Rising asset prices lead to a general increase in purchasing power, because many asset holders are willing (and able) to borrow more.

First, if growth did not recover and surprise on the upside (in which case high asset prices would be justified), eventually slow growth would dominate the levitational effects of liquidity and force asset prices lower, in line with weaker economic fundamentals.

Do Low Interest Rates Ensure High Asset Prices?

When interest rates rise, the prices of those assets will fall as well.

As the prices of these assets fall, their yields will rise.

High oil prices fuel public discussion about the future of oil prices.

Higher oil prices are here to stay, says the American economic forecaster Allen Sinai.

High oil prices also threaten to slow long term productivity growth.

This enables continued economic growth with high oil prices.

Second, it increases global asset demand, generating asset price inflation.

That is enough to shake asset prices worldwide.

This asset meltdown is the reason for the likely recession.

When interest rates fall, the opposite effect on asset prices may be predicted.

In theory, when interest rates go up, there is reason to believe that asset prices will go down.

To combat the effect of high oil prices, consuming countries adopt expansionary economic policies, lowering interest rates and increasing government spending.

When asset prices move, firms that own these assets are forced to revalue them on their balance sheets quarter by quarter.

Steel prices fell from their very high levels starting in late 2004 early 2005.

As a result, banks have even stronger incentives to resume heavy borrowing (as Admati argues), and, as rising asset prices lift the economy in the recovery phase, it becomes possible for them to borrow even more (as Bernanke knows).

Of course, it is not just oil prices that are high, but all commodity prices, from metals to food to lumber.

The bottom line is that when interest rates rise, asset values will fall.

The crisis culminated in a collapse of asset prices at the end of 2008.

T hat has to subtract growth and could cause core inflation to pick up. Indeed, according to Sinai, higher oil prices are the biggest risk...since the bursting of the stock market bubble in 2000 2001.

High oil prices kept Russia's economy and common people's income growing rapidly.

The high gasoline prices caused the taxi drivers and teachers to go on strike on 18 February 1974.

In other words, will the elevated asset values caused by low discount rates suddenly reset downward at some point? No one knows.

As a result, China s inflation, as well as asset prices, remain under control.

That belief can be traced to prevailing economic theory concerning the causes of asset price instability a theory that accounts for risk and asset price fluctuations as if the future followed mechanically from the past.

Keeping interest rates low discouraged capital inflows and encouraged asset price inflation.

Asset prices shifted, and capital rushed out of emerging markets, causing credit conditions to tighten and exchange rates to fall.

But if the central bank reduces interest rates and credibly commits to keeping them low in the future, asset prices will rise.

Then there is the energy issue. High oil prices have resurrected an old vulnerability.

Indeed, according to Sinai, higher oil prices are the biggest risk...since the bursting of the stock market bubble in 2000 2001.

The answer lies in their view of the root cause of continued high unemployment excessively high real interest rates.

Higher freight rates of course also affected the competitiveness of those steel producers that mainly depend on export markets.

When the prices of even safe assets fall and interest rates climb to sky high levels because traders and financiers collectively want more liquid assets than currently exist, it is simply not safe to let the market sort things out.

When asset prices overshoot reality, eventually they have nowhere to go but down.

The increase in some asset prices may, moreover, lead to a W shaped double dip recession.

For some reason, asset prices get way out of whack and rise to unsustainable levels.

But higher interest rates also imply large capital losses for central banks asset holdings.

Yet if we take a very long term view, it is not so clear that high oil prices are bad for the world as a whole. For example, if high oil prices were the result of taxes that were then redistributed to oil users, they would be unambiguously good.

One oft heard justification for high asset prices is that real (inflation adjusted) long term interest rates are very low.

Funds switched out of Japan have shifted to other financial markets, with the chase for yield driving up asset prices and lowering interest rates.

High oil prices will dampen global growth in the remainder of 2004 and into 2005.

So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption.

Faced with high inflation, Thatcher backed a monetarist approach that supported high interest rates and succeeded in sharply reducing inflation.