Bubble Psychology from UBS Research

Download 2009-10-23 UBS Bubble-ology

The worst financial crisis in nearly 80 years brought with it a collapse

in share, commodity and housing prices and the near breakdown of

our global financial and monetary systems. We believe that the

creation and destruction of money, or liquidity, played a key role in

this crisis, and that, in fact, a sizeable expansion of the money supply

is a near prerequisite for large asset bubbles.

The second edition in this Bubble-ology series therefore examines

the poorly understood concepts of money creation and money

destruction, the role of central banks and some key characteristics of

our financial system, that lead us to believe that our monetary

system is inherently unstable and prone to bubbles.

We track money before, during and after the crisis and conclude

that while government and central bank measures will most likely

prevent Japanese style-deflation, they are possibly also setting the

stage for future asset price booms and busts.

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