Bubble in Economics

Bubbles - the fascinating little spheres of air trapped within a thin layer of liquid - are more than just a fun pastime for children. They are a captivating subject for scientific study, a source of inspiration for artists, and a symbol of joy and innocence in popular culture. Let's dive into the world of bubbles and discover what makes them so fascinating. Bubbles are formed when air is trapped within a thin layer of liquid, such as soap, water, or soda. This creates a surface tension that holds the bubble together, and the air inside the bubble expands until it reaches a point where the surface tension can no longer hold it together. When the bubble pops, the air is released, and the liquid evaporates, leaving a residue of soap or other material. Scientists have been fascinated with bubbles for centuries, studying their properties and behaviour. In the 18th century, French physicist Jacques Charles studied the properties of gases and discovered that the volume of a gas is proportional to its temperature and pressure. This led to the development of gas laws, which are still used today to understand the behaviour of gases.

Artists have also been inspired by bubbles, using them as a subject in paintings, sculptures, and other art forms. In the 1960s, American artist John McCracken created a series of sculptures called "Bubbles," which were made of fibreglass and polyester resin. The sculptures were inspired by the bubbles in soap suds, and their reflective surfaces captured the changing colours and shapes of the surrounding environment. Bubbles are also a symbol of joy and innocence in popular culture. Bubble baths, blowing bubbles, and even bubble gum are all associated with childhood and carefree moments. Bubble wrap, a material invented in the 1950s, is used to protect fragile items during shipping and has become a source of amusement for people of all ages who enjoy popping the bubbles.

In economics, a "bubble" refers to a situation where the price of a particular asset rises rapidly and significantly above its fundamental value. This happens when investors or speculators purchase the asset based on the expectation that the price will continue to rise, rather than on the asset's actual value or potential future earnings. The result is a price "bubble" that is unsustainable since it is not supported by the underlying fundamentals of the asset. When the bubble eventually bursts, prices can plummet rapidly as investors rush to sell, and the market corrects itself. This can result in significant financial losses for those who purchased the asset at inflated prices, as well as broader economic impacts if the bubble was large enough and affected multiple markets or sectors. One example of a bubble in recent history is the housing bubble that led to the 2008 financial crisis. In the mid-2000s, housing prices in the United States rose rapidly as a result of lax lending standards and speculation by investors. Many buyers purchased homes with subprime mortgages that they were unable to repay, leading to a wave of defaults and foreclosures. As the bubble burst, housing prices fell sharply, causing significant losses for investors and triggering a broader financial crisis that had ripple effects throughout the global economy.

The stages of a bubble in economics are typically described as follows:

1. Stealth/Disbelief: In this stage, there is usually little public awareness of the asset's price increase. Those who are aware of the increase may dismiss it as temporary or insignificant.

2. Awareness: As the asset's price continues to rise, more people become aware of it and take notice. However, many people still do not fully understand the underlying reasons for the price increase.

3. Mania: During this stage, the price of the asset rises dramatically and rapidly, often driven by speculative buying and irrational exuberance. This stage is characterized by a "herd mentality," as investors rush to buy the asset for fear of missing out on the gains.

4. Blow-off: This is the final stage of a bubble, characterized by a sudden and dramatic drop in the asset's price, often triggered by a specific event or news item. Panic selling sets in, leading to a sharp decline in the asset's value, wiping out gains made during the bubble.

It is worth noting that not all bubbles follow this exact pattern, and some may experience different stages or unfold in different ways. Nonetheless, these stages provide a useful framework for understanding how bubbles can form and collapse in the world of economics.

Here are three examples of past bubbles in the Malaysian market:

1. Malaysian property bubble (1997-1998) - In the late 1990s, there was a significant increase in property prices in Malaysia. This was driven by easy access to credit and speculation by investors who believed that the prices would continue to rise. However, the bubble burst in 1998 due to the Asian Financial Crisis, causing property prices to plummet and leading to a severe economic downturn in Malaysia.

   
   

2. Malaysia's stock market bubble (1993-1994) - In the early 1990s, Malaysia's stock market experienced a boom, with share prices increasing rapidly. This was driven by a variety of factors, including easy access to credit, government support for the stock market, and high levels of speculation. However, the bubble burst in 1994, causing stock prices to plummet and leading to a recession in Malaysia.

   
   

3. Bitcoin bubble (2017) - While not specific to Malaysia, the Bitcoin bubble of 2017 had a significant impact on the Malaysian market. Bitcoin prices increased rapidly in late 2017, driven by hype and speculation. Many Malaysians invested heavily in Bitcoin, hoping to profit from the rising prices. However, the bubble burst in early 2018, causing Bitcoin prices to plummet and leading to significant losses for investors.

Disclaimer: Opinions expressed are solely my own and do not express the views or opinions of my employer. All views expressed on this site are my own and do not represent the opinion of any entity whatsoever with which I have been, am now, or will be affiliated. This is a personal blog - not a peer-reviewed journal or a sponsored publication. We make no representation as to accuracy, correctness, completeness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses injuries, or damage arising from its display use. This is not a recommendation to participate, buy, sell, subscribe, purchase, any goods, services, entity mentioned. Any action that you took and/or may take as a result of the information, analysis, experience, opinion, commentary, or knowledge on this blog is ultimately your responsibility, It is the reader's responsibility to verify their own facts.