We all have played with bubbles during our childhood days. It grows, expands, and suddenly bursts.
The economy bubble is quite similar to this bubble. But, there is the involvement of money. The prices of any particular product go on increasing, and it increases far more than fundamental value. A time comes when the supply of that product is less and demand is much higher. Investors invest a large amount of money in this particular product. The price increases exorbitantly by the illogical decisions of these investors, which forms a bubble.
After some time, a stage comes when the bubble bursts. That means now no one is ready to pay for the over-inflated price of the product.
Example Of Economy Bubble
- Tulipomania- It is the world’s first economy bubble. This bubble occurred in the year 1600. A time had come when a single tulip bulb was able to feed the entire family. But, all of a sudden, the price went down, and many tulip investors became bankrupt.
- Dotcom Bubble- Another economy bubble happened in the year 1995 to 2000. The investors started investing a large amount of money blindly in internet-based companies. Some of the companies were completely new in the market, and they were getting significant funds. So, they irresponsibly handled it. Finally, less revenue was generated by these companies. The investors suddenly realized that that is going well according to their expectations, and suddenly the dot-com bubble burst.
- U.S. Housing Bubble- When the stock market crashed because of the dot com bubble, real estate prices increased and affected many people. The bank started giving mortgages without checking the capabilities. People began buying houses at a meager interest rate. But, after four years, the interest rates became high, and people couldn’t afford mortgages. Bank had to face severe loss at that time, and finally, a stage came when no one was interested in buying a house. Eventually, the bubble burst in 2008.
Different Phases Of An Economic Bubble
- Displacement – It is the first phase in which the investors notice some new product or new technology is unique to the market.
- Boom – In this phase, the price of the asset increases rapidly. As the price rises, the investors take more interest in the purchase and start investing money.
- Euphoria – In the third phase, the price of the asset or product touches the sky.
- Profit-taking – The investors notice that they are not getting that much profit after investing so much in a particular product.
- Panic – The skyrocketing price of that product now takes a u-turn. Finally, the cost of the product clashes as supply exceeds the demand.
The U.S. Economic Bubble
The economy of the U.S. is quite essential. It is so because if it collapses, then the entire world will be affected by it.
The U.S. economy bubble was in the year 2008. People had to face the housing bubble in that year.
The bitcoin market is now skyrocketing. It has reached a value of more than $1 trillion.
If the easy flowing of money will stop one day, most people will be affected. Bitcoin can be the next U.S. economy bubble 2021. It will be more extensive and pervasive as compared to the year 2008.
Conclusion:
Investors should invest money wisely. They should think about the future of the product. The stages of the economic bubble may alert the investors to spot the next economy bubble.