Reply To: Asset Prices


There are two basic reasons. First, lower interest rates will increase the P.V. of future revenue streams. Second, the credit created will be spent along particular lines of production, which will boost the prices of assets used along that line of production. For example, suppose a significant amount of the credit expansion goes to mortgages. When the borrowers buy houses their prices are bid up making their production more profitable. Entrepreneurs producing houses have more revenue and use it to bid more heavily for inputs, which pushes up their prices. The prices of more specific inputs rise more than those of less specific inputs. The producers of the more specific inputs have more revenue and use it to bid more heavily for inputs, and so on. A third reason is that people may reduce their demand to hold money. Investors begin to anticipate how asset prices are moving up and may bid them up more quickly. The owners of the assets now have more wealth and may being to spend on things which augments the existing lines of asset price increases and likely adds additional lines of assets price increases throughout the capital structure.