Wednesday, June 12, 2013

More About Financial Bubbles


But why economic agents do not learn a lesson from history and what is the origin of the observed market euphoria? It should actually wonder more generally about the rationality of agents. By their individual actions, they participate in effect to create a gap between the actual value of a thing and its market value. And this gap increases; more the bursting of the bubble is near, even if the term is unknown. This process can be summarized by the metaphor of the beauty contest Keynes in Chapter 12 of the General Theory. So imagine that you are in a competition against a host of other competitors. You are facing a hundred photos of girls all equally charming as the other, and you are asked to select six, the six prettiest. The person whose choice is closest to the average choice (that is to say the girls who got the most votes) will be the winner of this competition and win the jackpot. Three techniques are available to you and to win. First, you choose a simple, even naive strategy, which is to choose the six most beautiful girls according to your standards of beauty. But you can also adopt a strategy. which is more vicious this time to copy your selection on the other competitors with your expectations. Finally, you say that there is no reason for you to be the one to embrace the second strategy you determine an ultimate, which includes the fact that each competitor will not only formulate expectations about choice other participants, but also on your own. The metaphor of beauty contests and shows that speculation is mainly due to expectations that each agent makes about the behavior of other agents. Worse, it seems rational to participate in this type of competition because there is a real jackpot game now apply this reasoning to any other market (financial, real estate or even tulips) and you now understand that when Prices are disconnected from reality is that economic agents engaged in a competition of beauty contests guy and that large batches are obviously involved other words, do not enter a speculative market generates a cost (opportunity) that corresponds to the potential gain that you would not have achieved; corollary, it is rational to participate in inflating a bubble in order to enrich themselves, knowing that sooner or later the bubble will explode . If the game mirrors expectations promote the creation of speculative bubbles, it should be noted that favorable market conditions may also participate in this movement. Thus, over the last ten years, it is interesting to note that each period of financial euphoria is a situation of low interest rates and abundant liquidity. Thus to extinguish the fire of the Internet bubble of the early naughtier, the Federal Reserve has made successive rate cuts that have led to a rise in private debt and the emergence of a real estate bubble The subprime; Belated. Again, the response of central bankers involved in the reduction rates that, this time, encouraged the public debt; replete. And since it seems that we are now cured syndrome "this time is different" (Reinhart and Rogoff), the current historically low interest rates could facilitate the emergence of a new bubble. What will be the nature of the next big crisis? An early response, rather obvious, is of the bond market, when many experts welcome historically low borrowing rates, especially for states but also for corporate, bond bubble continues to swell to form a time bomb. And if some commentators are trying to alert the markets inevitable future rise in interest rates, the warnings remain almost unnoticed as the general euphoria is great. But other risk factors may also be highlighted. Real overheating in China, seven-fold during the decade gold bubble carbon and financing of energy transition and finally growing attraction for bit coin. Yes, this totally paperless currency created in 2009 by a computer meeting the pseudonym Satoshi Nakamoto, who was at the center of media talks some time ago, due to the sudden surge in its course and all its fall brutal. At its inception, the parity bit coin stood indeed one thousandth of a dollar before reaching on April 10 to a high of 266 dollars, then lose in just a few days over 70% of its value to pass under the below 80 dollars. All bubbles eventually burst and one day or the other. But the man never lacks imagination to always find a new source of enrichment. And when he is not at the origin, it adopts a mimetic behavior that allows him to achieve his goal. This process can really be repeated ad infinitum? Or, maybe it does not itself amount to a giant bubble that would only swell for centuries?

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