Throughout history, there have been several instances identified as financial bubbles. The Dutch Tulip Bubble, or Tulipmania, is regarded as the first major financial bubble, dates back to the 17th century.4In the late 1500s and early 1600s, tulips were regarded as a sign of affluence. A rare type of tulip, which flowered in a striped, multicolored pattern, rather than the usual solid coloration, was particularly coveted. The high demand for this rare variety of tulip bulb caused the market value of tulips to soar.5Between the end of 1636 and early 1637, the price of tulips increased by twenty times its original value.6Like every financial bubble, this one inevitably burst and prices fell drastically – according to some records, they dropped by as much as 99%.7Tulipmania did not have devastating effects for the Dutch economy, but many people lost their fortunes when the bubble burst.8In order to allay some of the panic, contract holders were permitted by the Dutch government to end their contracts for 10% of their value.9
Since the Dutch Tulip Bubble of the 17th century, many other financial bubbles have been recorded. Another famous instance comes from the early 1700s, when the British government granted the South Sea Company a monopoly on trade with South America’s Spanish colonies. As the East India Trading Company had been a raging success, investors were keen to purchase shares in the South Sea Company. This enthusiasm resulted in a bubble which ultimately burst, leaving serious financial fallout in its wake.10The economic expansion and stock market bubble of the 1920s is cited as a causal factor behind the Great Depression, a period of serious economic crisis.11More recently, the US Housing Bubble, in which real estate’s market value skyrocketed, gave way to a devastating financial crisis that began in 2008.12
In his 1986 book,Stabilizing an Unstable Economy, economist Hyman P. Minsky identified the five stages to a credit cycle – displacement, boom, euphoria, profit-taking, and panic. These five stages are also applicable to financial bubbles and offer important insight into the mechanisms that underlie this financial phenomenon.13
FAQs
Minsky identified the five stages to a credit cycle – displacement, boom, euphoria, profit-taking, and panic.
What is the bubble theory in economics? ›
The hypothesis includes the idea that the rapid rise in market prices will be followed by a sudden crash as investors move out of overvalued assets with little or no clear indicators for the timing of the event.
What happens in an economic bubble? ›
A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a "crash" or a "bubble burst."
How long did the bubble economy last? ›
'bubble economy') was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. In early 1992, this price bubble burst and Japan's economy stagnated.
Is economic bubble good or bad? ›
Simply put, economic bubbles often occur when too much money is chasing too few assets, causing both good assets and bad assets to appreciate excessively beyond their fundamentals to an unsustainable level.
What causes an economic bubble to burst? ›
Because speculative demand, rather than intrinsic worth, fuels the inflated prices, the bubble eventually but inevitably pops, and massive sell-offs cause prices to decline, often quite dramatically. In most cases, in fact, a speculative bubble is followed by a spectacular crash in the securities in question.
Is the US stock market in a bubble? ›
The table below shows the current readings of each of these gauges for the US equity market. It shows how the conditions stack up today for US equities in relation to past times. Our readings suggest that, while equities may have rallied meaningfully, we're unlikely to be in a bubble.
Is America in a recession? ›
Though the economy occasionally sputtered in 2022, it has certainly been resilient — and now, in the second quarter of 2024, the U.S. is still not currently in a recession, according to a traditional definition.
Is AI in a bubble? ›
The AI boom resembles the dot-com bubble — but there's one big difference that makes this craze far more dangerous, says one expert. The princely valuations of companies like Nvidia reflect investors' excitement about artificial intelligence.
What are the strange economic bubbles? ›
Here are five examples of historic speculative bubbles: the Dutch Tulipmania (1634-1638); the Mississippi Bubble (1719-1720); the South Sea Bubble (1720); the Bull Market of the Roaring Twenties (1924-1929); and Japan's "Bubble Economy" of the 1980s.
According to the World Bank, China has "experienced the fastest sustained expansion by a major economy in history—and has lifted more than 800 million people out of poverty."2 China has emerged as a major global economic power.
When was the first economic bubble incident? ›
The major acceleration started in 1634 and then dramatically collapsed in February 1637. It is generally considered to have been the first recorded speculative bubble or asset bubble in history. In many ways, the tulip mania was more of a then-unknown socio-economic phenomenon than a significant economic crisis.
When was the last major economic crash? ›
According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December 2007 and ended in June 2009, and thus extended over eighteen months.
What are the 5 stages of economic development? ›
Using these ideas, Rostow penned his classic Stages of Economic Growth in 1960, which presented five steps through which all countries must pass to become developed: 1) traditional society, 2) preconditions to take-off, 3) take-off, 4) drive to maturity and 5) age of high mass consumption.
What are the stages of the economic cycle? ›
There are four stages in the economic cycle: expansion (real GDP is increasing), peak (real GDP stops increasing and begins decreasing), contraction or recession (real GDP is decreasing), and trough (real GDP stops decreasing and starts increasing).
What are the phases of the economy? ›
Key Points. The economic cycle generally comprises four phases: expansion, peak, contraction, and recovery. The duration of economic cycles varies, making the phases difficult to time. Some sectors tend to outperform others during different phases of the cycle.
What are the stages of economic thought? ›
Economic thought may be roughly divided into three phases: premodern, early modern and modern.
