Abstract
We have been examining the theory of instability in financial markets. Instability arises from the time dimension in financial markets—which allows for both current rents and future liquidity, in valuing the capital assets traded in a market. Since the value of a capital asset continues over time from purchase at time T1 to sale at T2, profitability can be increased by using debt to purchase the asset. The percentage of the purchase price financed by debt is called ‘leverage’; and the higher the leverage the greater the profit. This allows ‘speculation’ in trading in the market, using higher and higher leverage to drive up the prices of assets in a ‘hot’ market. As speculators move from financing the purchase of an asset with conservative leverage to speculative leverage to Ponzi leverage, the financial market moves into a financial bubble, bursting in the ‘Minsky moment’ of Ponzi leverage. Leverage in private markets creates instability in stock and real estate markets; and leverage in government budgets creates national fiscal instability.
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