The fundamental values of asset prices are the money-metric values that the costate variables associated with the commodities would have in some reasonable utilitarian central-planning social-welfare-maximization exercise under reasonable utilitarian preferences.
- Given that asset prices rarely approach the values Brad ascribes to them, could this be because there is competition for the limited amount of savings capital available in the world? If I, as a productively investing business, want to get access to some of it, I probably need to pay a lot more than 2% (I have anecdotally heard figures as high as 19% for small business loans recently, and that's for a loan 75% guaranteed by the UK government; perversely, I also saw a firm quote of 11.49% for an unsecured loan). Then again, I can definitely make a more than 2% return so I wouldn't mind paying more.
- Is it true that default risk is or should be minimal? One argument quoted (by David Smith of EconomicsUK) against a proposed £50 billion state guarantee of business lending is that the Treasury estimates losses of up to £12 billion on it.
- While long-run productivity growth should indeed be the guide for average investment returns, a dynamic economy is likely to produce lots of businesses which increase productivity by 5, 10 or 40% a year, and others which stagnate, shrink or fail. More and more investments in the context of a 'knowledge economy' are intangible assets which are mostly written off in the latter scenarios, and thus the successful businesses need to generate much higher returns to compensate. This implies both demand for, and supply of, higher-yielding assets. And again, a high default risk.