Is high g-debt good for stock markets?

iBankedUp's picture
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By this I mean, do you think that high government spending dependent upon high debt contributes to greater stock market performance. Financial repression during levels of high g-debt leads to unattractive private debt, and long-term debt, which essentially becomes a savings account.

If you think about the period between 2010-now, there's been a record amount of wealth creation due to higher debt levels pushing investors more into stocks, no matter how pricey they become. So, in an age where we might get more spending and not so great growth, do you think this is a natural, unintended stock market boon? Has that been the main cause of recent wealth creation from stock market appreciation?

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Jan 31, 2019

You're describing the crowding-out effect. I'm not sure I understand the theory you are putting forth.

The idea is that private-debt becomes unattractive in comparison to government bonds. Therefore more investors will invest in gov't debt thus crowding out the market.

"Hey, this risk-free bond has the same yield as this corporate bond. I was going to buy the corp, but the treasury is a better investment. Instead I'll buy risky equity"

I'm not sure I see your rationale. Or perhaps I'm mischaracterizing what you are saying?

George M. Rimakis, CFA

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Jan 31, 2019
Grimakis:

You're describing the crowding-out effect. I'm not sure I understand the theory you are putting forth.

The idea is that private-debt becomes unattractive in comparison to government bonds. Therefore more investors will invest in gov't debt thus crowding out the market.

"Hey, this risk-free bond has the same yield as this corporate bond. I was going to buy the corp, but the treasury is a better investment. Instead I'll buy risky equity"

I'm not sure I see your rationale. Or perhaps I'm mischaracterizing what you are saying?

Not crowding out, financial repression.

Essentially, over the past decade, stocks have risen because of low interest rates, stemming from reducing the burdens of debt by keeping rates low. Of course this makes all debt unattractive, so investors are pushed to stocks more in search of yield.

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Jan 31, 2019
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