if productivity drops, infrastructure gets worse and/or population declines. Market price naturally changes. If you can afford to put money in the bank, you can afford to sit on your land assets. There is only usually just some 1% property tax. Already the average growth in productivity covers that "risk". The problem with Keynes is that he doesn't make the difference between "capital" and "land", even these are very different in nature.
And in fact, housing has, in the US and UK, been grossly overvalued. And that bubble just popped. So prices will go down, and likely stay down for quite a while.
