Introduction:

The chapter "Institutional investors, the equity market and forced indebtedness" by Jan Toporowski takes a look at the link between the strategies of financial market institutions and the indebtedness of companies in the real sector. The chapter revisits some of the issues originally put forward by the author as the theory of capital market inflation, in the book The End of Finance (2000). The chapter makes much clearer the key assumptions and relationships between the operations of the capital dominated by institutional investors and the balance sheets of companies. In this way, it presents a theory of how macroeconomic dynamics may be affected by disequilibrium in the capital market. The author concludes that the supply of equity capital from long-term investing institutions, such as pension funds and insurance companies, in practice makes the equity capital market less adaptable to demand for equity capital from companies. The effect of this is to force companies into debt, with adverse consequences for their willingness to invest and for their cash flow. In this way, capital market disequilibrium may initiate and reinforce deflationary tendencies in the economy at large, and destabilise bank balance sheets in particular.