Economic bubble

An economic cycle that is characterized by a rapid expansion followed by a contraction is referred to as an economic bubble. The concept is based on the theory that security prices will always rise above their real value and will continue to do so until prices drop and the bubble bursts. Some bubbles happen in the normal course while others occur as a result of certain changes in the way key players conduct business.

Why should I be aware of this?

It is important to know how to respond to these disturbing signals? We can do a number of things to help face the crisis. It helps to be less dependent. on centralized systems over which we have no control (water works, power plants, chain food stores), the better we can take care of ourselves in the event of an economic crash..

All about economic bubble

The results of economic bubbles can bring about substantial change as was the case with the economic bubble of Japan in the 1980s as a result of which banks became partially deregulated. It can also bring about economic paradigm shift, as evidenced by the dotcom boom in the late 1990’s and early 2000s when people rushed to buy tech stocks even at high prices. It was believed that these high-priced stocks could be sold at even higher prices until confidence was lost on these stocks and a large market correction, or a crash, occurred.

Bubbles that happen in equities markets and economies tend to cause resources to be transferred to areas of fast growth. At the end of the cycle of a bubble, the resources are then moved again, causing prices to suddenly deflate.

Causes of the bubble

The exact cause of economic bubbles is a debated topic among economists. Some experts think that bubbles and inflation are related and are caused by the same factors. Others believe that the bubbles represent an increase or rise over the products or assets fundamental value. Whenever there is a rising movement, it must eventually return to that fundamental value, which is its natural state.

There is another school of thought which believes bubbles are a necessary effect of unreasonably valuing assets based solely on their returns in the recent past without really thinking from a macro perspective or regard for economic fundamentals.

Bubbles are caused when people chase the prices of assets instead of making purchases based on the intrinsic value of the assets. Bubbles, therefore, go to prove that a market is very efficient in the long-term but not very efficient in the short-term.

Short-term economic bubbles are normally seen as mistakes or artificial situations, resulting in a natural correction of the economic imbalance. Long-term bubbles, on the other hand, is brought about by a systematic misperception of the value of certain goods and services as well as long-term manipulation of financial records and lending practices by powerful governments and corporations. The correction of a long-term bubble has the potential of marking the beginning of a long period of depression.

What can I do about it?

• We should make ourselves as economically stable as possible, so in the event of a crash we don’t face excessive hardship.
• If you are paying monthly mortgage for your own home you can lose it if the economy crashes and money becomes worthless. Within a few months of not paying a mortgage, the home goes back to the bank. So try to pay off as much of the loan and carry only a small amount of debt.
• If you have investments, cash out as many as necessary to pay down your debts and mortgage to zero.
• If the house you live in has little equity, you are hardly the owner. You’re living in someone else’s property: the mortgage company’s. Better to sell a beautiful house and buy a more modest property that truly belongs to you.
• Gold and silver values skyrocket during economic crash.. Gold is useful for purchasing costly items, while silver is good for smaller exchanges in the first weeks after a crash. When you buy precious metals, get them from smaller coin shops where you aren’t required to give your name. When you buy gold, buy the purest available. That has more value.

References:

• Understanding the role of bubbles in an economy