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Three Bubble Bursts In The US Economy
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Three Bubble Bursts In The US Economy
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What is an economic bubble?
What is a bubble?
An Economic Bubble generally refers to a situation where the prices of a stock,asset or even an entire market exceeds it's value by a large margin.
What is a Bubble Burst ?
A bubble burst in simple language, would be the scenario when there are extreme sell offs which cause the prices of the stocks and assets to decline at a rapid pace.
Bubble Burst
Steps Of A Bubble Burst
1) Displacement: This takes place when investors get intrigued by a new models,technologies etc.
2) Boom: This is a scenario where we see a slow yet steady increase in prices as more investors enter the market
3) Euphoria: As the name suggests, there is an entire period where the prices reach new and unimaginable heights.
4) Profit Taking: Here, we start getting some warnings regarding the bursting of the bubble so we see smart money starting to take profits.
5) Panic: The prices start to descend as rapidly as they ascended and we reach the bursting of the bubble.
Some Examples
1) The Dutch Tulip Bubble
2) The South Sea Bubble
3) Japan's Stock Market And Real Estate Bubble
Dot Com Bubble
Dot Com Bubble
The dotcom bubble, also known as the internet bubble, was a rapid rise in U.S. technology stock equity valuations fueled by investments in internet-based companies during the bull market in the late 1990s. During the dotcom bubble, the value of equity markets grew exponentially, with the technology-dominated Nasdaq index rising from under 1,000 to more than 5,000 between the years 1995 and 2000. In 2001 and through 2002 the bubble burst, with equities entering a bear market.
In the rush to cash in on the Internet boom, many investors ignored traditional investment metrics, such as the ratio of a company's current share price compared to its per-share earnings. Instead they subscribed to a business model that favored building brand awareness and market share quickly, even if that required offering services or products for discount prices or for free. Low interest rates in 1998 helped drive up the amount of capital invested in dot-coms.
The dot-com bubble started to collapse in 1999. In 2000, companies such as Pets.com declared bankruptcy and by 2001 the bubble had burst, taking many dot-coms -- or "dot-bombs," as investors started calling them -- with it. The trillions of dollars in market value lost during the crash of the stock market between 2000 to 2002, coupled with the financial damage inflicted by the 9/11 terrorist attacks, led to widespread layoffs in the technology field.
Reasons for the Burst
NASDAQ GRAPH
Graph
USA Housing Bubble
USA Housing Bubble
Some experts believe that the bursting of the NASDAQ dot-com bubble led U.S. investors to pile into real estate due to the mistaken belief that real estate is a safer asset class. While U.S. house prices nearly doubled from 1996 to 2006, two-thirds of that increase occurred from 2002 to 2006, according to a report from the U.S. Bureau of Labor Statistics. Even as house prices were increasing at a record pace, there were mounting signs of an unsustainable frenzy—rampant mortgage fraud, condo "flipping," houses being bought by sub-prime borrowers, etc.
U.S. housing prices peaked in 2006, and then commenced a slide that resulted in the average U.S. house losing one-third of its value by 2009. The U.S. housing boom and bust, and the ripple effects it had on mortgage-backed securities, resulted in a global economic contraction that was the biggest since the 1930s Depression. This period of the late 2000s thus came to be known as the Great Recession.
USA Debt Bubble
USA Debt Bubble
In 2018, amidst a market correction, warning signs began popping up about corporate debt in the U.S., which doubled from $4.9 trillion in 2007 to $9.1 trillion in 2018. During this same time period, the cash-to-debt ratio fell below 12 percent—a record low—indicating that for every $1 of cash, corporations held $8 of debt. Mirroring corporations, individuals have also taken on unequalled amounts of debt in recent years. As of 2020, credit card debt sat at an all-time high of $930 billion—with delinquency rates on the rise. Similarly, student debt is at its highest—reaching $1.5 trillion in 2019. Today, students graduate with an average debt of $29,000.
The U.S. federal deficit has also continued to grow, reaching $22 trillion in 2019. According to the Congressional Budget Office, “other than the period immediately after World War II, the only other time the average deficit has been so large over so many years was after the 2007–2009 recession.” A similar pattern exists at the global level, where debt is more than $247 trillion, or roughly 318 percent of global GDP.
Coronavirus has decimated the world economy, but for the time being, the debit bubble has held. However, as the economy takes a turn for the worse and unemployment rates swing upward, it will become increasingly difficult for individuals and governments alike to keep pace with their payments.