Tuesday, November 12, 2013

Real Economy vs Financial economy

In a financial economy or “monetary-driven economy,” the capital market is far larger than GDP and channels savings not only into investments, but also continuously into colossal speculative bubbles. 

This isn't to say that bubbles don’t occur in the real economy, but they are infrequent and are usually small compared with the size of the economy. So when these bubbles burst, they tend to inflict only limited damage on the economy. The bubbles tend to be contained by the availability of savings and credit, whereas in the financial economy, the unlimited availability of credit leads to speculative bubbles, which get totally out of hand.