14 October 2011

Uncertainty as a positive

The sabbatical year serves as a limit to the money supply. 
The sabbatical year fixes the time when the growth of the money supply will certainly stop. Excess liquidity creates asset bubbles which pop as soon as it is clear when the growth of liquidity will stop. It is the uncertainty around when the illiquidity will occur that keeps the bubble going. The generation of the bubble depends on the uncertainty of what is considered a bad event (the cessation of the growth of the money supply) rather than the certainty about a good event. 
Bubbles thus depend on uncertainty as a positive rather than as a negative. 
The popping of a bubble comes from the stock reverting to a fund, from the asset's value being defined in terms of the likelihood of reselling the asset at a higher price down merely to the net present value of the asset’s income stream. The inability to resell at a higher price exposes the asset’s value as simply the net present value of the asset’s fruits. 

No comments:

Post a Comment