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Bubble Formation And Bubble Bursting: A Flowchart So Simple Even An Economist Can Get It

Tyler Durden's picture





 

Since it is now quite clear that despite calling for even endless-er QE, the uberdovish Chicago Fed, and by implication the entire FOMC, is still clueless about the two most critical processes of modern fiat-based economics, namely bubble formation, and its counterpart, bubble bursting, we decided to give them a helping hand, and to explain just how these two fundamental events occur, with flow charts so simple, even an Economics PhD can get it.

Bubble Formation: start at the bottom left...

Bubble Bursting: ...and end with a 'debt crisis' and a 'rush for the exits'

Rinse and Repeat - Simple. QED

Source: Oliver Wyman

 


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Wed, 09/26/2012 - 23:07 | Link to Comment flacon
flacon's picture

Can I Charlie MUNGER in my pants now?

 

http://www.urbandictionary.com/define.php?term=munger

Wed, 09/26/2012 - 23:21 | Link to Comment Precious
Precious's picture

,000 -> Asset bubbles arise from farting in the bathtub.

,000 -> Oh Ben.  You didn't fart that bubble.

Wed, 09/26/2012 - 23:25 | Link to Comment markmotive
markmotive's picture

Perhaps Peter Schiff can explain what a bubble is in this raw interview footage from the documentary "The Bubble"

http://www.planbeconomics.com/2012/09/22/raw-footage-of-peter-schiff-int...

Thu, 09/27/2012 - 02:15 | Link to Comment Ar-Pharazôn
Ar-Pharazôn's picture

"Oh Ben.  You didn't fart that bubble."

 

Obomber helped him

Thu, 09/27/2012 - 05:29 | Link to Comment ZippyBananaPants
ZippyBananaPants's picture

For those of you that don't know the difference between a fart and a fizzle, a fart travels around the turd on its way out, the fizzle actually travels through the turd, hence the greater smell!

Thu, 09/27/2012 - 06:15 | Link to Comment IBelieveInMagic
IBelieveInMagic's picture

This is the kind of first rate actionable information that we have come to love and expect from knowledgeable ZHers! +5

Thu, 09/27/2012 - 09:09 | Link to Comment ZippyBananaPants
ZippyBananaPants's picture

Thank you kind sir!

Thu, 09/27/2012 - 06:57 | Link to Comment neidermeyer
neidermeyer's picture

Mass quantities of carbonated beverages effervesce while fizzling , I find it extremely effective.

As to bubbles , isn't it enough just to say that bubbles are created by granting credit or price expansion for the purpose of eventually becoming "valid" "real" money in the publics eyes ... all so the central bank can then pull back in the real money which the public must repay from funds created by producing real goods and services.

Thu, 09/27/2012 - 06:37 | Link to Comment Dalmatian
Dalmatian's picture

If that bubble is Ben's "fart" I think what's gonna happen soon is the economy will have a shart.  Yikes!  Grab your mutual funds from the market!  Cash out!  SHART!!!

Thu, 09/27/2012 - 01:16 | Link to Comment thomasincincy
thomasincincy's picture

love that urban dictionary

Wed, 09/26/2012 - 23:09 | Link to Comment trebuchet
trebuchet's picture

there are a whole set of structural assumptions behind that flow chart around lack of change in composition of demand, lack of productivity growth and income/wage growth.

Nice try though

Wed, 09/26/2012 - 23:20 | Link to Comment dhussey
dhussey's picture

NERD ALERT!

Wed, 09/26/2012 - 23:24 | Link to Comment Diamond_Dave
Diamond_Dave's picture

I believe there may be a Chairmanship opening for the "Tre." That kind of thinking and over complexity statements is what allows the Central Banks to baffle the public.

Wed, 09/26/2012 - 23:55 | Link to Comment trebuchet
trebuchet's picture

No, its simple. 

What makes prices rise? demand > supply.

For assets, what drives demand?   expectations of future value. 

When expectations of future vaue are high and disconnect with reality you get asset bubbles. 

Those slides mainly describe the transmission mechanisms involved in influencing asset prices, not how asset prices are set.

OW are one of the biggest collection of nerds on the planet BTW, which i'm sure they will take as a compliment.

