Sunday, February 13, 2005

dollars backed by pyramids

Brad Delong writes that only the "substantial decline in the stock market in the near future" scenario is likely. By near future, of course, he must mean "before private accounts start to invest," because if it were to happen after that point, private accounts would take the loss rather than receiving the gain.

One problem with that hypothesis is that the stock market is the expectation of funds from private accounts is likely to push the market up, not down. If we give the market a fresh source of investment to chase shares, it's likely to push prices up and help sustain them, at least until retirees begin to pull as much money out of the stock market as they're putting in.

Isn't there a technical term for investments supported by new investors rather than underlying financial strength? If we should worry about the effects on a bond-supported portfolio (the Social Security Trust Fund) when cash flow turns negative, shouldn't we be more worried about the effect of the same cash flow reversal when the assets in the portfolio are set by the market?

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