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What’s a “Bubble”?

13 Feb

The Federal Reserve's Most Important Product [courtesy Google Images]

The Federal Reserve’s Most Important Product
[courtesy Google Images]

In economics, “bubbles” are typically entire markets wherein the majority of product in that market are significantly and artificially over-priced.

For example, if the housing market goes into a “bubble,” most homes in that market will be selling for prices that seem unreasonably high.   If tech stocks go into a “bubble,” virtually all of the individual stocks in that particular market will be selling for unreasonably high prices.

Bubbles can occur in a particular nation’s bond, stock, housing, and commodity markets.  All bubbles share a single common denominator:  they’re significantly over-priced.

But when we say “over-priced,” we necessarily mean “over-priced” in relation to something else.  What’s that “something else”?  It’s the free market.  Bubbles are over-priced in relation to the prices that would normally exist in the free market.

For example, suppose the real estate market is in a “bubble”.  Prices for homes could be ridiculously high.  A house that should sell for $250,000 on the free market, is nevertheless selling for $1 million.  That’s a bubble.  Motivated by greed, people nevertheless buy that home for $1 million believing that the bubble will continue to expand and  the price of the $1 million home will soon go even higher to, $1.5 or even $2 million.

The important point to grasp is that when stock, bond, commodity and home markets become “bubbles” they’re over-priced in relation to a true, free market.

Any free market is capable of over-reacting so as to produce excessively high or low prices.  But generally speaking, when a particular free market produces irrationally high or low prices, the more astute members of that market will sense the irrational price and reverse course so as to produce a good profit.  Free markets tend to correct their excesses in a more-or-less timely manner.

But a true “bubble” will persist long after the free market might’ve cause a price correction.

Why?

Because a true “bubble” isn’t caused by mere forces of supply and demand in a free market.  A “bubble” is caused by influences from outside of the free market.  These outside forces cause a market to be artificially stimulated, manipulated and controlled in way that defy and overcome the true forces supply or demand.

What’s the source of outside forces?

It might be a very wealthy corporation.  It might be conspiracy of individuals bent on cornering a market.  But in this day and age, when you see a “bubble,” you see the result of legislation, policies and/or regulations that’ve been imposed by government and/or the central bank.

Bubbles exist in the un-free, manipulated markets.  Manipulated by whom?  Government and central banks like the Federal Reserve.

How long will “bubbles” last and continue to grow?  Until the government and/or Federal Reserve change policy or run out of sufficient fiat currency to continue to inflate the “bubble”.

(What’s the Federal Reserve’s favorite song?  “I’m Forever Blowing Bubbles.”)

 
5 Comments

Posted by on February 13, 2014 in Economy, Federal Reserve, Fiat Currency, Fictions, Lies, Values

 

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5 responses to “What’s a “Bubble”?

  1. Martens

    February 13, 2014 at 11:15 PM

    Adask said: “Bubbles exist in the un-free, manipulated markets. Manipulated by whom? Government and central banks like the Federal Reserve.”

    That’s odd. Why limit the manipulation to government and central banks?

    Is it because, when we consider manipulation in general, whoever the perpetrators happen to be, we find there is no such thing as a “free market” of any economic significance, nor has there been for centuries?

     
  2. Jethro!

    February 14, 2014 at 10:39 AM

    If I were a betting man, I’d bet the “higher education bubble” will be the next to pop. Fueled by subsidized student loans and the government mantra that a college degree is some sort of “right”, schools that have been jacking up tuition rates — and have been betting on continuously raking in those ridiculously high tuition rates — are likely in for a rude awakening.

     
    • J.M.

      March 1, 2014 at 8:29 PM

      Jethro, my man,
      @ >If I were a betting man, I’d bet the “higher education bubble” will be the next to pop.

      Won’t it be FUN when the “weasel” pops? Like in POP goes the WEASEL. Weasels are are well known for the speed of their movements and for their bloodthirsty habit in destroying their prey

       
  3. Al Lopez

    February 14, 2014 at 11:02 AM

    Reblogged this on The Firewall.

     
  4. Yartap

    February 14, 2014 at 12:36 PM

    Easy CREDIT! make for a big bubble.

     

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