Global Debt Bubbles: Overview Flashcards

1
Q

What is a debt bubble?

A

A debt bubble occurs when excessive borrowing drives the value of an asset or a set of assets far beyond their intrinsic value, often leading to a crash.

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2
Q

What are the main drivers of a debt bubble?

A

Low interest rates, overleveraging, speculation, financial innovation, lack of regulatory oversight, and global capital flows.

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3
Q

What role do low interest rates play in debt bubbles?

A

Prolonged low interest rates can lead to excessive borrowing and risk-taking, which inflates asset prices and contributes to debt bubbles.

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4
Q

What does overleveraging mean in the context of debt bubbles?

A

Overleveraging refers to borrowing more than can be reasonably repaid, often under the assumption that asset prices will keep rising.

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5
Q

How does speculation contribute to the formation of debt bubbles?

A

Speculation inflates demand for assets, driving prices beyond their intrinsic value, which can lead to a debt bubble.

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6
Q

How can financial innovation lead to a debt bubble?

A

Financial innovations like derivatives can obscure risk and encourage excessive borrowing, which contributes to debt bubbles.

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7
Q

Why does lack of regulatory oversight lead to debt bubbles?

A

Without proper regulation, lending and borrowing practices can grow unsustainable, allowing risks to build unnoticed.

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8
Q

What role do global capital flows play in debt bubbles?

A

Global capital flows can amplify local debt bubbles by providing easy access to foreign credit, which increases borrowing.

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9
Q

What are the four phases of a debt bubble?

A

The expansion (boom) phase, maturity (peak) phase, burst (bust) phase, and aftermath (correction) phase.

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10
Q

What happens during the expansion (boom) phase of a debt bubble?

A

During the expansion phase, borrowing increases due to easily accessible credit, driving up asset prices.

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11
Q

What is the peak phase of a debt bubble characterized by?

A

The peak phase occurs when debt levels reach their limit, and warning signs like rising defaults appear.

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12
Q

What triggers the burst (bust) phase of a debt bubble?

A

The burst phase is triggered when borrowers can’t service their debt or credit is cut off, causing asset prices to fall.

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13
Q

What happens during the correction phase after a debt bubble bursts?

A

During the correction phase, the economy slows down as people and businesses deleverage, often leading to a recession.

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14
Q

What are the economic consequences of a debt bubble burst?

A

Recession, deflation, government bailouts, and long-term debt overhang are common consequences.

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15
Q

How can asset price crashes lead to deflationary pressures?

A

Deflation occurs when decreased demand and asset price crashes lead to lower prices, which increases debt burdens.

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16
Q

Why do governments often intervene after a debt bubble bursts?

A

Governments often intervene with bailouts to prevent key industries from collapsing and to stabilize the economy.

17
Q

What is meant by long-term debt overhang after a debt bubble bursts?

A

A long-term debt overhang happens when high levels of debt prevent economic growth by limiting consumption and investment.

18
Q

What is the South Sea Bubble (1720)?

A

A speculative bubble where the stock prices of the South Sea Company rose dramatically before collapsing in 1720.

19
Q

How did excessive borrowing lead to the Great Depression (1929)?

A

Excessive borrowing and speculation in the stock market led to the stock market crash of 1929 and the Great Depression.

20
Q

What caused the Japanese asset price bubble in the 1980s?

A

Loose monetary policy and excessive borrowing in real estate and stocks led to the Japanese bubble, which collapsed in the early 1990s.

21
Q

What led to the dot-com bubble (1997-2001)?

A

Speculative investment in tech companies without profits led to the dot-com bubble, which burst in the early 2000s.

22
Q

What caused the Global Financial Crisis (2008)?

A

The 2008 crisis was caused by excessive borrowing in the housing market, driven by subprime mortgages and financial innovations like mortgage-backed securities.

23
Q

How has globalization transformed debt bubbles over time?

A

Global capital flows and interconnected markets mean that debt bubbles in one region can have global consequences.

24
Q

What is the increased role of central banks in modern debt bubbles?

A

Central banks manage economies through monetary policy, but tools like low interest rates can also lead to debt bubbles.

25
Q

How have financial innovations contributed to more complex debt bubbles?

A

Financial innovations have made it harder to detect risk, and complex instruments can obscure the true scale of borrowing.

26
Q

Why are emerging markets increasingly vulnerable to global debt bubbles?

A

Emerging markets are vulnerable due to high external debt and reliance on foreign capital, which can quickly be withdrawn during a crisis.

27
Q

What are the potential sources of future debt bubbles?

A

Corporate debt, government debt, household debt, and climate-related debt are potential sources of future bubbles.

28
Q

Why could rising corporate debt levels lead to a global financial crisis?

A

If corporate profits decline or interest rates rise, high corporate debt levels could trigger a wave of defaults.

29
Q

How could government debt contribute to future debt bubbles?

A

Governments have accumulated large amounts of debt, and if confidence in their ability to repay weakens, a sovereign debt crisis could occur.

30
Q

How can household debt lead to financial instability?

A

High household debt, especially in real estate markets, can lead to defaults and instability if housing prices crash.

31
Q

What are the risks of climate-related debt bubbles?

A

Investments in green energy or climate-resilient infrastructure could create bubbles if returns on these investments are lower than expected.

32
Q

How might technological advancements impact future debt bubbles?

A

Technological advancements like cryptocurrencies and decentralized finance (DeFi) could either mitigate or exacerbate future debt bubbles.

33
Q

What are macroprudential policies in the context of debt bubbles?

A

Macroprudential policies are tools that central banks use to maintain financial stability by controlling systemic risks.

34
Q

Why are central bank and regulatory responses important in managing debt bubbles?

A

Regulatory responses like stress testing and higher capital requirements are essential in managing and preventing debt bubbles.

35
Q

How could social and environmental risks influence future debt bubbles?

A

Debt bubbles may be driven by inequality or environmental crises, such as speculative markets around green energy.

36
Q

Why is global stability impacted by regional debt bubbles?

A

In a globalized world, a debt bubble in one region can impact the global economy due to interconnected capital markets.

37
Q

What is the connection between inequality and debt bubbles?

A

Rising inequality could lead to debt-fueled consumption, making low-income households vulnerable to debt bubbles.

38
Q

What are speculative markets that may arise from climate change?

A

Speculative markets may arise around green energy, carbon credits, or real estate in climate-resilient areas.

39
Q

How do geopolitical tensions contribute to sovereign debt crises?

A

Geopolitical tensions and economic sanctions can disrupt global capital flows, making it harder for countries to service their debt.