April 1, 2020
What causes economic bubbles? – Prateek Singh

What causes economic bubbles? – Prateek Singh

How much would you pay
for a bouquet of tulips? A few dollars? A hundred dollars? How about a million dollars? Probably not. Well, how much would you
pay for this house, or partial ownership of a website
that sells pet supplies? At different points in time, tulips, real estate and stock in pets.com have all sold for much more
than they were worth. In each instance, the price rose and rose
and then abruptly plummeted. Economists call this a bubble. So what is exactly is going on
with a bubble? Well, let’s start with the tulips
to get a better idea. The 17th century saw the Netherlands
enter the Dutch golden age. By the 1630s, Amsterdam was an important
port and commercial center. Dutch ships imported spices
from Asia in huge quantities to earn profits in Europe. So Amsterdam was brimming with wealthy,
skilled merchants and traders who displayed their prosperity
by living in mansions surrounded by flower gardens. And there was one flower
in particularly high demand: the tulip. The tulip was brought
to Europe on trading vessels that sailed from the East. Because of this, it was considered
an exotic flower that was also difficult to grow, since it could take years
for a single tulip to bloom. During the 1630s, an outbreak
of tulip breaking virus made select flowers even more beautiful by lining petals with multicolor,
flame-like streaks. A tulip like this was scarcer
than a normal tulip and as a result, prices for these flowers
started to rise, and with them, the tulip’s popularity. It wasn’t long before the tulip
became a nationwide sensation and tulip mania was born. A mania occurs when there is an upward
movement of price combined with a willingness
to pay large sums of money for something valued much lower
in intrinsic value. A recent example of this
is the dot-com mania of the 1990s. Stocks in new, exciting websites
were like the tulips of the 17th century. Everybody wanted some. The more people who wanted the tulip,
the higher the price could go. At one point, a single tulip bulb sold for more than ten times
the annual salary of a skilled craftsman. In the stock market, the price of stock is based on the supply
and demand of investors. Stock prices tend to rise when it seems like a company
will earn more in the future. Investors might then buy more
of the stock, raising the prices even further
due to an increased demand. This can result in a feedback loop
where investors get caught up in the hype and ultimately drive prices
far above intrinsic value, creating a bubble. All that is needed for a mania to end
and for a bubble to burst is the collective realization
that the price of the stock, or a tulip,
far exceeds its worth. That’s what happened with both manias. Suddenly the demand ended. Prices were pushed to staggering lows, and pop! The bubbles burst, and the market crashed. Today, scholars work long and hard
trying to predict what causes a bubble and how to avoid them. Tulip mania is an effective illustration of the underlying principles
at work in a bubble and can help us understand
more recent examples like the real estate bubble
of the late 2000s. The economy will continue
to go through phases of booms and busts. So while we wait
for the next mania to start, and the next bubble to burst, treat yourself to a bouquet of tulips and enjoy the fact that you didn’t have
to pay an arm and a leg for them.

100 thoughts on “What causes economic bubbles? – Prateek Singh

  1. You say I don't have to pay an arm and leg for tulips but you've obviously never bought a bouquet for a girlfriend before.

  2. Tulip Mania was good, definitely a lot better than Tulip Forces. Imo, Tulip Heroes was what Tulip adventure should've been

  3. It reminds me of the cryptocurrency mania going on now. Bitcoin will eventually be like a bubble, if the demand of it won’t stop increasing.

  4. What is considered to be the intrinsic value of currency or cryptocurrency? Why would Bitcoin/Ethereum be in a bubble while the USD, for instance, is not?

  5. The answer: a bubble expands by greed of the owners of means of production and explodes when the customers have got enough information.

  6. Dot com was bubble
    Real estate was bubble ???
    No i dont think so , that was market correction
    Today their market cap has surpassed the previous all time high
    But tulip is still tulip same value as 400 years ago

  7. The housing bubble wasn´t caused by investors just willing to pay more, it was created by deregulation of S&L banks allowing them to sell mortgages to investment firms, then those firms creating investment ¨products¨ with those loans and having them falsely certified as safe investments despite prior knowledge that they were actually toxic assets.

