Market

Does a Bubble Pop Cause an Economic Collapse?

speculative market with bubbles

Where some see coincidence, I see consequence. Where others see chance, I see cost.

Merovingian

No, it doesn’t, but you may read further to know more.

The economic flow over time looks like a roller coaster. Periods of growth are inevitably replaced by recession. Sometimes platos or long bottoms happen.

The bubble can only happen (and does happen) at the time of growth. Bubble, in other words, is a speculation on the market. Usually, you buy something cheaper and then sell it with a higher price. In other words, you don’t produce anything, you don’t provide any kind of valuable service or anything at all. If this is your case you are only the one who has come to the right place in a right time.

Why do Bubbles pop?

In a simplified model, the market tends to be equilibrium (that is just a theory, of course). Anyway, sooner or later, other people find out that your shares don’t cost as much as you sell those, or your products can be bought cheaper, etc. And that means the end for your bubble.

So… is the collapse then inevitable?

One of the earliest known bubbles happened in Holland and is widely known as a tulip mania. In our days, it is more correct not to name it a bubble. The demand on tulips rose high but then decreased dramatically and gradually continued to fall. The risk was higher so that speculation was no longer worthy and tulips started to cost as much as they were worth of.

Generally speaking, a bubble or mania is a signal of sharp market growth, and it pops whenever circumstances change. And it doesn’t always even mean the recession. Other bubbles in other industries or economic sectors may continue to grow as well. Bubble pop has a signalizes that the market it has grew in is now becoming smaller or changing.

You may not even notice this or that bubble.

But it’s true that most famous bubbles seize their existence when default happens or the market shrinks or experiences hard times. Which only means that they depend on the situation rather than affect it. In other words, bubble’s pop is a consequence, not a reason.

One of the best illustrations on abruptness of the events is Lehman’s of course. And Deutsche Bank may become another famous example (we hope it won’t, anyway).

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