makes a great point:
“The fundamental cause of instability is the feed-back loop caused by debt use to speculate on rising asset prices. As an asset price rises, which makes the asset a better form of collateral, in turn increases the demand for more borrowing based on that collateral, which in turn boosts the asset price.
This feedback loop requires fuel to maintain and or accelerate its growth. As with all debt the main fuel is income, but this is always relative to amount of leverage a lender will allow the borrower to have on the collateral and the rate of interest they charge for the debt.”
This is very, very true. Rising asset prices increases their usefulness as collateral.
It’s important to note that we only reach our full productive capacity during asset bubbles, or massive government intervention. We had huge, huge growth during WWII – 26% annualized growth in one quarter- due to pushing our economy to the absolute limit.
I won’t claim we can do this level of growth forever. But it seems as though we don’t even bother trying to think about ways we can make our economy really hum. Instead, we wait for the stars to align and for some sector to offer massive windfall profits to a few people before we let our best efforts show.