Economic bubbles are considered bad because they run up asset values without an underlying rise in production or real value. Bubbles have occurred several times in recent history, the tech bubble of the 1990s, and the housing bubble of the 2000s being two examples. Since bubbles are artificially inspired by market sentiment, and/or monetary policy they naturally burst to become more realistically priced. These bursts have tended to be dramatic and cause substantial financial stress to unprepared individuals and entities.
Despite the negative effects of bubbles they are also economic opportunities. Bubbles attract investment capital from foreign countries, create wealth and fuel investments spawned by the increase in asset values. Without bubbles, financial and economic stasis would be more likely, and although that is more stable, it is can also have less near-term economic benefit. For example, consider an economy without asset inflation, and with GDP growth that remains steady at 1-2%, and that occasionally rises above inflation. Such an economy only keeps up with population growth and does necessarily increase or decrease in size.
A bubble economy however, may grow 3-5% for several years straight. Moreover, according to Department of Commerce GDP data, U.S. GDP grew an average of 3.82% each year between 1992-2000. That is year over year data as well meaning 3.82% compounded over the previous year's growth. Although in the 1990s the bubble was actually based in real technological innovation, a reasonable interest rate environment existed and inflation was actually kept in check by tightening the creation of U.S. currency per the CATO Institute. This bubble was conceivably caused by over-exuberant investors rather than loose monetary policy.
Even after the tech bubble had burst annual GDP did not decline below 1%, a relatively small price to pay for a bubble that created a lot of jobs, attracted a lot of foreign capital, and generated a lot of revenue. The housing bubble was not as healthy and was fueled by inaccurate derivatives valuations, loose lending policies, and a surge of speculative real estate purchases and construction. Interest rates were also much lower in the mid-2000s than the 1990s. Yet this led to a four year average GDP growth of 2.95%, low unemployment and large corporate, foreign and individual investments. Without this bubble, economic growth may have only averaged 1-2%, and a recession still might have occurred afterward.
The growth created by asset bubbles serves as a stimulus for economic expansion, and expansion that may otherwise be impossible to attain with more practical, but stable economic policies. As with large companies, developed countries with large economies like the U.S. have to grow GDP in the hundreds of billions to expand at a rate that can support and substantiate significant capital investment into industrial research, business development, and government sponsored programs. The need for economic bubbles suggests it is quite possible the U.S. has reached its economic apex where continued economic expansion at a consistent rate higher than 1% is difficult, unsustainable and unfounded.
Even after the tech bubble had burst annual GDP did not decline below 1%, a relatively small price to pay for a bubble that created a lot of jobs, attracted a lot of foreign capital, and generated a lot of revenue. The housing bubble was not as healthy and was fueled by inaccurate derivatives valuations, loose lending policies, and a surge of speculative real estate purchases and construction. Interest rates were also much lower in the mid-2000s than the 1990s. Yet this led to a four year average GDP growth of 2.95%, low unemployment and large corporate, foreign and individual investments. Without this bubble, economic growth may have only averaged 1-2%, and a recession still might have occurred afterward.
The growth created by asset bubbles serves as a stimulus for economic expansion, and expansion that may otherwise be impossible to attain with more practical, but stable economic policies. As with large companies, developed countries with large economies like the U.S. have to grow GDP in the hundreds of billions to expand at a rate that can support and substantiate significant capital investment into industrial research, business development, and government sponsored programs. The need for economic bubbles suggests it is quite possible the U.S. has reached its economic apex where continued economic expansion at a consistent rate higher than 1% is difficult, unsustainable and unfounded.
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