Homestead mailing list

[Don Bowen KI6DIU <don.bowen AT earthlink.net>]

At 1/24/2008, you wrote:
> Sigh. I suspect I will always have a negative reaction to the term
> "bubble" when used to describe a waxing or waning economic condition.
> As you write, "bubbles burst." Exactly. A bubble, dammit, deflates all
> the way when popped, down to flat, just a memory of its former bulgy
> self. A bubble does not deflate five or ten or twenty percent and then
> hold there shivering and waiting for more helium or ballast.

"Bubble" is a popularized term, the real term is asset price 
inflation.  This has happened many times in the past and will happen in the 
future.  The stages are utterly predictable.  First is the influx of credit 
in the form of new money or methods of creating money.  New money then 
drives a mania, the feeling, real or otherwise, that "everyone else is 
making money so I should before it is too late."  As long as the rising 
asset value covers the rent payments on the money the mania 
continues.  Then as the fundamentals catch up, there is a panic to sell 
before the asset losses value.  Income from the rising asset values can no 
longer support the costs of the credit to purchase those assets.  Panic 
selling leads to a crash as investors become insolvent and are unable to 
repay the credit.

New credit leads to asset price inflation leads to a mania by purchasers 
followed by panic to dump in a falling market ended by a crash of 
insolvency.  New money can be brought into play to ease the crash but that 
most often just fuels the next round of asset price inflation.  For a very 
recent example look at the money dumped into the system to provide a soft 
landing for the dot com crash which found its way into the housing market 
with new credit vehicles.



Don Bowen              Awl Knotted Up                       KI6DIU
http://www.braingarage.com