The bubble emerges in the midst of a self-reinforcing virtuous cycle of strong capital flows, good asset returns, and strong economic conditions. The capital that came in during the early upswing produced good returns, as it was invested productively and led to asset price appreciation, which attracted even more capital. In the bubble phase, the prices of the currency and/or the assets get bid up and increasingly financed by debt, making the prices of these investments too high to produce adequate returns, but the borrowing and buying continues because prices are rising, and so debts rise rapidly relative to incomes.

When there is a big wave of money coming into (and/or staying in) a country/currency, typically the exchange rate is strong, foreign-exchange reserves increase, and the economy booms—or in some cases the currency rises a lot and the economy grows more slowly. This upswing tends to be self-reinforcing until it is so overdone that it reverses. It is self-reinforcing because the inflows drive up the currency, making it desirable to hold assets denominated in it (and desirable to hold liabilities denominated in other currencies), and/or produce more money creation that causes prices to rise more.

In either case, during these bubbles the total returns of these assets to foreigners (i.e., asset prices in local currency plus the currency appreciation) are very attractive. That plus that country’s hot economic activity encourage more foreign inflows and fewer domestic outflows. Over time, the country becomes the hot place to invest, and its assets become overbought so debt and stock-market bubbles emerge. Investors believe the country’s assets are a fabulous treasure to own and that anyone not in the country is missing out. Investors who were never involved with the market rush in. When the market gets fully long, leveraged, and overpriced, it becomes ripe for a reversal. In the bullets here and in the ones that follow, we show some key economic developments typically seen as the bubble inflates. •• Foreign capital flows are high (on average around 10 percent of GDP) •• The central bank is accumulating foreign-exchange reserves •• The real FX is bid up and becomes overvalued on a purchasing power parity (PPP) basis by around 15 percent •• Stocks rally (on average by over 20 percent for several years into their peak)

简单几句话就介绍了泡沫产生的原理：一开始投资被高效的使用，资产价格、收益都很吸引人，导致更多的资本（国内、国外）流入这个国家，货币同时也强势升值，导致更多的国际资本愿意持有这种货币的资产。当资产价格被推高到一定程度（4个指标），导致底层的收益以及产生的产品和服务不能支持如此高的估值，以及很多投资的成本、杠杆变高，这些都造成了泡沫的出现。