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  • From: Don Bowen KI6DIU <don.bowen AT earthlink.net>
  • To: homestead AT lists.ibiblio.org
  • Subject: Re: [Homestead] Rural Land Prices and Conditions
  • Date: Mon, 28 Jan 2008 10:56:54 -0800

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




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