The economic principle of bubble rupture

The economics of a bubble burst
Source:anonymous Mail forwards
Once there was a small island nation, and the territory was the isle itself. The currency in circulation is only 2 yuan, because only 2 coins of 1 yuan circulate in this island country.

1) There are only 3 citizens on this island, and a 1-dollar coin is owned by each of the islands, B and C.

2) B decided to use 1 yuan to buy Shimoshima to a, so that a and c each have a 1 yuan coin and b to get a value of 1 Yuan Island.

The net worth of this small island is 3 yuan.

3) c. Since this island island has only one island, and the island is a non-productive asset, it will certainly appreciate. So, he borrowed 1 yuan and bought the island with his own 1 yuan to B.

A borrowed a dollar to C, so his net worth is 1 yuan

B sold his island and got 2 yuan, so his net worth is 2 yuan.

C got an island worth 2 yuan but owed a dollar, then his net worth is 1 yuan.

Net worth of this island nation = 4 yuan

4) Armor saw the island he once owned appreciated and regretted selling it. Fortunately, he borrowed 1 yuan. Then he borrowed 2 yuan from B, so he bought the island with 3 yuan. He used the borrowed $2 in cash and eliminated the $1 debt owed to him to buy a small island from c.

B borrowed 2 yuan for a, so his net worth is 2 yuan.

C now has 2 1 yuan coins, his net worth is still 2 yuan.

The net worth of this country = 5 yuan. Bubbles are gradually building up.

5) b Seeing the value of land rising, he also wants to own land. So he used 4 yuan to buy a land for a, payment is to C borrowed 2 yuan and lifted a to him borrowed 2 yuan.

As a result, a not only cleared the debt but also got 2 coins. His net worth is 2 yuan.

B got a $4 worth of land but he still owes 2 yuan, his net worth is 2 yuan.

C borrowed 2 yuan to B, so his net worth is 2 yuan.

The island's net worth = 6 Yuan. Nonetheless, the island has only one island and 2 yuan in circulation.

6) Everyone earns money, everyone is happy and rich.

7) One day, C has a bad idea, "well, if the land does not appreciate, b how to give back my money." After all, only 2 yuan in circulation, I think after all, B owns the land at most only worth 1 yuan.

This is the same as a thought.

8) Nobody wants to buy the land. Finally, a has 2 yuan of money, his net worth is 2 yuan. B owes 2 yuan to the land, but he once thought that the value of 4 yuan is now worth only 1 yuan. His net worth has changed to 1 yuan.

C borrowed 2 yuan, but it was a rotten debt. Although his net worth is 2 yuan, but his heart is very disturbed.

The island's net worth has become 3 yuan.

Of course, before the bubble burst, B also thought his land value was 4 yuan. His net worth is 2 yuan, his heart is also very uneasy.

The island's net worth has become 3 yuan.

9) b has no choice but to declare bankruptcy. C had to give up the debt he owed him, in return he got now only 1 yuan worth of land.

A has 2 coins, his net worth is 2 yuan. B is bankrupt, his net worth is 1. (b lost everything) C had no choice but to have a land worth only 1 yuan. (c lost 1 yuan) the island's value =3.

End of Story * * *

Anyway, it's just a redistribution of property. A win, B lost, C survived the difficult.

Notable points:

(1) When a country's bubble is formed, the debt between individuals is also being formed.

(2) The island in this story is a closed-systems with no other country and no external debt. The value of an asset can only be calculated in the island's own currency, so there is no net loss.

(3) When the bubble burst, it is possible to produce an over-damping system, meaning that the value of the land will not fall to less than 1 yuan.

(4) When the bubble bursts, the person with cash is the winner. People who have land or borrowed from others are losers. Assets will shrink, even in the worst case, they will go bankrupt.

(5) If there is a fourth citizen who has a coin or another piece of land, he does not participate in the game. In the end, he did not win or lose. In the process he will only see his money or the land appreciating or devaluing.

(6) When the bubble rises, everyone makes money.

(7) If you're smart enough to know you're in a bubble, it's worth the money (like a) to play. But you have to know when it's time to turn everything into cash.

(8) The above applies not only to land but also to stocks.

