Economic bubble
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An economic bubble (sometimes referred to as a "speculative bubble") refers to a market condition, where the prices of commodities or asset classes increase to absurd levels (that no longer reflect utility of usage and purchasing power). It occurs when speculation in the underlying good causes the price to increase, thus producing more speculation. The bubble is usually followed by a sudden drop in prices, known as a crash or a bubble burst. Both the boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate chaotically, and become impossible to predict from supply and demand alone.
Economic bubbles are generally considered to have a negative impact on the economy because they cause misallocation of resources into non-optimal uses. In addition, the crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise as was the case of the Great Depression in the 1930s for much of the world and the 1990s for Japan.
Another important aspect of economic bubbles is their impact on spending habits. Participants in a market with goods that are overvalued, spend more because they "feel" richer (the Wealth Effect). Many observers quote the housing market in the United Kingdom, Spain and parts of the United States in recent times, as an example of this effect. When the bubble inevitably pops, those who held on to these assets usually experience an opposite feeling of poorness.
When the bubble occurs in equity markets, it is called a stock market bubble. It is usually very difficult to differentiate a stock market bubble from an ordinary bull market except in hindsight.
Causes
The cause of bubbles is disputed. Some regard bubbles as related to inflation and thus believe that the causes of inflation are also the causes of bubbles. Others take the view that there is a "fundamental value" to an asset, and that bubbles represent a rise over that fundamental value, which must eventually return to that fundamental value. There are chaotic theories of bubbles which assert that bubbles come from particular "critical" states in the market based on the communication of economic actors. Finally, others regard bubbles as necessary consequences of irrationally valuing assets solely based upon their returns in the recent past without resorting to a rigorous analysis based on their underlying "fundamentals".Examples
Examples of economic bubbles include:- Tulip mania (top 1637)
- The South Sea Company (1720)
- Mississippi Company (1720)
- English Channels Bubble
- Railroads Bubble
- the Victorian land boom of the 1880s; see [link]
- Florida speculative building bubble (1926)
- Poseidon bubble (1970)
- TY Beanie Babies (1996)
- dot-com (2000)
- Japanese asset price bubble (late 1980s)
- Real estate bubble
- * British property bubble (as of 2006)
- * Irish Property Bubble (as of 2006)
- * US property bubble (as of 2006)
- ** (The former Florida swampland real estate bubble)
- * Spanish property bubble (as of 2006)
- * California property bubble (as of 2006)
Other goods which have produced bubbles include beanie babies and postage stamps.
See also
External links
- [Dictionary definition of economic bubble]
- [Discussion of the recent stock market bubble]
- [Discussion of the US housing bubble and conflicting opinions.]
- [Discussion of the housing bubble and comparison to stock market bubble]
- [The compelling Real DJIA, 1924-now]
- [The 3 Fed Chair warnings, Real DJIA]
- [When Bubbles Burst (PDF)], World Economic Outlook, International Monetary Fund, April 2003.
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