The Mechanisms of Financial Bubbles

Financial Bubble --------------------------Everything becomes greatly Over Valued, and Over Consumed, then Busts !

Economic Activity and Leverage (Risk Taking)

What becomes the Bubble? --------------------------------Assets and Consumption financed by Debt and Equity When? ---------------------------About every 80 years. (Four Generations) Where? ---------------In this case, Worldwide

Key Points: ----------------------------------------------------------------It is all about Individual Confidence (consumers and investors). As Confidence rises, the Bubble inflates. As Confidence falls, the Bubble deflates. But these relationships are not linear; Confidence rises and falls parabolically...or worse. (see "How?" below)

US Economy $14T Consumer Spending 70%

<-------- Deflate / Inflate -------->

Capital Investment Housing Autos Military

Key Points: -------------------------------------------------------------Bubbles progress through five (5) distinct phases of parabolic increase into a blow-off top, followed by a three phase crash, composed of: 1. Trend Reversal 2. Realization, and finally, 3. Capitulation. Afterward, a multi-decade rebuilding phase ensues.

Who drives the Bubble? ------------------------- Consumers - Bankers - Investors - Business owners - Government ------------------------Everyone (All Individuals)

Investors Provide Equity and Debt

Employment Levels

Government

Leverage -------------------> <------------------- Deleverage

More Speculation -------------> <-------------- Less Speculation Balance Fulcrum How? -------------------------------------------------------------Individual Willingness to Speculate (Risk Taking) 2007 <-------- 25 Years -------> Period
We are here

As Individuals (Consumers, Bankers, Investors, Businesses, Government) become more and more confident over a period of decades, their willingness to Speculate (Risk Taking) becomes progressively greater (parabolically). This creates a Bubble in Asset Values and Consumption. When this Risk-Taking Mania runs its course, Individuals progressively withdrawal from Speculation (Risk Taking), and Asset Values and Consumption collapse back to traditional and sustainable levels. The rise and fall of bubbles take many, many years, in this case 35 years starting in 1982.

Collapse

Bubble dcantey 7-11-11