Let's talk about economic bubbles, what they mean and how we can use them to our advantage, and how they can also destroy us.
Bubbles are created as a product or service is capitalized on and more layers are added to the base cost. In addition profits are also added, as this continues to grow so does the bubble.
The Real Estate bubble continued to grow at a rapid rate basically due to more and more layers of profits being added to a certain region or type of property. Now I don’t recall anyone complaining about a bubble as it is being inflated, in fact everyone is trying to figure out how they can get inside that bubble and share in some of the profits, thus another layer is added and the bubble grows.
So what causes a bubble to burst? In my opinion, as bubbles continue to grow they become weaker to the economic weather forecast. I know, right now you’re saying he has dropped off the deep end this time. Allow me to explain. Bubbles grow and become more and more dependent upon economics remaining consistent in order to survive. Just as in in our Real Estate bubble, the banking industry ran into rough times, due to sub prime mortgages and people who bought homes that in reality they could not afford in the first place. As these loans began to default, banks began to tighten the money supply, business owners started laying workers off, unemployment was rising and more and more home were falling into foreclosure. This is what I mean by economic weather reports. As long as the “weather” doesn’t change the bubble will continue to survive; one hiccup and look out.
When we see a economic bubble burst, is that at good thing or a bad thing? Bubbles come and go simply because of an economic storm here or there. The one good thing about a bursting bubble is the opportunity to rebuild it. Will our Real Estate bubble come back? Absolutely it will, maybe not as fast or as large as the last one, but it will come back. Everyone including our government always predict that next time it will be better and we will never let this happen again. Sort of reminds me of New Years Eve and the resolutions that are made only to be forgotten before January is over. By nature we forget very quickly the past, only to be driven by inflating new bubbles. Stick around and you will have an opportunity to blow some life into new bubbles.