A real shift behind high asset prices?

In a recent piece for Bloomberg View, Tyler Cowen works out a line of thinking that suggests we are not in the midst of an asset bubble. Instead, the high prices we see for equities and real estate may reflect a quite rational conservative allocation of an abundance of wealth.

The argument goes like this:

In essence, it’s a simple case of too much wealth chasing too few safe assets.

I’m inclined to agree with this explanation. To be sure, low interest rates account for some amount of the price appreciation, which would have been less had rates been higher. And the general zeal of the herd can account for some premium, just as it would account for some of the discount in a bearish market. But that there is a ‘real’ underpinning to the trend–that relative prices have shifted as we’ve moved from a world with less wealth to a world with more wealth, whose owners want to hold it in the same things, of which there is a constrained supply (namely, American equities and real estate in the world’s most desirable cities)–I suspect this is true.

Insofar as this explanation is correct but not yet accepted wisdom, it means we still haven’t caught up with how globalization has changed the world. Indeed, the accepted wisdom has scarcely caught up with how growth in the emerging economies has irrevocably altered the labor market in the advanced economies: workers in the advanced economies now compete with a vastly greater number of people in proximity to productive capital.

Questions to ponder: