Bubbles And Bubbles, When Will They Pop?

The bubble analogy has been used in various industries, and for the most part, it fits the narrative. Just like how a real bubble starts off as something small, then it grows exponentially into a beautiful thing before it eventually pops. Such is the anatomy of a bubble, and it can occur in many segments of the economic facet.

Before we get into the different types of economic bubbles, it is worth noting that when a bubble bursts, it can have far-reaching and devastating ripple effects and lead to a recession. This is usually bad for most businesses and subsequently bad for the job situation as many people end up losing their jobs. This also translates to lower purchasing power, which affects the profit margins of companies, and the cycle continues.

The stock market bubble

The stock market is one of the lucrative business segments, and that thrives on investor participation. The performance of stocks should traditionally be driven by the company's performance in terms of profit and market conditions. However, investor participation usually causes fluctuations in the stock market performance because investors may buy or sell on impulse based on the type of news they believe might influence the direction of the stocks.

This investor participation tends to cause overvaluation of stocks. This happens especially when the economy indicates healthy growth, and so investors get overexcited and buy more, thus driving up the stock prices. This creates the illusion that it is still safe to buy, and so investors continue to buy. Their expectations for the stock to continue performing better might be supported by good market conditions such as healthy demand. Eventually, the prices become so inflated that negative news in the market or economic changes may trigger a downturn that might send to stock prices on a freefall, thus a stock market bubble.

The debt bubble

Lending is a natural part of the economy, and it takes place from the individual level, the institutional level, and even to the government level. Credit allows the borrower to fulfill their current needs, especially when they do not have enough money to do so. Having some debt is not bad as long as it is managed and repaid within the stipulated timeframe.

The U.S national debt currently stands at just above $23 trillion, and two-thirds of it is the amount that the government owes to members of the public through bonds, treasury bills, and notes. Debt is mainly aimed at helping individuals, businesses, and organizations to secure finances for investments in assets. However, credit has become so common that people are now using it to service their lifestyles. Since no tangible investments are backing most of these loans, this leaves banks exposed to risks, and the growing debt bubble eventually bursts, resulting in a currency crisis.

Housing bubble

This is perhaps one of the most common types of economic bubbles that are experienced in most markets. In any given market, there is a demand for housing, and there are players in the market that can cater to this need. Investors have, however, jumped on board the opportunities by investing heavily in the property market. This speculative market leads to the development of more housing properties than are in the market. Since the segment is largely driven by demand, the prices of the houses tend to be inflated.

The speculation investing and demand lead to a bubble that grows until it eventually pops. In this case, the market is flooded with houses that are empty as the majority of the population cannot afford to purchase or rent with the exorbitant prices. Real estate investors that borrow money to build houses for sale, as well as rentals, may end up being inconvenienced. They get trapped in a situation where they have to try and sell for prices lower than the market value so that they can offset the debt they owe to the lenders. Housing bubbles or real estate bubbles are dangerous because investors may find themselves selling their properties at a loss and even selling some of the other property that they own so that they can clear their debt.

The Student Debt Bubble

This type of bubble is also known as a student loan bubble, and there is a good reason why it is classified as a bubble. Student loans were initially meant for the students that could not afford to pay their fees. However, more people apply for them nowadays, not because all of them need student loans but because others do it. The problem is not that more people are applying for student loans, but that over the past few decades, there has been a sharp increase in student debt defaulters. According to the Student Hero report released in 2018, student debt has multiplied over the past four decades due to the rapid increase in college tuition.

Student debt is classified as a bubble because eventually, the amount of defaulted student loans will be so big that it will reach uncontrollable levels where the borrowers will not be able to clear their loans despite declaring bankruptcy. The downside to the student debt bubble is that it forces those with piled-up student loans to delay important things like starting a family or purchasing a home so that they can focus on clearing their debt. Fortunately, even if the student bubble bursts, it is not expected to affect the economy like other types of bubbles.

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