Asset price bubbles are not only the consequence of expansionary monetary policies, but also the only way to ensure fiscal solvency in the longer term

The highly expansionary monetary policies in OECD countries have led to bubbles in the prices of financial and real estate assets through the known portfolio rebalancing mechanism: if the money supply increases, economic agents rebalance the structure of their wealth by buying assets with the excess money they initially hold, driving up the prices of these assets. But it must be understood that asset price bubbles are not only the consequence of expansionary monetary policies, they are the only way to ensure fiscal solvency in the longer term through the following mechanism: Since asset prices (bonds, equities, real estate, etc.) are higher, at equilibrium, demand for investment money is stronger since the total value of wealth has increased and investment money is a fraction of total wealth; If demand for investment money increases significantly, the money supply can increase significantly without there being an increase in transaction money; The increase in the money supply makes it possible to monetise public debt and ensure fiscal solvency; the fact there is no increase in transaction money makes it possible to prevent price rises (at equilibrium, transaction money is linked to nominal income), and therefore to prevent rises in interest rates, which also ensures fiscal solvency .