A run-up in stock markets, especially in – stock markets (share [U.S.: stock] stock market bubble; here again, especially in the case of shares of young companies) – real estate or – commodities (precious metals, tulips) or – in relation to certain forward contracts, such as futures in the case of oil and natural gas), stimulated by corresponding expectations, steady (continuous), persistent (insistent) and considerable (considerable) increase in prices. As a result, the market price of the corresponding asset moves further and further upwards from its true value (the price which would be performed under regular conditions of demand and supply). – Because this leads to misallocation of capital – the money and thus the factors of production no longer find their way into the hands of the best host (to the most favorable allocation of scarce resources), – speculative bubbles are rightly regarded as economically harmful. As a rule, however, they can neither be punished by regulatory measures nor by central bank policy; especially since even the central bank often only recognizes the bubble when it has burst. As financial history has shown in many examples, investors with almost feverish expectations in a market are not deterred by anything or anyone (as long as the music is playing, you have to dance). Even if the central bank could identify speculative bubbles in real time without a doubt and stop further credit-financed purchases by charging very high interest rates, it must be remembered that the high level of interest rates inevitably puts the brakes on all investment and thus inhibits technical progress. – It has been empirically proven that bubbles in any asset cause households to liquidate their savings and to incautiously take on debt. Therefore, when the speculative bubble bursts, a recession may result. This is because banks will suffer losses because many investors will be unable to repay the loans taken out to finance their commitments. As a result, institutions will be excessively reluctant to grant loans. – Financial history also teaches that so far it takes between five and ten years from the emergence of a bubble to its bursting on stock markets and in the real estate sector. – See selling panic, stock bubble, accelerator, financial, algorithmic trading, buying up, central banking, bear market, cyclical, bubble, building land, boom-bust cycle, stock market fever, stock market sentiment, cleaning up after, crash, dotcom bubble, recovery, short-term, euphoria phase, financialization, gambling effect, bull market feeds bull market, high flyer, hindsight, real estate bubble, Jackson Hole consensus, Shortsightedness, Leaning against the wind, Short-selling ban, Martin principle, Market insight, Central banking, Massive selling, Milkmaid bull market, Low interest rate, Overtrading, Panic selling, Rally, Feedback loop, Runup, Sell out, Speculative bubble, Free rider, Tulip crash, Overexposure, Exuberance, Unreasonable, Asset bubble, Interest rate stimulus, Finding back. – Cf. ECB Monthly Bulletin of September 2004, pp. 22 et seq. (with important literature references), ECB Monthly Bulletin of November 2010, pp. 75 et seq. (asset price bubbles; overviews; numerous literature references).
Attention: The financial encyclopedia is protected by copyright and may only be used for private purposes without express consent!
University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/