{"id":14099,"date":"2016-09-12T19:54:06","date_gmt":"2016-09-12T23:54:06","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=14099"},"modified":"2016-09-12T19:54:06","modified_gmt":"2016-09-12T23:54:06","slug":"economic-research-bubbles-credit-and-their-consequences","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2016\/09\/12\/economic-research-bubbles-credit-and-their-consequences\/","title":{"rendered":"Credit bubbles and their consequences"},"content":{"rendered":"<p>Interesting <a href=\"http:\/\/www.frbsf.org\/economic-research\/publications\/economic-letter\/2016\/september\/equity-and-housing-bubbles-and-consequences\/\" target=\"_blank\">paper from the San Francisco Fed<\/a> by \u00d2scar Jord\u00e0, VP Economic Research at the San Francisco Fed, Moritz Schularick, professor of economics at the University of Bonn, and Alan M. Taylor, professor of economics and finance at the University of California, Davis. They discuss the difficulty in identifying asset bubbles and the relationship of asset bubbles to credit.<\/p>\n<blockquote><p>A defining feature of advanced economies in the post-World War II era is the rise of credit documented in Jord\u00e0, Schularick, and Taylor (2016). This is visible in Figure 1, which displays the cross-country average ratio to GDP of unsecured and mortgage lending since 1870. Following a period of relative stability, both lending ratios grew rapidly after the war, with mortgages taking off in the mid-1980s&#8230;.<\/p>\n<p><a href=\"http:\/\/www.frbsf.org\/economic-research\/publications\/economic-letter\/2016\/september\/equity-and-housing-bubbles-and-consequences\/?utm_source=mailchimp&amp;utm_medium=email&amp;utm_campaign=economic-letter-2016-09-12\"><img data-recalc-dims=\"1\" decoding=\"async\" class=\"alignnone size-full\" src=\"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2016\/09\/2016-27-1.png?w=525&#038;ssl=1\" alt=\"\" \/><\/a><\/p>\n<p>Most buyers use mortgages to buy homes, but few savers use borrowed funds to invest in the stock market. Thus, one might expect equity price busts to be less dangerous than collapses in house prices: A crash in the price of assets financed with external (rather than internal) funds is likely to have deeper effects on the economy. As collateral values evaporate, some agents will delever to reduce their debt burden, in turn causing a further collapse in asset prices and in aggregate demand. The more widespread this type of leverage is, the more extensive the damage to the economy. Integrating the role of credit into the analysis of asset price bubbles is therefore critical.<\/p><\/blockquote>\n<p>Anna Schwartz discussed the issue in a 2008 <a href=\"http:\/\/www.wsj.com\/articles\/SB122428279231046053\" target=\"_blank\">interview with the Wall St Journal<\/a>. Then 92 years old, the co-author with Milton Friedman of <em>A Monetary History of the United States (1963)<\/em> nailed the cause of asset bubbles:<\/p>\n<blockquote><p>If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates &#8230;..<\/p><\/blockquote>\n<p>The problem is not asset bubbles, whether they be in stocks, housing or Dutch tulips. That is merely a symptom of a deeper malaise: too easy monetary policy. The threat is the underlying credit expansion that caused the problem in the first place.<\/p>\n<p>And while asset bubbles may be difficult to measure, credit bubbles are easy to identify. If credit grows at a faster rate than GDP, that is a credit expansion. The ratio of credit to GDP should be maintained in a narrow, horizontal band.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" title=\"US Bank Loans &amp; Leases to GDP\" src=\"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2016\/09\/2016-09-13-credit.png?w=525&#038;ssl=1\" alt=\"US Bank Loans &amp; Leases to GDP\" \/><\/p>\n<p>Easy to monitor and easy to correct, if the Fed is looking in the right place. But central banks are good at looking elsewhere &mdash; and closing the gate long after the horse has bolted. A similar problem is evident in Australia.<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" title=\"Australia Credit to GDP\" src=\"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2016\/09\/2016-09-13-credit-australia.png?w=525&#038;ssl=1\" alt=\"Australia Credit to GDP\" \/><\/p>\n<p>Even worse if we look at household credit to disposable income (on the left below).<\/p>\n<p><img data-recalc-dims=\"1\" decoding=\"async\" class=\"aligncenter\" title=\"Australia Credit to GDP\" src=\"https:\/\/i0.wp.com\/thepatientinvestor.com\/wp-content\/uploads\/2016\/09\/2016-09-13-hhcredit-australia.png?w=525&#038;ssl=1\" alt=\"Australia Credit to GDP\" \/><\/p>\n<p>Unfortunately the horse has bolted and attempting to contract the level of debt would cause a deflationary spiral with devastating consequences. The only way to restore sanity is to hold debt steady at current (nominal) levels and allow growth and inflation to gradually reduce the GDP ratio to more stable levels.