 

Thu, 09/27/2012 - 00:19 | Link to Comment SafelyGraze
SafelyGraze's picture

me and the treb are all about the aforementioned chartflaws shown above. 

as per an example you have your illiquidity overhang vis-a-vis the re-leveraged non-performing asset class vehicles and the tranche restructuring they represent.

and that's just for starters. you also have to take into account the wage spread in terms of the price movements with respect to volume inventories in a just-in-time-environment, which would be concurrently improved with a retainer.

chartmaker: you're suspect.

but don't take my word for it.

 

Thu, 09/27/2012 - 06:17 | Link to Comment jeff montanye
jeff montanye's picture

you see first asset prices are influenced, then they are set (after the influencers go offstage and the setters come on).  it really is that simple.

Thu, 09/27/2012 - 18:00 | Link to Comment trebuchet
trebuchet's picture

you are so right its scary - coz that is exactly the way the CBs view the markets

 

haha even though you meant it as a sarc comment on my post 

Wed, 09/26/2012 - 23:10 | Link to Comment DavosSherman
DavosSherman's picture

The FOMC is comprised of psychopathic morons.

Wed, 09/26/2012 - 23:12 | Link to Comment CunnyFunt
CunnyFunt's picture

A 20-minute turnover, excellent ZH!

Wed, 09/26/2012 - 23:14 | Link to Comment sitenine
sitenine's picture

"So Simple Even An Economist Can Get It"
Tyler, if you're taking bets, I've got 10 Oz silver against.

Wed, 09/26/2012 - 23:18 | Link to Comment GFORCE
GFORCE's picture

Still too complicated for Krugman...

Wed, 09/26/2012 - 23:27 | Link to Comment covsire
covsire's picture

Well he is a Nobel Prize W1nnar!  I mean, you can't get these w1nnar's attention without a clearly identifable character in the mix, like a part of the flowchart that reminds these delusional morons that they are like Aragorns and Gandalphs.  Without that identifiable quality, these slides are useless for the delusional elite who fancy themselves as the saviors of mankind and the elite of the round table.

Thu, 09/27/2012 - 00:54 | Link to Comment RockyRacoon
RockyRacoon's picture

Exactly!  Not enough terms of art nor inexplicable formulas with a lot of funny characters in it (you know, like squiggles in subsets of parentheses) for the Noble Elite to even take notice of this obviously over simplified graph.  Meh.

Pity that the chart is comprehendable by (and scares the crap out of) my 2 rescue mutts.  Their cushy life is in jeopardy!

Thu, 09/27/2012 - 04:15 | Link to Comment Sandmann
Sandmann's picture

No it isn't. Krugman is working for his gold.....he peddles a view that he believes in but few others outside Wall Street and its pet creature The Fed. Krugman lives in a world of Brest-Litovsk and not the Midwest. He has as the Germans say - a different Weltanschauuung. Rather as Wolfgang Schauble sees himself as someone to lead the German Volk away from its own "evil" nature by submerging it in a New European Order.......Krugman sees the US as simply a means to create a New World Order.

 

It is the Old Old Story....Men who think they have Hidden Insight....or as Keynes put it: -

'Madmen in authority who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back.'

They are both hellbent on the abnegation of what those around them hold dear - the nation state

Thu, 09/27/2012 - 07:54 | Link to Comment mvsjcl
mvsjcl's picture

But how is it that so many madmen of so different backgrounds and locales all hear the same voice?

Thu, 09/27/2012 - 05:52 | Link to Comment Comay Mierda
Comay Mierda's picture

Still too complicated for Krugman...

yes.  he cant understand why there are no aliens

Wed, 09/26/2012 - 23:22 | Link to Comment yogibear
yogibear's picture

Charlie Evans, like Dudley have their knee pads on servicing financial criminals.

 

 

 

Wed, 09/26/2012 - 23:26 | Link to Comment markmotive
markmotive's picture

Always has been that way. Always will.

Wed, 09/26/2012 - 23:28 | Link to Comment newengland
newengland's picture

mark,

Nihilist.

Wed, 09/26/2012 - 23:27 | Link to Comment newengland
newengland's picture

Love ya, Tylers.

Carry on...

Wed, 09/26/2012 - 23:29 | Link to Comment adr
adr's picture

There's a lot of hot air blown into the bubble by speculators in that chart.

It looks like removing the speculators makes physical demand the only cause of inflation.

Thu, 09/27/2012 - 00:53 | Link to Comment Beam Me Up Scotty
Beam Me Up Scotty's picture

You mean JPM and GS? You think speculators are average joes day trading? JPM bought a whole bunch of that last SPR release. They don't even own a refinery. Did they buy it to heat their buildings?

