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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:
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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