Pat Gunning wrote: > I don't follow your asset bubble story, Tony. Let's assume that the asset > is a share of stock. You seem to be saying that an asset bubble can exist > without the bulls actually buying the asset. Is that what you have in > mind? If not, where do the bulls get the money to buy it? And where does > the money go when the bulls become bears? Your story seems incomplete. > More importantly, now that I think of it, if the asset bubble is merely a > book entry and not something real, how does its bursting affect aggregate > demand or aggregate supply? > OK, Pat, let me try to clarify what I obviously explained badly. Consider shares of stock - existing shares, that is (new issues raise different questions and are a small part of the market). In any fairly short period most holdings are not traded. Those that are traded are traded at a price which equates demand and supply - the money goes from buyer to seller, bulls match bears at the equilibrium price. No money (saving) is absorbed or released net - it just changes hands. The price can rise or fall depending on people's beliefs about future prices and returns. If a bubble bursts when expectations turn sour it can affect aggregate demand, for example because individual shareholders who previously regarded their holdings as sufficient, say for retirement, are now (really) poorer (individually) in terms of the purchasing power of their holdings, and decide to cut back on spending. Such an individual need not have intended to sell the shares immediately - what changes is their expectation of future prices. That is why it only, in principle, takes a few transactions to reveal the current price with possibly large effects. Admittedly, new issues really do (or can) translate real money savings into new investment, but the terms at which they do so are heavily influenced by transactions in existing shares. Tony Brewer