I looked over the comments and what I wrote and I know this part makes no sense

What you can do, however, is extract value from them via the bond market. You take out mortgages on the structures, sell those mortgages to the Chinese and use that to fuel consumption right now. This again is the wealth maximizing thing to do, because you want to shift consumption from the future to today.

The problem is that forms is two fold.

First, this process is facilitated by a fall in the real interest rate, which allows heavy borrowing against by both raising the value of the asset and easing the financing costs. Yet, if the gains from trade are growing fast enough they will drive the real interest rate to zero, at which point land prices become undefined.

I had this worked out in my head at one point but now I can’t remember what I was thinking.

It had something to do with the fact that a speed up in technological progress – in this case facilitated by gains from trade – put us on the opposite side of steady state equilibrium.

Thus both the capital-to-labor ratio and consumption had to be falling over time. If they were falling fast enough then this could only be accomplished by negative real interest rate.

But, I am not sure.

Advertisements