    Yes, there was PLENTY of greed going around, but there was also rampant FRAUD. lenders and real estate brokers were pushing overpriced properties at unqualified house buyers. When closing day came, they inundated buyers with reams of paperwork and had them unwittingly sign loans that had no fixed mortgage rate, or that included balloon payments.

    This oversimplification does a terrible disservice to the public, as it makes them think that if you just don´t get too greedy you´ll be ok, but there were crooks out there looking for victims and people with power willing to use it to twist and extort the laws to their own ends.

  8. It's not just "mania" – it's dictated by social and government policy, bubbles make the economy appear to grow (elevated house prices are used as a guide because it implies wage growth) when in actual fact supply is choked and demand must rise. An interesting factor must surely also be how fixing prices cost businesses money as they cannot exploit the bubble.

    An example I would use is look at Cristiano Ronaldo (CR7) jersey sales in his Real Madrid shirt in May-June this year. The cost price of £60 is probably much lower than they could actually sell for, however, this bubble burst when he moved to Juventus, so while his shirt price was still £60, sales plummeted because of social factors. This kind of conservative attitude to restrict bubbles is far safer for businesses.

    Even look at government bailouts, Wonga are a vulture loan service who exploit low wages, charge gouging interest rates and increase these based on demand, which rises because of wage stagnation. This high risk strategy meant people couldn't repay the loan cost, so Wonga tanked, only fortunately to be bailed out by the UK government (where Wonga are big party donors)

    Modern day economic bubbles are manufactured by governments.

  9. I've heard this explanation a million times, I could easily recite it myself, but I still feel like I don't understand. I feel like this type of explanation is just the gist of what's going on. What causes that collective realization that the item is worth less? How does that physically manifest? What substantive occurrence is the stock market reacting to? Lesser sales figures? People selling off stocks? Is the latter a cause of the stock market reacting, or is it a symptom of the stock market reacting?

  10. “Sultan of Turkey, who sent the first tulip bulbs and seeds to Vienna in 1554 from the Ottoman Empire.” Not just from “EAST”

  11. There are much bigger bubbles now than ever before (bitcoin is not one of them, stop talking about it). Disaster is inevitable when one of them bursts.

  12. This shows a rise and fall in demand for a product and it's price this is very interesting and I also study economics

  13. So were not going to talk about the Federal Reserve and their ability to artificially lower interest rates?

  14. all interest-based systems like current banking and financial institutions are unfair and eventually, are injurious to society..on the other hand , taxes .charities and donations improve and increase the economy and reduce rift between the rich and poor.

  15. Now I know how boba (bubble) teas got its name. This also applies to milkteas, too overprice for its worth. Unfortunately people still doesn't realize it.

  16. America is on the rise of the next recession after a 10 year save from 2009-2019, it will occur 22-24 months after 2019, sometime within the year 2021 is what a lot of economists are predicting. The saving 10 year point post-great recession of 2007-2009/ House owners personal Mortgage Debt/Housing crash's bubble/The Mortgage District Crashed bubble(all stock/banking districts like placed in New York's Wall Street, Tallagousee. LA, Chicago Illinois, and Washington DC couldn't clearly help with near safe deposits. results, or checkings towards any costumer. Beyond tellers shutting down along bank closures on them, after several mortgaged payments that tons of average joes/janes were loaning with added CDO percentiles on top, which had played a major factor on the US' economy and the states' protesting against the governed/federal banks/running away from FBI or Warran police/Rangers as they'd knocked on peoples doors)(trying federal charged high-rising amounts debts/loan payment criminals). The Dot-com bubble was after the success of internet in 1994/1995 to 1997, and again 1998-2001. August 21st 1999 was when the Y2K scandal occurred, 1997 and September 11th 2001 were the bombings the twin towers and lost of several stocks put onto new internet companies like Amazon and E-bay and Google. I might not understand what a bubble is outside of chowing gum or kid's blowing bubbles. However America has had a difficult life within the post-Cold War era versus Canada outside our GM and factory loses and brief recession periods. We didn't get affected during the eighties, noughties, or Fifties/Sixties like the states did. .

Leave a Reply

Your email address will not be published. Required fields are marked *