Thu, 09/27/2012 - 07:25 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

You are not speculating on price if you actually control the price movement in both directions.  You are a practicing monopoly in that case.

Wed, 09/26/2012 - 23:45 | Link to Comment Julian
Julian's picture

Pop!

Thu, 09/27/2012 - 00:00 | Link to Comment dbomb12
dbomb12's picture

Its all Greek to me, maybe a little Spain, Italy and Portugal as well

Thu, 09/27/2012 - 00:03 | Link to Comment Bernankenstein
Bernankenstein's picture

My mommy taught me a poem. I have no idea what it means...but it is like the "Three Little Fishes" poem. Don't forget to say the chorus after each verse. God I love my job. She always made me part of the story. It inspired me to become what I am today.

 

Down at the Fed in a little bitty room

Was a cabal of seven board governors, and Benny, too.

Print! Said the seven to Benny, Print if you can! Print if you wish.

So they printed and printed and printed, right over the fiscal cliff.

 

Chorus: Krugy Krugy Lloyd, Dimon Dimon Timmy Boob

 

Stop! Said the middle class (whatever that is), you’ll cause us great loss!

But the seven guvs and Ben didn’t want to be bossed

So those seven retarded knuckleheads set off on a printing spree

And they printed and printed, right on to eternity.

 

Whee! yelled the 7 stooges, oh this is a lot of fun!

Print all through the days, we’ll never be done!

So they printed and printed and printed, it was all moneterrorist recreation

‘Till all of a sudden they noticed some hyperinflation.

 

Whoa! Cried the guvs, oh look at the prices!

Who’d have known our fun could have caused such a crisis?

Back to the Fed they convened and conspired,

To ensure the economy is eternally mired.

 

Thu, 09/27/2012 - 00:22 | Link to Comment Precious
Thu, 09/27/2012 - 00:27 | Link to Comment Bernankenstein
Bernankenstein's picture

LOL

Thu, 09/27/2012 - 09:13 | Link to Comment GeezerGeek
GeezerGeek's picture

Cute. Fresh take on an old song. I actually remember listening to it around 1950. My parents had it on a 78 rpm record, the standard back then. I never realized back then that it would be applicable to elitist hubris some 60 years later.

Thu, 09/27/2012 - 04:38 | Link to Comment Mudja
Mudja's picture

Brilliant!

Thu, 09/27/2012 - 17:48 | Link to Comment Ewtman
Ewtman's picture

Tried this to the tune of The Beverly Hillbillies. Seems to work just as well.

Thu, 09/27/2012 - 00:56 | Link to Comment icanhasbailout
icanhasbailout's picture

Flowchart for sophisticated, Ph.D. economists:

 

You -----> Suck

Thu, 09/27/2012 - 01:04 | Link to Comment Dr. Engali
Dr. Engali's picture

I didn't see war in that flow chart. Maybe the should leave a space .

Thu, 09/27/2012 - 01:32 | Link to Comment polo007
polo007's picture

Hey guys,

You can download a complete copy of this Oliver Wyman report by visiting the following link:

http://www.oliverwyman.com/media/OW_EN_FS_Publ_2011_State_of_Financial_Services_2011_US_Web.pdf

The Financial Crisis of 2015

An Avoidable History

Thu, 09/27/2012 - 06:16 | Link to Comment falak pema
falak pema's picture

superb read! TY. I picked this out for what WYman calls "the worst case scenario" :

 

"One way of interpreting the historical data in the chart is that the transfer of power from the British Empire to the United States in the first half of the 20th century caused a period of global instability that ultimately led to the default of some of the world’s largest economies. Only when the US emerged as the dominant economic and military power at the end of WWII did the world enter a new period of economic stability. In 1940 the British pound still accounted for two- thirds of foreign currency reserves but by 1945 the US dollar had become the global reserve currency."

 

It sums up my sentiment of the historical trend in western civilization today. Pax AMericana now precisely where PAx Britannica was in early 1900.

 

But as Wyman says, its the worst case scenario. And its better to face it as a possible outcome in order to plan avoiding it as the ONLY probable outcome.  His whole message to TPTB is to pull their heads out of the sand and mend their rotten, corrupt ways !

 

Good Advice!

But is anyone listening? 

 

Thu, 09/27/2012 - 01:54 | Link to Comment ebworthen
ebworthen's picture

Economists will claim they can control the hot air, the bubble, the pin, and Women.