(9) The actual value of the land or stock depends largely on the state of mind. The economics of a bubble burst

Once there is a little island country. The land of this country is the tiny island itself. The total money in circulation is 2 dollar as there were only a pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, A and C now all own 1 dollar while B owned A piece of the land that's worth 1 dollar.
The net asset of the country = 3 dollar.

3) C thought that since there are only one piece of the land in the country and land are non productive asset, its value must de Finitely go up. So, he borrowed 1 dollar from A and together with his own 1 dollar, he bought the land from B for 2 dollar.
A have a loan to C of 1 dollar, so he net asset is 1 dollar.
B sold he land and got 2 dollar, so he net asset is 2 dollar.
C owned the piece of land worth 2 dollar and with his 1 dollar debt to A, he net asset is 1 dollar.

The net asset of the country = 4 dollar.

4) A saw, the land he once owned have risen in value. He regretted selling it. Luckily, he had a 1 dollar loan to C. He then borrowed 2 dollar from B and and acquired the land back from C for 3 dollar. The payment is by 2 dollar cash (which he borrowed) and cancellation of the 1 dollar loan to C.
As a result, a now owned a piece of the land which is worth 3 dollar. But since he owed B 2 dollar, and his net asset is 1 dollar.

B loaned 2 dollar to A. So he net asset is 2 dollar.
C now has the 2 coins. He net asset is also 2 dollar.
The net asset of the country = 5 dollar. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own. So he bought the land from A for 4 dollar. The payment is by borrowing 2 dollar from C and cancellation of He 2 dollar loan to A.

As a result, a has got his debt cleared and he got the 2 coins. He net asset is 2 dollar.
B owned a piece of land that's worth 4 dollar but since he had a debt of 2 dollar with C, he net Asset is 2 dollar.
C loaned 2 dollar to B, so he net asset is 2 dollar.

The net asset of the country = 6 dollar. Even though, the country have only one piece of land and 2 Dollar in circulation.

(6) Everybody have made money and everybody felt happy and prosperous.

(7) One day a evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There are only 2 dollar in circulation, I think after all the land that B owns are worth at more than 1 dollar only. "
A also thought the same by now.

(8) Nobody wanted to buy land anymore. In the end, A owns the 2 dollar coins, he net asset is 2 dollar. B owed C 2 dollar and the land he owned which he thought worth 4 dollar are now 1 dollar. His net asset become-1 dollar.

C have a loan of 2 dollar to B. But it's a bad debt. Although he net asset is still 2 dollar, he heart is palpitating.

The net asset of the country = 3 dollar again.

Of course, before the bubble burst B thought his land worth 4 dollar. He net asset is still 2 dollar, he heart is palpitating.

The net asset of the country = 3 dollar again.

(9) B had no choice but to declare bankruptcy. C as to relinquish him 2 dollar bad debt to B but in return he acquired the land which was worth 1 dollar now.

A owns the 2 coins, he net asset is 2 dollar. B is bankrupt, he net asset is 0 dollar. (B lost everything) C got no choice but end up with a land worth only 1 dollar (C lost one dollar) the net asset of the country = 3 dollar.

Story Ends *******

There is however a redistribution of wealth. A is the winner, and the B is the loser, and the C is lucky the and he is spared.

A few points worth noting-

(1) When a bubble was building up, the debt of individual in a country to one another was also building up.
(2) This stories of the island are a close system whereby there are no other country and hence no foreign debt. The worth of the asset can
Only being calculated using the island ' s own currency. Hence, there is no net loss.
(3) An overdamped system was assumed when the bubble burst and meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow and cash is the winner. The fellows has the land or extending loan to others is the loser. The asset could shrink or in worst case, they go bankrupt.
(5) If There is another citizen D either holding a dollar or another piece of land but refrain to take part in the game. At the end of the day, he'll neither win nor lose. But he'll see the value of the the-his-money or land go-up and-like-a see saw.
(6) When the bubble is in the growing phase, everybody made money.
(7) If you were smart and know that's living in a growing bubble, it's worthwhile to borrow money (as a) and take Part in the game. But if you must know the should change everything back to cash.
(8) In addition of land, the above applies to stocks as well.
(9) The actual worth of land or stocks depend largely on psychology.