Asset Bubble Posted by Posted by shareinfoline on March 27 2008 11:46:03

Once there as a little island country! "he land of this country as the tiny island itself! "he total #oney in circulation as 2 dollar as there ere only t o $ieces of 1 dollar coins circulatin% around! 1& "here ere 3 citi'ens li(in% on this island country! A o ned the land! B and ) each o ned 1 dollar! 2& B decided to $urchase the land fro# A for 1 dollar! *o+ A and ) no each o n 1 dollar hile B o ned a $iece of land that is orth 1 dollar! "he net asset of the country , 3 dollar! 3& ) thou%ht that since there is only one $iece of land in the country and land is non $roduceable asset+ its (alue #ust definitely %o u$! *o+ he borro ed 1 dollar fro# A and to%ether ith his o n 1 dollar+ he bou%ht the land fro# B for 2 dollar! A has a loan to ) of 1 dollar+ so his net asset is 1 dollar! B sold his land and %ot 2 dollar+ so his net asset is 2 dollar! ) o ned the $iece of land orth 2 dollar but ith his 1 dollar debt to A+ his net asset is 1 dollar! "he net asset of the country , 4 dollar! 4& A sa that the land he once o ned has risen in (alue! -e re%retted sellin% it! .uc/ily+ he has a 1 dollar loan to )! -e then borro ed 2 dollar fro# B and and ac0uired the land bac/ fro# ) for 3 dollar! "he $ay#ent is by 2 dollar cash 1 hich he borro ed& and cancellation of the 1 dollar loan to )! As a result+ A no o ned a $iece of land that is orth 3 dollar! But since he o ed B 2 dollar+ his net asset is 1 dollar! B loaned 2 dollar to A! *o his net asset is 2 dollar! ) no has the 2 coins! -is net asset is also 2 dollar! "he net asset of the country , 2 dollar! A bubble is buildin% u$! 12& B sa that the (alue of land /e$t risin%! -e also anted to o n the land! *o he bou%ht the land fro# A for 4 dollar! "he $ay#ent is by borro in% 2 dollar fro# ) and cancellation of his 2 dollar loan to A! As a result+ A has %ot his debt cleared and he %ot the 2 coins! -is net asset is 2 dollar!

B o ned a $iece of land that is orth 4 dollar but since he has a debt of 2 dollar ith )+ his net Asset is 2 dollar! ) loaned 2 dollar to B+ so his net asset is 2 dollar! "he net asset of the country , 6 dollar! 3(en thou%h+ the country has only one $iece of land and 2 4ollar in circulation! 16& 3(erybody has #ade #oney and e(erybody felt ha$$y and $ros$erous! 17& One day an e(il ind blo ed! An e(il thou%ht ca#e to )5s #ind! 6-ey+ hat if the land $rice sto$ %oin% u$+ ho could B re$ay #y loan! "here is only 2 dollar in circulation+ 7 thin/ after all the land that B o ns is orth at #ost 1 dollar only!6 A also thou%ht the sa#e! 18& 8obody anted to buy land any#ore! 7n the end+ A o ns the 2 dollar coins+ his net asset is 2 dollar! B o ed ) 2 dollar and the land he o ned hich he thou%ht orth 4 dollar is no 1 dollar! -is net asset beco#e 91 dollar! ) has a loan of 2 dollar to B! But it is a bad debt! Althou%h his net asset is still 2 dollar+ his -eart is $al$itatin%! "he net asset of the country , 3 dollar a%ain! :ho has stolen the 3 dollar fro# the country; Of course+ before the bubble burst B thou%ht his land orth 4 dollar! Actually+ ri%ht before the colla$se+ the net asset of the country as 6 dollar in $a$er! -is net asset is still 2 dollar+ his heart is $al$itatin%! "he net asset of the country , 3 dollar a%ain! 1<& B had no choice but to declare ban/ru$tcy! ) as to relin0uish his 2 dollar bad debt to B but in return he ac0uired the land hich is orth 1 dollar no ! A o ns the 2 coins+ his net asset is 2 dollar! B is ban/ru$t+ his net asset is 0 dollar! 1 B lost e(erythin% & ) %ot no choice but end u$ ith a land orth only 1 dollar 1) lost one dollar& "he net asset of the country , 3 dollar! ************ ****End of the story******* ********* ********* ** "here is ho e(er a redistribution of ealth! A is the inner+ B is the loser+ ) is luc/y that he is s$ared! A fe $oints orth notin% 9 11& :hen a bubble is buildin% u$+ the debt of indi(idual in a country to one another is also buildin% u$!

12& "his story of the island is a close syste# hereby there is no other country and hence no forei%n debt! "he orth of the asset can only be calculated usin% the island5s o n currency! -ence+ there is no net loss! 13& An o(er da#$ed syste# is assu#ed hen the bubble burst+ #eanin% the land5s (alue did not %o do n to belo 1 dollar! 14& :hen the bubble burst+ the fello ith cash is the inner! "he fello s ha(in% the land or e=tendin% loan to others are the loser! "he asset could shrin/ or in orst case+ they %o ban/ru$t! 12& 7f there is another citi'en 4 either holdin% a dollar or another $iece of land but refrain to ta/e $art in the %a#e! At the end of the day+ he ill neither in nor lose! But he ill see the (alue of his #oney or land %o u$ and do n li/e a see sa ! 16& :hen the bubble as in the %ro in% $hase+ e(erybody #ade #oney! 17& 7f you are s#art and /no that you are li(in% in a %ro in% bubble+ it is orth hile to borro #oney 1li/e A & and ta/e $art in the %a#e! But you #ust /no hen you should chan%e e(erythin% bac/ to cash! 18& 7nstead of land+ the abo(e a$$lies to stoc/s as ell! 1<& "he actual orth of land or stoc/s de$end lar%ely on $sycholo%y!