The "lost decade" of Japan from 1990 to 2000 and extend to now (2 decade) was the result of low interest rate and high inflation during the 80s'such that the Japanese central bank feared the economy was becoming unstainable.The central bank began to increase interest rate to cool its economy but it came too late. The nation woke up to realize that corporates were highly geared and consumers were highly leverage in real estate. The bubble bursted and Japan still has not recovered today despite the central bank pumping in money (printing money) and with low interest rate.
The US was facing the same situation as Japan in 2008 when the bubble bursted.The fear of a lost decade for US is not unthinkable. Fed has maintained near zero interest rate and pumping money into its economy hoping to boost spendings by corporations and consumers but without much success due to multiple problems facing both the US and the world.
The Fed has said that it could raise interest rates anytime when sign of a recovery and should act forcefully to prevent another bubble should the low interest rate and higher inflation are allowed to prolong.
The vulnerable economies right now are not US and Europe or even Japan.These new vulnerable economies are Singapore, Hong Kong; China and other high growth, high inflation economies in Asia.
We are fortunate that MAS has been taking preemptive actions to prevent a bubble with various cooling measures to discourage corporations and consumers from highly leveraged particularly in real estate.
Question we need to ask is can MAS alone prevents an asset bubble? Economists have differing views with regards to Japan's "lost decade"and the US subprime crisis. Some believe it was due to weak monetary policies while others believe it was due to economic cycle largely at play. Both have their points.
Bubble usually starts by the rich (top 20%) and filled up by the 80%. The bubble starts to burst also usually by the rich and burst by the other 80%. Interest rate only serve as a catalyst but the bubble usually starts to burst when the 20% feel that the economy is not sustainable and start to move their funds or take profits. This exodus effect will cause the 80% to act and the bubble will burst.
The moral of this economic lesson is that we should invest with our EYES and not with our MIND. If one is highly leverage, make sure you have plan B.Interest rate in "theory" is just a catalyst. The thing that causesthe burst is the exodus effects when corporations and consumers start to be cautious just like the Japanese did.
Well! with this, I wish everyone well.