"Economic Bubbles" or ''Asset Bubbles '' can be described as a situation where an asset is valued at a price range that strongly exceeds its intrinsic value.
"A bubble is an economic cycle characterized by rapid escalation of asset prices, followed by a large drop in price". There are several factors that cause bubbles such as:Liquidity Factors, Extrapolation, Social Herding, and Moral Hazard.
The Tulip Mania
The first major bubble in history is known as “Tulip Mania” which occurred in 1620 until 1637. It was a period in the Dutch Golden Age when the prices of fashionable Tulip reached extraordinarily high levels and then dramatically collapsed in February 1637 and was considered as the first recorded speculative bubble. The effect on the economy was not significant. Tulip Mania had no critical influence on the prosperity of the Dutch Republic. Yet, the Tulip prices after the bubble became equal to regular flowers.
The Dot-Com Bubble
The “Dot-Com Bubble” is another bubble that occurred in 1990 to 2001. It was a period of extreme growth in the usage of Internet by businesses and consumers. This bubble had a moderate effect on the economy, causing a mild recession in the United States and the developed countries. Sell-offs and subsequent fall in stock prices occurred, and a significant portion of the invested funds was lost.
The South Sea Bubble
“The South Sea Bubble” lasted from 1711 until 1720. It was created as a public-private partnership to consolidate and reduce the cost of national debt. Britain was involved in the War of the Spanish Succession and Spain controlled South America. Unfortunately, the company never realised any significant profit from its monopoly and stock rose greatly in value as it expanded its operations dealing in government debt As a result, stocks in the South Sea Company were traded for 1,000 British Pounds and attracted a lot of people to invest in the South Sea Company but then the stock prices decreased significantly in the second half of 1720. There was a significant impact on the economy, as a massive amount of money was lost, and the British government took actions to stabilize the banking industry. Moreover, the stocks of the South Sea Company became worthless.
The US Housing Bubble
“The U.S. Housing Bubble” occurred between 2007 and 2009, it was a real estate bubble that affected more than half of the U.S states. Housing prices rose in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. As an effect, a lot of people lost their houses due to the inability to pay their mortgages. The US Housing Bubble is closely related to the Global Financial Crises.
The Cryptocurrency Bubble
“The Cryptocurrency Bubble” is still subject to many debates. In 2010, various scholars and journalists claimed that some cryptocurrencies are indicating an economic bubble phenomenon, yet others argue that the cryptocurrency bubbles are indicative of unforeseen technological problems in the new economic markets.
Cryptocurrencies are digital assets designed to work as mediums of exchange that use cryptography to secure transactions. The value of some cryptocurrencies, and Bitcoin, in particular, has risen dramatically in 2017, followed by a significant decline. As the value of most cryptocurrencies fluctuates a lot, there is an opportunity for generating speculative gains.
How to identify an economic bubble?
Any or a combination of the following factors may be an indicator to an economic bubble.
- Rationalizing decisions based on speculated price increases
- Rationalizing asset prices by increasingly weaker arguments
- Incentives for behaving irrationally by economic actors
- A high presence of marketing/media coverage
- Higher risk lending and borrowing behavior
- Unusual changes in single measures
- A lower interest rate environment
- Leverage to purchase assets
- Trade imbalances
Infographic Original Source: https://www.cyberius.com/global-bubbles-infographic/