Chapter 10. Irrational Exuberance

“How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Alan Greenspan, December 5, 1996

Baby boomers piled into mutual funds, inflating share prices and prompting fund managers to crowd into hot stocks. The 1997 Asia Crisis showed that they had become the world’s investors of last resort. It prompted China and other Asian countries to build up stockpiles of dollars. That lowered U.S. interest rates and allowed more bubbles to form.

When they have credibility, central bankers can move markets easily. Just asking one hypothetical question will do it. That is what happened on December ...

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