Bubble

An economic condition where excess buying occurs and a run-up in prices results (referred to as an economic bubble, speculative bubble, market bubble, or financial bubble). While the exact cause of a bubble is unknown, the stage is typically followed by a crash or “burst,” when prices suddenly drop. In an economic bubble, it is not uncommon for prices to fluctuate significantly, blurring the equilibrium between supply and demand patterns. Often, bubbles are identified in retrospect due to these consequences.

In general, economic bubbles are considered to affect spending power, as assets are overvalued and people tend to spend more. Ultimately, this spending pattern results in a negative impact on the economy when the bubble “bursts,” as assets have been misallocated and market participants react by retracting their spending. Historically, this succession of “boom” and “bust” was evident during the Great Depression in the 1930s and in Japan in the 1980s. In more recent times, the United States experienced a technology bubble in the early 2000s and a housing and credit bubble that burst in 2008, resulting in the greatest fiscal crisis since the 1930s.