WHY ECONOMIC BUBBLES CAUSE MARKET TURBULENCE?

What is Economic bubble?

The bubble phenomenon is characterized by a rapid escalation of asset prices, followed by a decline.

Economic bubbles form when market participants buy overpriced goods and sell them to others at a much higher price. The bubble 'bursts' when the last person pays the highest price for the overpriced goods and cannot find any other buyers.

Effects of Economic bubbles:

Cause negative economic impacts due to resources being allocated to suboptimal purposes. When the bubble bursts, it can cause significant damage to a vast amount of wealth, leading to economic instability that spreads to neighboring countries.

Adversely affects consumption habits. People tend to consume more on high-valued assets because they feel wealthier.

3 Economic bubbles that shook the world:

The Tulip Mania bubble:

In February 1637, tulip fever peaked when a single tulip bulb was sold for more than ten times the annual income of a skilled craftsman. Some were willing to pay 5 hectares of land just to own one tulip bulb. Later, the price of tulip bulb futures contracts plummeted suddenly (partly due to the plague in Europe), delivery was disrupted, and the market began to collapse. Merchants panicked as the price of a tulip bulb fell to just 1% of its previous value, or even lower, erasing all paper profits. The tulip mania ended as quickly as it had begun.

The dotcom bubble:

In 1989, the World Wide Web was born, ushering in a new era of internet-based and technology startups, continuing the growth trend. Media and investor attention focused on Dotcom companies creating a huge bubble effect. The internet boom in 2002 led to many investors pouring money into internet company stocks until the companies went bankrupt, wiping out investor money. After that event, the surviving companies continued to develop and are now valued at several billion USD.

The U.S. real estate bubble:

When the dot-com bubble burst, real estate prices started to spike, combined with lower interest rates and easy credit conditions, everyone wanted to borrow money to own a home. Adjustable-rate mortgages with low initial interest rates became popular. Many people began to buy homes, transferring them to make a profit. When the stock market rebounded, interest rates also rose, leading to higher mortgage interest payments. At this point, home values plummeted severely, leading to a sell-off.