By E. Porras
Asset bubbles and contagion have had a profound impact at the monetary markets after the monetary and sovereign debt crises. This booklet takes a quantitative method of analyzing those phenomena and should entice practitioners who have to comprehend the repercussions of those occasions on buying and selling exchanges and the markets.
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Additional resources for Bubbles and Contagion in Financial Markets, Volume 1: An Integrative View
That is, demand is not creating sustainable wealth but rather shifting future consumption to the current time. One reason why future demand is altered is that the resources that should have been available to make future demand possible are consumed in the present, as bubbles are fueled by debt. Given that debt is consumed in the present and expended over the future, liquidity will be unavailable to pay for later consumption. 3 shows that the amount for demand A is transferred into bubble demand B.
The multiplier effect of fractional reserve banking, which depends on the percentage of deposits banks are required to hold as reserves, ampliﬁes the effects of these actions. The optimal monetary policy for an economy depends on the nation’s economic situation. If the country is suffering unemployment and recession, authorities will use an expansionary policy and increase the total supply of money to encourage spending. On the other hand, if the country is undergoing an inﬂationary period, the authorities will decrease the rate of money supply to implement a contractionary policy to slow down consumption.
Furthermore, by 1825 the government had already repealed the Bubble Act, which meant anyone with means could invest in a new corporation. Railway companies took advantage of these new technologies and promoted themselves as rock-solid ventures. The usual offer was that shares could be purchased with a 10 percent deposit and the company could call in the remainder as needed. The deal offered was de facto a credit to prospective investors, therefore enlarging the company’s lenders’ pool. This fact, together with a solid marketing campaign promoting the railways as sound investments, resulted in thousands of investors, including citizens with very limited savings, purchasing large quantities of shares.