Essay: Returns on investments

Sample Essay

The result is that the demand exceeds the available financial assets and supply for assets cannot meet the demand. At this point, there is increase in prices for assets and many investors invest in the booming economy as positive returns on invested are being attained. Minsky refers this point, where increase in investment results to increase in income as euphoria. Traders speculate increase in the prices and therefore invest in production of goods for sale, a process that builds up resulting to an event referred to as overtrading.

Overtrading refers to over speculation about price increase and returns on investment. Over speculation revolves around buying assets for resale since euphoria makes investors to overestimate their profits and returns. As businesses ad individuals observe others making money out of speculation, they also begin to speculate about the future and the result is irrationally (mania or bubble) as individuals want to get rich quick. The bubble comes before a burst. A surprise event results to the busting of the bubble, which is referred to as a crash. Prior to the crash, the prices escalate and drop unstably, an economic scenario referred to as noise. When the prices drop consistently, a crash follows. Some top players in the market catalyze the bursting of the bubble since they take profits and sell out. The result is decrease in prices and financial distress arises. The distress arises when a firm realizes that it cannot repay its liabilities.

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