In turn, soaring stocks and declining interest rates lower the cost of capital and artificially boost consumption, as the wealth effect encourages people to spend more. The booms usually come to a painful end when the phase of accelerating growth gives way to decelerating growth rates. Financial asset prices collapse. In addition, while growth rates were overestimated, supply was underestimated. Cutthroat price competition and competition from newer technologies lead to widespread losses.
Stock prices collapse some more.
Subsequently, the cost of capital rises and credit is sharply curtailed, as the new-issue market shuts down, and as bonds can be placed only at prohibitively high interest rates. Alan Greenspan has begun, and will continue, to lower interest rates and ease monetary policies, at any cost, in an attempt to avoid a hard landing. My vote is no. Investment booms driven by technological breakthroughs are deflationary. Railroads cut long-distance transportation costs.