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Economic
bubble
An economic bubble occurs when
speculation in a commodity causes the price to increase, thus
producing more speculation. The price of the good then reaches absurd
levels and the bubble is usually followed by a sudden drop in prices,
known as a crash.
Economic bubbles are generally
considered to be bad things because they cause misallocation of
resources into non-productive uses. In addition, the crash which
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 and Japan in the 1990s.
Another important aspect of
economic bubbles is their impact on spending habits. Participants in a
market with goods that are over valued e.g. the housing market in the
United Kingdom, Spain and parts of the United States spend more
because they "feel" richer.
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 until it is over.
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 "inevitably"
return to that fundamental value. Finally 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.
Examples of economic bubbles
include:
- Tulip mania (top 1637)
- The South Sea Company (1720)
- Mississippi Company (1720)
- English Channels Bubble
- Railroads Bubble
- Poseidon bubble (1970)
- Internet bubble (2000) (see
also dot-com)
- Japanese asset price bubble
(late 1980s)
- Real estate
- Florida swampland real estate
bubble
- Spanish property bubble
- British property bubble
Table of major historical crises
(through 1999):
[1]
Other goods which have produced
bubbles include beanie babies and postage stamps.
See also
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