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Paper wealth can vanish fast
A rush to sell
Central banks have raised interest rates, and many have started shrinking their balance sheets through quantitative tightening, so the money supply is starting to shrink. If sentiment shifts and people try to cash out on their paper wealth en masse, more assets chase fewer dollars, and the global economy risks a balance sheet reset.
Falling prices and debt
Prices would fall, and trillions in paper wealth would be vaporized as assets are revalued at sharply lower prices. Households and governments carrying debt could find themselves underwater on their obligations. Loan-to-value ratios, already elevated, spike, which forces them to sell more assets and cut spending to prioritize paying down debt.
Japan and productivity
Japan after 1990 shows the pattern: a deep recession, massive asset price corrections, and a period of stagnation. The best route around it is faster productivity. If GDP grows faster than asset and debt values, real economies can catch up to their inflated balance sheets and settle at a healthier equilibrium.
Why did Japan's slump last so long?
Economist Richard Koo of Nomura Research Institute described it as a balance sheet recession. After land and stock prices collapsed, companies were left with debts that exceeded their assets, so they used profits to pay down borrowing even when interest rates were near zero. When businesses repay debt instead of borrowing, demand for money falls and growth stalls. Japan's banks also carried bad loans for years, which kept credit tight.
How does quantitative tightening work?
It reverses quantitative easing. A central bank lets the bonds it holds mature without buying new ones, or sells them outright, which removes reserves from the banking system. The Federal Reserve began shrinking its balance sheet in June 2022, after it had peaked near $9 trillion. It had also run an earlier, smaller round of tightening starting in October 2017.
Why do falling prices force more selling?
Economist Irving Fisher described the mechanism in his 1933 paper on the debt-deflation theory of great depressions. Borrowers who owe more than their assets are worth must sell assets to repay lenders, and that selling pushes prices down further. Lower prices raise the real burden of the debt that remains, which sets off another round. Fisher wrote the paper after losing most of his own fortune in the 1929 crash.
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