American investors have too much money (I believe because of all the stimulus from covid)
Don’t forget the interest income payment from the rate hikes in 2023-2024 that were generating $1 trillion of net interest per year that mostly went to rich people. With such strong fiscal flows (7-8% of GDP) over the past 2-3 years where so much money has been pumped out and mostly given to the rich people, those money has got to go somewhere.
These are all free money created by US Federal Government that cannot be removed from the circulation unless taxed back by the government itself (ironically, what Trump is trying to do with his tariffs).
When you buy stock, the money simply switches hands to the people who sold you the stock. From an aggregate standpoint, if the stock market crashes, then the people who spent money to buy the stocks lose, but the people who sold their stocks don’t. It’s simply money that is changing hands. The dollars already spent by the government into existence won’t go anywhere, unless they are taxed back by the government itself.
(Of course this doesn’t preclude the misallocation of capital where investment is mostly concentrated in unproductive sectors while they could have been better invested in industries that improve the living standards of the people etc. and will have an impact on a real economy. A government that knows what it’s doing can easily offset this with fiscal spending, though the US finance capitalism is driven to extract from the national wealth rather than to build the nation itself)
It’s not the same as the 2007 subprime mortgage bubble where the asset price inflation was fueled by bank lending.
Of course, this also doesn’t preclude investors from borrowing from the banks to invest in the AI stocks but with the high interest rate, that’s not very likely.
A recession in the US is going to be caused by a contraction in government spending (which Trump is trying very hard to achieve) and the increasingly uneven distribution of income where the wealth is increasingly concentrated into the top 1% that drives a contraction in aggregate demand as poor people reduce their consumption, leading to a recessionary spiral where people start to lose jobs and have even less money to consume.
This.
Don’t forget the interest income payment from the rate hikes in 2023-2024 that were generating $1 trillion of net interest per year that mostly went to rich people. With such strong fiscal flows (7-8% of GDP) over the past 2-3 years where so much money has been pumped out and mostly given to the rich people, those money has got to go somewhere.
These are all free money created by US Federal Government that cannot be removed from the circulation unless taxed back by the government itself (ironically, what Trump is trying to do with his tariffs).
When you buy stock, the money simply switches hands to the people who sold you the stock. From an aggregate standpoint, if the stock market crashes, then the people who spent money to buy the stocks lose, but the people who sold their stocks don’t. It’s simply money that is changing hands. The dollars already spent by the government into existence won’t go anywhere, unless they are taxed back by the government itself.
(Of course this doesn’t preclude the misallocation of capital where investment is mostly concentrated in unproductive sectors while they could have been better invested in industries that improve the living standards of the people etc. and will have an impact on a real economy. A government that knows what it’s doing can easily offset this with fiscal spending, though the US finance capitalism is driven to extract from the national wealth rather than to build the nation itself)
It’s not the same as the 2007 subprime mortgage bubble where the asset price inflation was fueled by bank lending.
Of course, this also doesn’t preclude investors from borrowing from the banks to invest in the AI stocks but with the high interest rate, that’s not very likely.
A recession in the US is going to be caused by a contraction in government spending (which Trump is trying very hard to achieve) and the increasingly uneven distribution of income where the wealth is increasingly concentrated into the top 1% that drives a contraction in aggregate demand as poor people reduce their consumption, leading to a recessionary spiral where people start to lose jobs and have even less money to consume.
Trump caused an increase in government spending during his last presidency. I expect the same to happen again.