5 ms·

> that means that capital is wasting the resources, which means that the capital is not earning a return, _which means that it stops growing_. What's interesti

> that means that capital is wasting the resources, which means that the capital is not earning a return, _which means that it stops growing_. What's interesting is that people might not notice for awhile that the capital isn't earning a proper return, and the realization can be in the form of a sudden price adjustment + crash (think tech bubble burst or housing bubble). I think even standard economics is starting recognize this, even though the serious study of severe crashes has been somewhat neglected between WW2 and 2008. One problem is that data is hard to come by, given the rarity of the event. Another is that it's hard to come up with a good theoretical reason why asset prices can be persistently wrong for so long. > (1929 and 2008 are exceptions, not the rule.) What if it turns out that severe crashes to the tune of 1-2 a century are a rule? How many data points would we need to see before economists would be convinced?

AnimalMuppet 10y ago
> What if it turns out that severe crashes to the tune of 1-2 a century are a rule? During the 1800s, it was more like 5-10 severe crashes a century. Add in the crash of 1907, as well. What changed? The Federal Reserve, created in 1913.
- smallnamespace 10y ago
  Considering that all developed economies are deep in the liquidity trap and therefore unresponsive to marginal changes in monetary policy, looks like we will be in for some tough times.
smaddox 10y ago
> Another is that it's hard to come up with a good theoretical reason why asset prices can be persistently wrong for so long. The reason is well understood, but not by mainstream economists. I suggest reading about Hyman Minsky and Steve Keen's research. To summarize, increases in total debt (private or public) contribute to demand, while decreases in total debt subtract from demand. This results in a financial instability. More demand => more debt-fueled investment => more demand. Eventually, businesses that could never have survived at the bottom of the cycle can get huge loans; they might not even seem speculative, because demand is so high and keeps growing. However total debt rises too quickly, due to speculation and Ponzi financiers, and it can't rise at such rates indefinitely. Once debt growth begins to slow, businesses financed primarily by debt begin to fail, because demand slows and they can't convince anyone to give them more loans to cover interest. This triggers runaway deleveraging and fall in demand. In such a down-turn, even businesses that could have survived at the bottom of the cycle have trouble because they've taken out loans or sold shares to invest in growth, since they expected demand to continue to rise. Instead, demand shrinks, because much of it was debt-fueled and unsustainable.
- smallnamespace 10y ago
  Yeah that's a reasonable model that links the debt and business cycles together, but it makes a key assumption: that investors only depend on lagging metrics of credit quality (business defaults), so fail to stop the bubble from inflating. What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past.
  - AnimalMuppet 10y ago
    > What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past. I think the problem is human nature. People forget. Sure, this has happened many times before, but the most recent time was, say, eight years ago. That's a long time in peoples' memories. And, while there may be this nagging memory of trouble, right now there's money to be made...
  - smaddox 10y ago
    Lenders can't predict the future any better than creditors. There's nothing mysterious about that. If you want a theory for _why_ the future is unpredictable, read up on chaos theory.

AnimalMuppet 10y ago

> What if it turns out that severe crashes to the tune of 1-2 a century are a rule? During the 1800s, it was more like 5-10 severe crashes a century. Add in the crash of 1907, as well. What changed? The Federal Reserve, created in 1913.

smallnamespace 10y ago
Considering that all developed economies are deep in the liquidity trap and therefore unresponsive to marginal changes in monetary policy, looks like we will be in for some tough times.

smaddox 10y ago

> Another is that it's hard to come up with a good theoretical reason why asset prices can be persistently wrong for so long. The reason is well understood, but not by mainstream economists. I suggest reading about Hyman Minsky and Steve Keen's research. To summarize, increases in total debt (private or public) contribute to demand, while decreases in total debt subtract from demand. This results in a financial instability. More demand => more debt-fueled investment => more demand. Eventually, businesses that could never have survived at the bottom of the cycle can get huge loans; they might not even seem speculative, because demand is so high and keeps growing. However total debt rises too quickly, due to speculation and Ponzi financiers, and it can't rise at such rates indefinitely. Once debt growth begins to slow, businesses financed primarily by debt begin to fail, because demand slows and they can't convince anyone to give them more loans to cover interest. This triggers runaway deleveraging and fall in demand. In such a down-turn, even businesses that could have survived at the bottom of the cycle have trouble because they've taken out loans or sold shares to invest in growth, since they expected demand to continue to rise. Instead, demand shrinks, because much of it was debt-fueled and unsustainable.

smallnamespace 10y ago
Yeah that's a reasonable model that links the debt and business cycles together, but it makes a key assumption: that investors only depend on lagging metrics of credit quality (business defaults), so fail to stop the bubble from inflating. What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past.
- AnimalMuppet 10y ago
  > What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past. I think the problem is human nature. People forget. Sure, this has happened many times before, but the most recent time was, say, eight years ago. That's a long time in peoples' memories. And, while there may be this nagging memory of trouble, right now there's money to be made...
- smaddox 10y ago
  Lenders can't predict the future any better than creditors. There's nothing mysterious about that. If you want a theory for _why_ the future is unpredictable, read up on chaos theory.