Economic Bubble

The term “bubble” is used to describe the rapid inflation of market value, which is typically followed by an equally rapid decline in value – which may be referred to as a “bubble burst.”¹ This happens when the price of a good surpasses its intrinsic value. While some bubbles may be identified as they occur, or even predicted beforehand, they are often only identified after the fact.²

There are five stages of a financial bubble.³ The first is displacement, the stage which gives rise to the bubble. Here, investors take note of something new and exciting, such as low interest rates or a novel technology. The second stage is the boom, in which steadily climbing prices suddenly skyrocket upward, attracting media attention and new investors alike. Third is euphoria, a blissful stage in which prices continue to climb and people are swept up in the belief that no matter how high the prices get, someone will always be willing to buy. Fourth comes profit-taking. In this stage, some people predict that the bubble is about to burst – a tricky prediction to make with accuracy – and begin to sell. The fifth and final stage is panic. Relatively self-explanatory, this stage consists of sharply declining prices sharply and panicking investors selling as quickly as possible.