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The Anti-Bubbles by Diego Parrilla

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CHAPTER 7

A Premortem Analysis

Soros Reflexivity

How can we justify the behavior of Central Banks and Governments, testing the limits of monetary policy and credit markets? The answer in my view is given by Soros Reflexivity theory, which states that “fundamentals drive prices, but prices also drive fundamentals.”

The European Government bond crisis was a good example of how Soros’ Reflexivity theory works. During the early stages, the crisis in small economies such as Greece was not impacting larger economies such as Italy or Spain. “We are ok,” would say their respective finance ministers. As the crisis advanced, a domino effect of forced liquidations and contagion pushed the borrowing costs of Italy and Spain higher. “We are ok. We don’t need ...

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