Relative Valuations of Fixed Capital and Financial Assets in the United States

Abstract

This paper examines the relative valuations for fixed capital and financial assets in the United States, illustrating the observed relationships from the valuations of assets on the real productive side of the economy to the financial valuations of equities and other financial assets, and also to private net worth. The analysis examines the various layers of the relationships of asset valuations relative to potential GDP for the private nonfinancial sectors of the U.S. economy, building up from the relative valuations for fixed capital assets (the capital stock), to the relative valuations for total nonfinancial assets (including land), and then to total assets (i.e., including financial assets). The low rate of net investment in recent years is also addressed, including examining the role of higher effective rates of depreciation. Comparisons are made for the observed relative valuations of corporate equities to Shiller’s CAPE and to a measure of Tobin’s q ratio. Relationships for the relative valuation of assets during business cycles are examined, including the observed lead times and threshold changes relative to business cycle peaks.