What you need to know about balloons, also called speculative balloons, market balloons, price bubbles, or speculation frenzy.
The first balloon in the world appeared in the Netherlands. This balloon, known as the Tulip Madness, has been engraved as high-expectations tulip bulb prices rising and then rapidly declining.
Another most famous balloon engraved on history pages was the South Sea Balloon, also known as the first stock balloon. Not even the physicist Isaac Newton could survive this balloon.
What is an economic bubble and can it be predicted? Here’s what you need to know and learn about balloons in an economic sense.
What is an Economic Balloon?
In economic terms, a bubble is a high volume of trade at extreme prices, which is not in line with actual intrinsic values. A simpler definition is the trading of assets with inflated values.
Balloons continue to grow until investors realize that asset prices are much higher than they should be; This leads to a downturn in asset prices, which could lead to a collapse in the market.
Balloons can also be called market balloons, speculative balloons, price bubbles, or speculation frenzy.
Is it possible to predict balloons?
In the case of a balloon, prices can change frantically and very quickly. Moreover, these changes are often unpredictable and unpredictable.
Even if there is no speculation, uncertainty or limited rationality in the market, there are numerous views on the reasons for the formation of balloons. Many of these views are also close to each other.
The mainstream economy reveals that balloons cannot be predicted and stopped before or during the formation of balloons. Accordingly, the development of balloons is unstoppable because such a move will lead to financial crises. According to this view, authorities will have to overcome the consequences by using financial and monetary policy tools after the balloon explodes.
The Austrian school of economics, on the other hand, argues that economic bubbles always have negative effects on economies. The main reason for this is the fact that balloons lead to inefficient and wasteful use of economic resources.
Balloon Examples in History
Looking at the history of financial markets, it is possible to see examples of balloons. Especially in the US economy, there are plenty of examples of economic balloons.
For example, in the 1970s, when the US terminated its implementation of the gold standard, American monetary expansion led to enormous bubbles in commodities. These balloons finally came to an end after the US Federal Reserve raised interest rates above 14%. This caused the commodity bubble to burst, causing gold and oil to fall to historically normal levels.
The rapid growth of the technology sector in the late 1990s and early 2000s is one of the most prominent examples of a bubble. As more and more people started to use the internet, investors paid much higher prices to the shares of dot-com companies, which were booming. Eventually, many of these companies failed to make a profit and their shares rapidly depreciated. There are big losses left.
Another example of economic bubbles was the housing and stock exchange bubbles, which rose as a result of the Fed’s low interest rates from 2001 to 2004. The rapid rise in housing prices, in particular, led to an expectation of profit and led the US borrowing from all sectors to buy second and third properties. These balloons burst when interest rates returned to more normal levels.
The consequences were severe. The impact spread to the financial system and the entire economy in 2007 and 2008. World economies were also affected negatively. This example is important for us to see how the balloons grew before the explosion and how dangerous and harmful they were when they finally exploded.