The word “bubble” as applied to an asset class or economy is the most misused, ill-defined and misunderstood term of the 21st century. But then again, there is a lot of that going around. We also have “settled science” and “gender fluid.” And like those two, “bubble” forms the mantra of its own modern religious belief.
Listening to the “bubble-heads” you would get the idea that a price bubble is some sort of bacteria that is antibiotic-resistant, ready to cause death and destruction. The common example is the “Tulip Mania” of the 1600s in what is now The Netherlands.
The flower came from Turkey and was able to withstand harsh northern winters. It became popular among the wealthy Dutch, which, incidentally, was the richest economy in Europe back then. Amsterdam merchants were used to large profits as financing a single voyage to the East Indies could easily yield a 400-percent return. The point is prices kept going up to a peak level and then started going down when people stopped buying tulips.
Once upon a time Justin Bieber t-shirts cost P1,000 when everyone was in love with the singer. Then the “bubble” burst the price down to P100—“Buy one, Take one.” No big deal. That is the way free market pricing works.
In the early 2000s, banks in the US and Europe loaned money to anyone who could sign their name on a loan contract to buy a house or two. Demand for houses made the prices go up. When the banks stopped providing this “free” money, demand died and housing prices collapsed. Again, no big deal, except to the borrowers and lenders. Yes, it is correctly called a “debt bubble” to the extent that everyone went crazy borrowing—and loaning—money just like they did buying Bieber t-shirts.
When the Bieber t-shirt price collapsed, manufacturers of those shirts went out of business. When the property loan market collapsed, the banks “went out of business.” Unfortunately, banks are more important to an economy than the companies that make t-shirts.
The situation when prices go up, peak out, and then go down is a normal part of the business cycle. That is why shopping malls have three-day sales. Maybe the best way to understand it is the illegal-drugs market.
Every so often someone comes up with a designer drug that everyone wants to try. Prices skyrocket. Then a whole bunch of people start overdosing and dying. Sales stop, prices fall, and eventually the sellers are out of business. The problem occurs when the free market is manipulated.
Governments, central banks and politicians are like drug dealers. Pushers want to keep the users happy and what better way to keep “The People” happy than to give them the ability to buy a new car or house. So, cheap money has been made available for the past 40 years almost everywhere, except in “Third World Basket Cases” like the Philippines. Like I said, another name for this money pushing is debt-bubble.
Is the US in a bubble, more specifically a debt-bubble? Of course. The western governments have fine-tuned the practice just like drug dealers. The dealer wants the drugs strong enough to make the user happy but not enough to kill him or her. The price must be high enough to make the dealer a profit but not too high to stop sales.
But obviously there will be instances of a deadly overdose like what happened a few years ago in Greece and nearly happened in Spain and Portugal. Not to worry. The US has got at least five more years until the debt abuse finally catches up with that economy again.
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