The Savvy Wallet

Why and How Do Asset Prices Collapse? Minsky Moments Explained Have you ever wondered why some markets experience sudden and dramatic crashes, wiping out the wealth of investors and triggering recessions? If so, you may be interested in learning about the concept of Minsky moments, named after the economist Hyman Minsky, who developed a theory of financial instability and crises. What Is a Minsky Moment? A Minsky moment is a sudden, major collapse of asset values which marks the end of the growth phase of a cycle in credit markets or business activity 1 A Minsky moment is preceded by a period of excessive speculation and risk-taking, fueled by easy credit and optimistic expectations. As asset prices rise, investors borrow more money to buy more assets, hoping to sell them later at a higher price and make a profit. This creates a positive feedback loop that reinforces the upward trend in asset prices and increases the leverage in the system. However, this process cannot go on forever. ...

Linear (Arithmetic) and Logarithmic (Exponential Growth) Scales/Charting Explained When you look at a chart of a financial asset, such as a stock, a cryptocurrency, or a commodity, you may notice that there are different ways to display the price movements. One of the most important choices you have to make is whether to use a linear or a logarithmic scale for the y-axis, which represents the price level. In this post, we will explain the difference between these two types of scales and how they can affect your analysis and trading decisions. What is a linear scale? A linear scale, also known as an arithmetic scale, is a type of scale that plots the price level changes with each unit change according to a constant unit value. This means that each change in price is represented by the same vertical distance on the scale, regardless of the price level when the change occurred. For example, if the price of an asset moves from $10 to $20, the vertical distance on the scale will be the same...

How Low Can Interest Rates Go? A One Minute Perspective on “Modern-Day” Central Banking Limits Interest rates are one of the most important tools that central banks use to manage the economy. By changing the cost of borrowing, they can influence the level of spending, saving, investment, and inflation. But how low can interest rates go, and what are the limits of central banking in the modern world? What are interest rates and how do they work? Interest rates are the price of money. They reflect how much it costs to borrow or lend money for a certain period of time. For example, if you borrow $100 at an annual interest rate of 10%, you will have to pay back $110 after one year. Conversely, if you lend $100 at an annual interest rate of 10%, you will receive $110 after one year. Central banks set the interest rate at which they lend money to commercial banks, which in turn affects the interest rates that commercial banks charge to their customers. In the United States, the central bank ...

Why Wasn’t “Money Printing” (Fed, ECB, etc.) Followed by High Inflation? One of the most common questions that many people have about the economic consequences of the COVID-19 pandemic is why the massive expansion of central bank balance sheets did not lead to high inflation. After all, according to the classical quantity theory of money, if the money supply increases faster than the output of goods and services, then the price level should rise. This is what happened in some historical episodes of hyperinflation, such as in Germany in the 1920s or in Zimbabwe in the 2000s. However, the reality is more complex than the simple equation MV=PY, where M is the money supply, V is the velocity of circulation, P is the price level, and Y is the real output. In this blog post, we will explore some of the reasons why the money printing by the Federal Reserve, the European Central Bank, and other central banks did not result in high inflation, at least not yet. The difference between base money ...

From Deflationary Shock/Crash to Inflationary Spiral: A One Minute “Deflation to Inflation” Scenario What is deflation and why is it bad for the economy? Deflation is a general decline in the prices of goods and services, which sounds like a good thing for consumers, but it can have negative consequences for the economy as a whole. Deflation can be caused by a sudden drop in demand, a surge in supply, or a contraction in the money supply. When deflation occurs, consumers and businesses may postpone their spending and investment decisions, expecting that prices will fall further in the future. This can create a vicious cycle of lower demand, lower production, lower income, lower spending, and lower prices, which can lead to a deflationary spiral. A deflationary spiral is a situation where deflation feeds on itself and becomes self-reinforcing, causing a severe economic downturn. A deflationary spiral can be triggered by a deflationary shock, which is a sudden and large negative shock to...

Is Hyperinflation a Threat for the United States or European Union Nations? Hyperinflation is a term that describes a situation where the prices of goods and services increase rapidly and uncontrollably, eroding the value of money and causing severe economic and social problems. Hyperinflation is usually caused by excessive money supply, political instability, economic shocks, or a loss of confidence in the currency. Hyperinflation is rare in modern history, but it has occurred in several countries, such as Germany, Zimbabwe, Venezuela, and Hungary, with devastating consequences. But what about the United States or the European Union nations? Are they at risk of hyperinflation in the near future? The answer is not straightforward, as there are many factors that influence inflation and its expectations. However, based on the current economic conditions and outlook, most experts agree that hyperinflation is unlikely to happen in these regions, at least in the short term. Here are some of...

Negative Oil Prices Explained in One Minute: From Demand Shock to Futures Market “Fine Print” Oil is one of the most important commodities in the world, but its price can be very volatile. In April 2020, something unprecedented happened: the price of US oil turned negative for the first time in history 1 . How did this happen and what does it mean? Demand shock The main reason for the negative oil prices was the collapse in demand caused by the COVID-19 pandemic. As lockdowns across the world kept people inside, the need for oil plummeted. Airlines grounded their flights, factories halted their production, and cars stayed parked. The International Energy Agency estimated that global oil demand fell by 29 million barrels per day in April 2020, a 30% drop from the previous year 2 . Supply glut At the same time, the supply of oil remained high, creating a huge surplus. In March 2020, Saudi Arabia and Russia engaged in a price war after failing to agree on production cuts. They both ramped...