Macroscope | Stock prices are at bubble heights. Who’s sounding the alarm?

How do we know when a stock market boom is about to end in a bust, or when an asset bubble is about to burst? There is little point in looking to market practitioners or analysts for objective answers as they are generally too anxious to preserve their market-linked bonuses.

But what about economists – at least those who either still work in academia or for multilateral institutions such as the International Monetary Fund, rather than investment banks? Surely those who have no vested interest in keeping the market mood music going can be relied on to offer objective advice.

His answer was disturbingly frank. Asset inflation, he said, was a greatly understudied and misunderstood subject, given its role in periodic financial crises. Coming from a man whose students at the Massachusetts Institute of Technology (MIT) included future leaders of major central banks, this was a revealing statement.

On the other hand, close attention is paid to what economists term current price inflation; that is, a continuous increase in the price of anything from a loaf of bread or a bowl of rice to a train ticket.