Commentary
Inflation in assets inevitably leads to bubbles bursting.
In the period when central banks were glad to see limited consumer price increases despite large increases in the money supply, they created massive inflation in assets. Throughout the quantitative easing era, bond prices spiked, equity valuations soared, house prices increased significantly above affordability levels, and multiples in private equity and venture capital rose to all-time highs.
Asset inflation preceded consumer price inflation, and it may be a major source of financial instability.
The Bloomberg U.S. house price index has slumped 20 percent since the beginning of monetary contraction, and the evidence of the burst of housing price inflation is a clear signal of capital destruction. Monetary contraction leads to a decline in asset prices that subsequently creates a re-evaluation of the asset base in financial firms, from banks to venture capital firms….