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.