DiscoverScroll article

An economic bubble (also called a speculative bubble, asset bubble, or simply financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify.

Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth (e.g. dot-com bubble), and/or by the belief that intrinsic valuation is no longer relevant when making an investment (e.g. 2000s US housing bubble), and even esoteric assets (e.g. Bubbles usually form as a result of either excess liquidity in markets, and/or changed investor psychology. 1980s Japanese asset bubble and the 2020–21 Everything bubble), are attributed to central banking liquidity (e.g. overuse of the Fed put). In the early stages of a bubble, many investors do not recognise the bubble for what it is, often thinking that the increase in asset prices is justified. Therefore, bubbles are often conclusively identified only in retrospect, after the bubble has already "popped" (or "burst") and prices have crashed. The bursting of a bubble can lead to significant financial losses and economic disruption.

The term "bubble", in reference to financial crisis, originated in the 1711–1720 British South Sea Bubble, and originally referred to the companies themselves, and their inflated stock, rather than to the crisis itself.

There are different types of bubbles, with economists primarily interested in two major types of bubbles: The equity bubble and the debt bubble.

Examples of an equity bubble are the Tulip Mania, the cryptocurrency bubble, the dot-com bubble, and the Roaring Twenties

Examples are the Roaring Twenties stock market bubble (which caused the Great Depression) and the United States housing bubble (which caused the Great Recession). Debt bubbles tend to have more severe and systemic economic consequences than equity bubbles because they directly affect the banking and financial system.

The impact of economic bubbles is debated within and between schools of economic thought; they are not generally considered beneficial, but it is debated how harmful their formation and bursting is. In addition, the crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise; this view is particularly associated with the debt-deflation theory of Irving Fisher, and elaborated within Post-Keynesian economics.

When the bubble inevitably bursts, those who hold on to these overvalued assets usually experience a feeling of reduced wealth and tend to cut discretionary spending at the same time, hindering economic growth or, worse, exacerbating the economic slowdown.

This may determine how central or relatively minor/inconsequential policies like fractional reserve banking and the central bank's efforts to raise or lower short-term interest rates are to one's view on the creation, inflation and ultimate implosion of an economic bubble. Economic bubbles often occur when too much money is chasing too few assets, causing both good assets and bad assets to appreciate excessively beyond their fundamentals to an unsustainable level. Once the bubble bursts, the fall in prices causes the collapse of unsustainable investment schemes (especially speculative and/or Ponzi investments, but not exclusively so), which leads to a crisis of consumer (and investor) confidence that may result in a financial panic and/or financial crisis. Typically the collapse of any economic bubble results in an economic contraction termed (if less severe) a recession or (if more severe) a depression; what economic policies to follow in reaction to such a contraction is a hotly debated perennial topic of political economy.

There are chaotic theories of bubbles which assert that bubbles come from particular "critical" states in the market based on the communication of economic factors.

Economic or asset price bubbles are often characterized by one or more of the following: For example, in the housing bubble of the 2000s, the housing prices were unusually high relative to income.

Quick Facts

• In the early stages of a bubble, many investors do not recognise the bubble for what it is, often thinking that the increase in asset prices is justified.
• 1980s Japanese asset bubble and the 2020–21 Everything bubble), are attributed to central banking liquidity (e.g. overuse of the Fed put).
• The bursting of a bubble can lead to significant financial losses and economic disruption.
• Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth (e.g. dot-com bubble), and/or by the belief that intrinsic valuation is no longer relevant when making an investment (e.g.
• 2000s US housing bubble), and even esoteric assets (e.g.

Source material: Wikipedia - "Economic bubble". Adapted and summarized for DiscoverScroll. Original contributors are credited through the linked Wikipedia article. Read original on Wikipedia. CC BY-SA 4.0. Changes were made from the original.