Bubble Trouble

When the price of an asset rises faster than can be explained by economic fundamentals, it creates a bubble.

Famous bubbles include tulip mania in Holland during the 17th century (when the prices of tulips reached unheard of levels) and the South Sea bubble in Britain a century later: here speculators (which included a vast array of citizens including parliamentarians and a king’s mistress) drove up the share price of the South Sea Trading Company with disastrous results.

There have been many others since, including the dot-com bubble in internet company shares that burst in 2000 and the bubble in house prices which, when it burst in 2007, helped to trigger the recent global economic downturn.

Economists argue whether bubbles are caused by the irrational behaviour of crowds, aided in part by savvy speculators, or are the result of misinformed consumers who assume the inflated prices are sensible.

Whatever their cause, bubbles do not last forever and often end, not with a pop, but with a crash.

So where is the next bubble? Property? Stocks? Student loan debt?

Kevin “KAL” Kallaugher has been the resident cartoonist for The Economist since 1978. KAL Draws is a series of animated shorts which was commissioned by The Economist to illustrate finance-related topics like tax, trade and inflation for their specialized dictionary titled Economics A-Z.