Friday 26 January 2018
Price and financial stability: rethinking financial markets
David Harrison, 22 Jan 2018
According to David Harrison, since the start of the Bretton-Woods system every few years an economic crisis of some sort occurs. He considers that under the current system these crises are inevitable, and can be compared to the occurrence of earthquakes in areas located on tectonic faults. Harrison attributes this catastrophic nature to the fact that the markets include two separate price systems.
The first is pricing based on current output of a given good or service. This is the real market. The second is the value placed on future asset flows, known as the financial market. One can understand the difference between these two markets by considering the expectations which drive price changes in each of them. In the real market, the output of a given asset is measured often and sales are made frequently so a given good or service’s price can gradually change with the reality of its output. In the financial market the value of a given investment can only be predicted, not measured. As a result of this, speculators are left guessing what the average other speculator expects a given stock to do and thereby feedback loops can result in grossly overvalued assets.
Tuesday 23 January 2018
Subscribe to:
Posts (Atom)