When financial yields are low, price to book ratios are high, so the businesses represented in the financial markets are expensive. This should encourage investment in things like proprietorships and non-corporate business. When yields are high, then price-to-book ratios are low, and the reverse is true -- why futz around with Sally's Shoe Store when Johnson and Johnson is yielding 6%?
The following chart from the NIPA table 2.1 plots personal income received from financial assets (dividend and interest payments) against personal income received from proprietorships, both farm and non-farm. The latter attempts to exclude wages and operating income and tries to account for depreciation and inventory changes -- this is "return on capital" for proprietorships, which are classified and non-corporate farm and non-farm non-corporate businesses that must file certain tax forms that I don't care about. Note that rental income received is a separate type of income and is not shown (it moves uniformly up, from left to right, but there are owner-equivalent rent issues there). Both time series are presented as ratios of GNI.
The sum of both time series is shown below:
See how these returns began to decline during the debt-deflation and climbed during the debt-inflation starting in the 1980s, but there is at least evidence for not a lot of variation for the sum of earnings for both corporate and non-corporate businesses.
No comments:
Post a Comment