In the words of Moshin Khan, the director of the IMF Institute, "It's not clear that our economic theory works [in a debt crisis]." The IMF's programs to constrict demand and reduce the current-account deficit increase the cost of servicing debt and cause deflation of asset prices, a double poison for highly indebted countries.
That belief can be traced to prevailing economic theory concerning the causes of asset-price instability – a theory that accounts for risk and asset-price fluctuations as if the future followed mechanically from the past.
It is going to take many such cycles before the exuberant will finally paradigm shift into rationality.DUANE WEISENHAUSLos AngelesSIR You correctly recognise one of the key causes of asset-price inflation during the past three years excessive leverage by noting that margin debt has doubled since 1996.
Estate planning, however, is a critical aspect of wealth management in modern society because intestate death can cause distribution of assets among relatives whom the estate holder might not have liked to receive a share (Global Property Guide 2015).
The excess amount of easy money causes prices of assets such as equities or property to increase, which reinforces speculative tendencies.
Conversely, during the second phase, the combination of an increase in disposable income together with the accrued need for insurance due to social transfers cuts, leads to a growing demand for asset holdings that ends up exceeding the initial steady state level causing an excess of asset demand, supplied by foreign assets.
Carney said there were three ways in which climate change could affect financial stability: physical risks, such as claims from floods and storms; liability risks that could arise if those suffering climate change losses sought compensation from those they held responsible; and transition risks caused by the revaluation of assets caused by the adjustment to a lower-carbon economy.
These bets send signals to the market that can themselves cause the price of assets to shoot up or tumble down.
Bierman agrees with this assessment, and says the current federal uncertainty is both an asset and a cause of anxiety.
A stampede out of ETFs might cause a fire sale of assets that would ripple through the financial system.
