Gentlemen and Bonds Asking George Washington for an ID

George Soros' Perspective on Booms and Busts

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The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp. The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage - borrowing for investment purposes. At the peak of the boom both the value of the collateral and the degree of leverale reach a peak. When the price trend is reversed participants are vulnerable to margin calls and, as we've seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.