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Economic Bubbles

Usually, it takes place in securities, real estate and stock markets.The rising prices of stocks, securities or properties attract people to invest in them, believing that they will be able to sell them at even higher prices. Prices keep rising till the time when people start losing confidence in the securities or stocks, and thus, a crash occurs which moves the prices back to the original level.” Asset bubbles can exist in an economy with endogenous growth provided that they are not too large and that the growth rate in the equilibrium without bubbles exceeds the interest rate” (Grossman Yanagawa, 2002).A different perspective can be seen from the bubble effect. It is natural for companies to revalue their assets or uprating the equity valuation. In order to remain in business and to compete with other businesses, they need to raise equity. Since most of the big companies nowadays are public limited companies, they require publishing their annual reports at the end of the financial period. Thus, if they do not revalue their assets, their financial statement would be badly affected. Since the real value of money is falling with time, taxes rising, and governments not able to meet the commitments, investors’ assets kept independent of government is completely rational. It is the excessive debt that has brought the crash which has been transferred by the governments. (Odey, 2009)Some economists believe that the bubble occurs due to inflation which causes the prices to rise but the others believe that there is a basic value of every asset and bubbles tend to raise the value of the asset, but eventually, the value moves back to is the original position after going through the economic fluctuations. Some of the theories regarding the bubble state that there are economic players who play the key role. The bubble originates from the communication and coordination of the economic players. However, the basic concept of bubble suggests that people donot see the intrinsic or real value of the asset.

Economic Bubbles