Saturday, 13 July 2013
Interesting take on debt
The second video is basically a summary of economist Hyman Minsky's "financial instability hypothesis". The idea is that rising asset prices are prone to unsustainable, speculative bubbles because as prices go up people buy more (rather than less, as is the typical price-demand relationship). To finance the purchase of increasingly costly assets, consumers will borrow more debt which increases their purchasing power. With more purchasing power people continue to bid up the price and hence demand for the assets. This vicious cycle continues until people can no longer afford to service their debt, at which point the whole bubble collapses.
|Real Housing Prices in Canada & the US.|
Image Source: The Economist
(obtained via Krugman's blog)
Household debt and house prices in Canada, by the way, have gotten the attention of one Nobel Laurette in economics and an economist who predicted the US housing crash.
Cheerful thoughts, eh?