What is economic bubble / Most famous economic bubbles that happened

What is economic bubble / Most famous economic bubbles that happened

The economic bubble represents one of the scenarios that investors fear. Throughout history, the world has experienced many economic bubbles that affected certain sectors. In this article, I will explain to you in detail the concept of an economic bubble and how and when it occurs? What are the most famous economic bubbles that the world witnessed in the past?

Economic bubble: a term that is not new

An economic bubble, also called a financial bubble, occurs when the value of certain goods rises unnecessarily, due to a large increase in demand for them.

The increase in demand is usually for a limited time, but in some cases, it lasts long before the crash occurs and the economic bubble bursts.

The economic bubble is called by this name because after the rising stage in which prices rise unjustifiably, the bubble explodes, and prices return to before the bubble, this is like a soap bubble that can get very big but eventually will explode with you, for sure.

According to economists, an increase in consumer demand for any of the goods, products, or assets, such as real estate, will necessarily lead to higher prices, and here begins the process that may lead to an economic bubble.

As soon as the price of an asset rises, many investors start investing in it, as it appears to be a very promising and profitable investment area. Prices continue to rise as long as the great demand for this asset continues, but the beginning of the bubble bursting occurs when some investors start selling their assets to obtain cash, or because they know that this investment will not be profitable in the long term, so the price begins to fall slightly, The logical consequence of this is that more investors will sell their assets for fear that the price will fall further.

At the same time, new investors are afraid to venture and invest in this asset, meaning that investors are offering their assets for sale and have difficulty finding buyers for them, meaning that the quantity of supply becomes more than the demand, so the price drops rapidly and sharply to reach, after a short period, the pre-bubble values or Sometimes less than that.

What is economic bubble / Most famous economic bubbles that happened

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The most famous economic bubbles throughout history

The tulip bubble is the oldest economic bubble in history, this bubble occurred in the Netherlands in the seventeenth century, we also remember the Japanese bubble in the nineties, and the dot-com bubble at the beginning of the millennium.

Tulip bubble

The tulip bubble or the tulip madness began when tulips were brought to Europe from the Ottoman Empire in the middle of the seventeenth century, and there was a competition to own the largest number of bulbs for these flowers. greater than the average annual salary of an individual.

After the crazy rise in the price of the bulbs, the bubble burst a few days after many of these bulbs were sold at once in an auction of 5 million euros, which led to a drop in their price, and the demand for them fell as a result. Its real price quickly returned to its pre-bubble level, and many investors lost all their investment.

The economic bubble of the South Sea Company

The South Sea Company is an English joint-stock company founded in 1711 when the United Kingdom was an empire on which the sun never set.

The government had many problems due to wrong financial estimates and high public debt, and it was not possible to repay certain government bonds, and in 1719, the South Sea Company offered to take 31 million pounds sterling, equivalent to three-fifths of the British public debt, through a bond exchange. government with shares in the company.

As a result, the company’s stock prices rose very quickly. Shares that were offered at £128 on January 1, 1720, hit £500 in May of the same year, then soared to £1,050 in June.

The rise in the value of the shares of the South Sea Company was not due to its profitable economic activities, but rather due to the rush to buy shares. That is, the value of the shares has increased unjustifiably because there is no real profitable business behind it.

The trade exchanges operated by the South Sea Company were minimal, due to the lack of interest of the company’s managers, who cared only more about the stock market than the company’s business. The company’s revenues were scarce, and as a result, the value of the shares subsequently collapsed.

When the company’s shares collapsed at the end of September 1720, thousands of people were fired, with huge repercussions for the British economy.

Japan’s economic bubble

The Japanese bubble began to grow in 1986, and exploded in 1991, the assets of financial speculation were stocks and real estate.

Among the reasons that led to the formation of the Japanese bubble are the issuance of some financial legislation, the rapid increase in real estate prices, the country’s production capacity, and the increase in corporate liquidity.

For this reason, many Japanese companies have become involved in stock market and real estate market activities. Then the explosion occurred after the dispute between the Bank of Japan and the Ministry of Finance over the decisions to be taken after the devaluation of the dollar.

After the bubble burst, stocks and real estate were sold off as prices started to fall, and Japan as a result entered a tunnel of deflation and depression. The period after this bubble was known as the lost decade.

Dotcom bubble

This bubble occurred in the USA between 1997 and 2001, and it had very serious consequences for global markets.

The start was in the US stock market, where the Nasdaq recorded in one day a historical high of 5,132.52 points. This rise was supported by the technology companies that originated in the United States in the 1990s.

The value of companies operating in the technology sector rose, and when prices rise, investors started buying shares in those companies without any justification for the large difference between the share price and the profits achieved by these companies.

When the bubble burst, the stock price of all tech companies collapsed, for example, Amazon’s stock price in that period fell from $107 to just $7.

Mortgage bubble

The bursting of this bubble led to the global economic crisis in 2008, which started in the US real estate market.

Many consider that the economic bubble that exploded in 2008 is the largest global financial crisis in history, and comes in second place after the crisis of 1929, which also occurred in the United States of America and was known as the Great Depression.

The bursting of the mortgage bubble resulted in an economic and financial depression all over the world, and according to the analyzes of some economic experts, some countries have not yet recovered from this crisis.

The bubble arose because of high real estate prices, for this reason, many Americans borrowed money from banks to buy real estate. They were thus betting on the continued rise in prices so that they would be able to compensate for the value of those loans and the interest resulting from them.

But what happened was a sharp drop in prices in 2007, so many real estate values ​​became less than the value of debts, and thus Americans became unable to pay their loans to the banks.

To secure the rights of the banks, millions of Americans were foreclosed on their properties until they could repay the loans, and they were forced to vacate their homes. Because Americans were unable to pay, American banks suffered from a lack of liquidity, and many declared bankruptcy.

The liquidity collapse had serious repercussions on stock market indices and on the entire global economic system, which has not fully recovered yet.

Will the world witness economic bubbles in the near future?

It is not difficult to predict the next economic bubble. Any commodity, product, or asset whose price rises unjustifiably much, will be the beginning of an economic bubble. For example, the price of Bitcoin and other digital currencies rose and reached tens of thousands of dollars, and this reminds us of what happened in The seventeenth century with the tulip craze, now, due to the crypto craze, the value of a single currency has reached more than the average annual income per capita in developed countries.

This increase in the price of cryptocurrencies was not due to profits, but rather due to the increase in demand for them only, and the bursting of this bubble can occur at any time, especially since many large investors such as the American company Tesla have invested billions of dollars in these currencies, and they can simply sell what They have it when they need cash, which will lead to an increase in supply and a sharp price drop.

What is economic bubble / Most famous economic bubbles that happened