Growing threat of Asset bubbles

Globalization

Rising global competition and the emergence of independent central banks have helped countries contain consumer prices.  But globalization is pushing asset prices in the opposite direction.

In a world with few barriers to the flow of capital, foreigners are often the main buyers of stocks, bonds and real estate in markets from New York to Seoul, making prices for these assets less stable, and an increasingly telling signal of a coming economic crash.

Debt-fueled property booms and recessions

Many postwar economic "miracles," ranging from Italy and Japan in the 1950s to Latin America and Southeast Asia later, first took off because of strong fundamentals (like strong investment and low inflation) but were sustained by rapidly rising debts and ended with a bursting property bubble.

In recent decades, recessions have been more likely to originate in debt-fueled property booms, for the simple reason that there has been an explosion in mortgage finance.  Since the boom in modern finance began in the late nineteenth century, mortgage lending has grown much faster than other lending to households and private companies, which helps explain why economic booms and busts "seem to be increasingly shaped by the dynamics of mortgage credit."

The growing threat posed by asset bubbles

Before World War II, there were 78 recessions - including only 19 that followed a bubble in stocks or housing.  

After the war, there were 88 recessions, the vast majority of which, 62, followed a stock or housing bubble.

For the last 3 decades, every major economic shock has been preceded by a bubble in housing, stocks or both, including 

• Japan's meltdown in 1990, 
• the Asian financial crisis of 1997 - 1998, 
• the dot-com crash of 2000-2001, and, of course, 
• the global financial crisis of 2008.  

Asset price crashes can trigger bad consumer price deflation

Often, a crash in prices of houses or stocks will depress the economy, by making people feel suddenly less wealthy.  Thus shaken, they spend less, resulting in lower demand and a fall in consumer prices.  In other words, asset price crashes can trigger bouts of bad consumer price deflation.  

• This is what happened in Japan, where the real estate and stock crash of 1990 led to the long fall in both asset and consumer prices. 
• It also happened in the US, where the stock crash of 1929 was followed by consumer price deflation in the early years of the Great Depression.