Thu, 09/27/2012 - 01:55 | Link to Comment zhandax
zhandax's picture

Look at the pictures of Roubini’s wall and tell me who is controlling whom

Thu, 09/27/2012 - 01:45 | Link to Comment chump666
chump666's picture

The Keynesian commies from hell (China) just shot some speed into the Shanghai composite.

Hilarious spike.

China has just started printing. Nice.  Cue war less than three months :China/Japan.  Dec/Jan Iran is bombed and the oil price goes parabolic.  World economic endgame begins the first leg.

 

Thu, 09/27/2012 - 02:03 | Link to Comment chump666
chump666's picture

China gonna do somthing soon, could be why they just juiced their market.

http://usa.chinadaily.com.cn/china/2012-09/27/content_15785839.htm

Thu, 09/27/2012 - 01:49 | Link to Comment titty sprinkles
titty sprinkles's picture

Instructions not clear enough, got my dick caught in a printing press

Thu, 09/27/2012 - 02:19 | Link to Comment radicall
radicall's picture

Tyler swings between Ben is printing.. buy commodities and oh commodities are in bubble.. Schitzo.. Just like the markets

Thu, 09/27/2012 - 02:33 | Link to Comment JKearney3153
JKearney3153's picture

who's gonna bail out the fed when they burst?............shit

Thu, 09/27/2012 - 02:34 | Link to Comment JKearney3153
JKearney3153's picture

ooops, sorry. stupid question.....china ;)

Thu, 09/27/2012 - 04:34 | Link to Comment zhandax
zhandax's picture

Right, pal.  If you don't know who the sucker is at the table, look at that busted flush between your job and your mortgage.

Thu, 09/27/2012 - 02:40 | Link to Comment oakley88
oakley88's picture

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Thu, 09/27/2012 - 05:25 | Link to Comment sabra1
sabra1's picture

The Bernank, aka Bubble Boy!

https://www.youtube.com/watch?v=SOcFdS_ALMw

Thu, 09/27/2012 - 06:38 | Link to Comment rsnoble
rsnoble's picture

My flowchart starting last night at 9pm till now ends with me getting out of this chair and taking a huge shit.  In fact ill be lucky if I get out of this chair.

Thu, 09/27/2012 - 06:45 | Link to Comment ptoemmes
ptoemmes's picture

I kind of like hands on for teaching...

Put the FOMC in a bubble...a hot air balloon might do.  

Start blowing it up and let it - and them - float up to, oh, 10,000 feet or so.

Pop the bubble - preferably quickly.

They may or may not then understand, but the problem will be solved.

 

Thu, 09/27/2012 - 07:35 | Link to Comment bania
bania's picture

Billy Idol gets it.

Thu, 09/27/2012 - 08:48 | Link to Comment RSloane
RSloane's picture

I disagree with the title of this thread. Its not simple enough for economists to get. Next time, do the flowchart in crayons.

Thu, 09/27/2012 - 09:27 | Link to Comment Drachma
Drachma's picture

Reminds me of the one about the constipated econometrician...he had to work it out with a pencil.

Thu, 09/27/2012 - 10:24 | Link to Comment sasebo
sasebo's picture

Posted this on wrong thread ----

Has anybody looked at a basic circular flow chart lately? I think this is where the real answers to when will all this crazyness end are to found. A basic flow chart shows the mechanism that makes the economy run. No govmunt & no finance. The real economy needs neither.

What it shows is that when you add finance, the leakage to savings removes money for consumption without adding an injection for investment. It also adds an injection from the fed (part of finance, not a part of guvmunt) to finance.

So what does this mean? It means that money is confiscated from workers by corporate profits, taxes,  to purchase imports & debt payments to finance. So guvmont has to borrow money from finance (the fed) to transfer to laid off consumers to finance corporate profits & bank loans, etc.

And where does this fed, financial, guvmont insanity end? Simple. And it can only be seen from a look at a simple circular flow diagram. When the worker-consumer is removed from the flow diagram who's going to provide corporate profits, repay bank loans, pay govmunt taxes & pay for the trade deficit? The fed printing presses? Yeah, right.

And this is a first pass -- just think what a phd grad student (Austrian not Keynesian) can do with this.   

Thu, 09/27/2012 - 11:23 | Link to Comment dadichris
dadichris's picture

Great article!

Thu, 09/27/2012 - 11:47 | Link to Comment Darkness
Darkness's picture

Can someone simplify this for me?

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