Tour De Economy

An excellent analogy I read in Kindleberger & Aliber’s (2003) book in describing a bubble read as follows “After several years of bubble-like behaviour [it] resembles that of a young person on a bicycle; the rider needs to maintain the forward momentum or the bike becomes unstable.” Fitting don’t you think?

Bubbles appear across the world, some more notable than others relating to commodities, currencies, property and shares have been prominent since the early 1970’s. With housing and property bubbles, property differing to housing because it includes commercial buildings, occurring in the 1980’s in Japan, Finland, Norway and Sweden, the 1990’s for Thailand, Malaysia, Indonesia and other neighbouring Asian counties, it’s not just the UK and America who have seen the boom and bust. Kindleberger & Aliber (2003) define a bubble as “a non-sustainable pattern of price changes or cash flows”.

History has taught us that the implosion of bubbles is quite often quickly followed by economic failure and the collapse of banks and other financial firms, followed by a sluggish economic growth in years to come. Wall Street Crash (1929) & the sub-prime collapse of America comes to mind. Global recession and depression. Some Journalists compared the collapse of the American property bubble to the Wall Street Crash and rightly so.

History at a glance – “This time, it’s different”

They've shaped and crippled economies, they've had an effect on each and every one of us but how do we know when a bubble exists? Well I’ll tell you, a bubble exists when asset price inflation rises beyond what incomes can sustain. Economic bubbles have been around for generations with the first recorded bubble, Tulip mania, dating back to the 17th century. Although there has only been 6 significant cases pre twentieth century, over the past 100 years, bubbles have arguably become more destructive to the economy. I know you probably don’t remember the Wall Street Crash (1929), but fundamentally, that was the boom and bust of an economic bubble which plunged the world into depression. Now at this point I have to restrain myself from going off in a tangent about the Wall Street Crash being a catalyst for the rise of the Nazi’s, this is neither the time nor the place.

Personal interests aside lets fast forward 71 years to 21st century, home of the real estate bubbles. Now the UK housing bubble burst around 2006/2007, but still today it is a hot topic amongst journalists, academics and the government, and will continue to be until regulations tighten and effective preventative measures are developed and tested.