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Interesting paper from the San Francisco Fed by \u00d2scar Jord\u00e0, VP Economic Research at the San Francisco Fed, Moritz Schularick, professor of economics at the University of Bonn, and Alan M. Taylor, professor of economics and finance at the University of California, Davis. They discuss the difficulty in identifying asset bubbles and the relationship of &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/thepatientinvestor.com\/index.php\/2016\/09\/12\/economic-research-bubbles-credit-and-their-consequences\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Credit bubbles and their consequences&#8221;<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[57],"tags":[],"class_list":["post-14099","post","type-post","status-publish","format-standard","hentry","category-stock-markets"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Credit bubbles and their consequences - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Credit bubbles and their consequences - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Interesting paper from the San Francisco Fed by \u00d2scar Jord\u00e0, VP Economic Research at the San Francisco Fed, Moritz Schularick, professor of economics at the University of Bonn, and Alan M. 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Taylor, perfectly illustrates how high public debt levels impede the ability of an economy to recover from a financial crisis: Figure 3....... shows that high levels of public\u2026","rel":"","context":"In &quot;Debt Levels&quot;","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"Recessions and Public Debt Levels","src":"https:\/\/i0.wp.com\/www.frbsf.org\/economic-research\/files\/2014-07-3.png?resize=350%2C200","width":350,"height":200},"classes":[]},{"id":9474,"url":"https:\/\/thepatientinvestor.com\/index.php\/2014\/03\/12\/how-a-private-credit-boom-can-lead-to-a-sovereign-debt-crises-frbsf\/","url_meta":{"origin":14099,"position":1},"title":"How a private credit boom can lead to a sovereign debt crises | FRBSF","author":"ColinTwiggs","date":"March 12, 2014","format":false,"excerpt":"From a FRBSF paper Private Credit and Public Debt in Financial Crises by \u00d2scar Jord\u00e0, Moritz Schularick, and Alan M. Taylor: Recovery from a recession triggered by a financial crisis is greatly influenced by the government\u2019s fiscal position. A financial crisis puts considerable stress on the government\u2019s budget, sometimes triggering\u2026","rel":"","context":"In &quot;Debt Levels&quot;","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":6541,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/01\/06\/why-governments-need-asset-bubbles-the-economist-video\/","url_meta":{"origin":14099,"position":2},"title":"Why governments need asset bubbles &#124; The Economist [video]","author":"Colin Twiggs","date":"January 6, 2013","format":false,"excerpt":"Zanny Minton-Beddoes, economics editor of The Economist, explains why governments need asset bubbles to mask growing inequality between rich and poor. http:\/\/youtu.be\/JkybYT_EYNc Hat tip to Gregor Samsa","rel":"","context":"In &quot;Economy&quot;","block_context":{"text":"Economy","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/img.youtube.com\/vi\/JkybYT_EYNc\/0.jpg?resize=350%2C200","width":350,"height":200},"classes":[]},{"id":23187,"url":"https:\/\/thepatientinvestor.com\/index.php\/2020\/12\/12\/a-stock-market-bubble-of-epic-proportions\/","url_meta":{"origin":14099,"position":3},"title":"A stock market bubble of epic proportions","author":"Colin Twiggs","date":"December 12, 2020","format":false,"excerpt":"A great deal has been written in recent years about real estate bubbles, stock market bubbles and even bond market bubbles. But there is really only one kind of bubble \u2014 that is a debt bubble. Without low interest rates fueling rapid debt growth, any form of bubble would wither\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":7527,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/04\/22\/fed-watch-monetary-policy-and-financial-stability\/","url_meta":{"origin":14099,"position":4},"title":"Fed Watch: Monetary Policy and Financial Stability","author":"ColinTwiggs","date":"April 22, 2013","format":false,"excerpt":"Tim Duty quotes Minneapolis Federal Reserve President Narayana Kocherlakota, speaking at the 22nd Annual Hyman P. Minsky conference: ....unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity. All of these financial market outcomes are often interpreted\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":4257,"url":"https:\/\/thepatientinvestor.com\/index.php\/2012\/05\/02\/paul-l-kasriel-dont-end-the-fed-mend-the-fed\/","url_meta":{"origin":14099,"position":5},"title":"Paul L. Kasriel: Don\u2019t End the Fed, Mend the Fed","author":"Colin Twiggs","date":"May 2, 2012","format":false,"excerpt":"Although the return to a gold standard for our monetary system has much appeal, it is unlikely to occur. So, let\u2019s not let the perfect be the enemy of the good. Perhaps there is second-best monetary policy approach to the gold standard that might achieve most of the desirable outcomes\u2026","rel":"","context":"In &quot;Banks &amp; Interest Rates&quot;","block_context":{"text":"Banks &amp; Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/14099","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=14099"}],"version-history":[{"count":0,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/14099\/revisions"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=14099"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=14099"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=14099"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}