Global Debt Bubbles: Overview Flashcards
What is a debt bubble?
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.
What are the main drivers of a debt bubble?
Low interest rates, overleveraging, speculation, financial innovation, lack of regulatory oversight, and global capital flows.
What role do low interest rates play in debt bubbles?
Prolonged low interest rates can lead to excessive borrowing and risk-taking, which inflates asset prices and contributes to debt bubbles.
What does overleveraging mean in the context of debt bubbles?
Overleveraging refers to borrowing more than can be reasonably repaid, often under the assumption that asset prices will keep rising.
How does speculation contribute to the formation of debt bubbles?
Speculation inflates demand for assets, driving prices beyond their intrinsic value, which can lead to a debt bubble.
How can financial innovation lead to a debt bubble?
Financial innovations like derivatives can obscure risk and encourage excessive borrowing, which contributes to debt bubbles.
Why does lack of regulatory oversight lead to debt bubbles?
Without proper regulation, lending and borrowing practices can grow unsustainable, allowing risks to build unnoticed.
What role do global capital flows play in debt bubbles?
Global capital flows can amplify local debt bubbles by providing easy access to foreign credit, which increases borrowing.
What are the four phases of a debt bubble?
The expansion (boom) phase, maturity (peak) phase, burst (bust) phase, and aftermath (correction) phase.
What happens during the expansion (boom) phase of a debt bubble?
During the expansion phase, borrowing increases due to easily accessible credit, driving up asset prices.
What is the peak phase of a debt bubble characterized by?
The peak phase occurs when debt levels reach their limit, and warning signs like rising defaults appear.
What triggers the burst (bust) phase of a debt bubble?
The burst phase is triggered when borrowers can’t service their debt or credit is cut off, causing asset prices to fall.
What happens during the correction phase after a debt bubble bursts?
During the correction phase, the economy slows down as people and businesses deleverage, often leading to a recession.
What are the economic consequences of a debt bubble burst?
Recession, deflation, government bailouts, and long-term debt overhang are common consequences.
How can asset price crashes lead to deflationary pressures?
Deflation occurs when decreased demand and asset price crashes lead to lower prices, which increases debt burdens.