What Is an Economic Bubble?

An economic bubble is a series of asset (especially virtual capital) price inflation, that is, a sharp rise in a continuous process, which makes its market price far exceed the value it actually represents, forming a false prosperity and containing too many "bubbles" Economic aggregate. In terms of a country's total national assets, it can generally be divided into two parts: tangible assets (including land) and financial assets. In today's asset market, the largest amount of listed assets traded are concentrated in stocks and real estate. Therefore, asset price inflation is particularly manifested in stocks and real estate. The two main reasons for the economic bubble are: speculation has become a trend, and its prices have continued to rise; assets have excessive and abnormal evaluation returns. This high appraisal return makes the market price of assets far from the value it actually represents, that is, the real foundation of the economy. Whether it is a specific asset or a country's total assets, the gap between this market price and its real economic base is magically false, but it will eventually burst, and that is where the bubble lies. The economic white paper compiled by the Japan Economic Planning Agency in 1993 used theoretical prices to represent the "real economic foundation." The theoretical price is calculated through the "return-to-return model", which includes variables such as expected returns, interest rates, and risk compensation. If the market price of assets rises significantly above the theoretical price, an economic bubble will form. ^[1]

Economic bubble

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For the economy

In the modern market economy. The long-term existence of the economic bubble is due to its objective reason, which is mainly determined by the duality of its role.

Benefits of an economic bubble

On the one hand, the existence of an economic bubble is conducive to the concentration of capital, promoting competition in active markets, and prospering the economy. For example, the existence of the securities market can raise funds through the issuance of financial instruments such as stocks and bonds; expand the capital of enterprises to expand reproduction and promote economic development; at the same time, the development of joint-stock companies has promoted the reform of state-owned enterprises and improved capital operation efficiency. It also has a significant effect. For another example, in the land market, the formation of land prices and the paid transfer of land use rights can focus on the construction of urban infrastructure, improve the utilization of land resources, and promote the development of the real estate industry and economic growth. Financial securities transactions and land transactions can also stimulate the economy and promote competition. Through the survival of the fittest, the rational allocation of social resources improves the efficiency of resource allocation. Therefore, a moderate economic bubble is necessary and beneficial. Otherwise, we cannot understand the reasons for the existence of securities markets and land markets.

Disadvantages of the economic bubble

On the other hand, we should clearly see that there are negative elements in the false and speculative factors in the economic bubble. For example, speculative factors in the stock market, the fluctuations of stock prices are too large, and the separation from the actual capital is getting more and more serious, and its false components will be more and more, which will adversely affect the development of the national economy and cause social unrest; The sharp rise and fall of stock prices will also lead to the loss of stockholders' assets and even cause polarization. For another example, in the land market transactions, speculative operations of speculative speculations, if they exceed a certain range, will also cause skyrocketing land prices. Real estate prices, especially residential prices, have risen too fast, thereby disrupting the order of the real estate market and seriously affecting the quality of living of residents. Therefore, the negative and negative aspects of the economic bubble should also be acknowledged. But overall, the benefits of a moderate economic bubble outweigh the disadvantages.

Dialectically looking at the pros and cons of the economic bubble, the significance is that we must make full use of the positive aspects of the economic bubble to activate the economy and promote economic growth; at the same time, we must suppress the negative aspects of the economic bubble and avoid its excessive expansion to form a bubble economy. Cause false prosperity, and bring harm to social and economic development.

Expert advice

Some insiders in the Mainland have revealed that under pressure from performance evaluations, mainland commercial banks in March and June 2009 had a large number of loans at the end of the quarter in order to "reduce the scale." These phenomena have attracted great attention from the regulatory authorities and have begun to take measures to control them.

Wu Xiaobo believes that "bubble expectations have become a reality" and that the Chinese economy is now in an inflationary channel. He suggested that China's economic reforms in the next 20 years should follow the principle of "easy first and then difficult". First, reforms should be made in three areas: the tax sharing system, the banking system, and the land transfer system.