An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values”. In other words, an economic bubble is the commonly used term for an economic cycle that is characterized by a rapid expansion followed by a contraction, often times in a dramatic fashion.
While some economists deny that bubbles occur, the cause of bubbles remains a challenge to those who are convinced that asset prices often deviate strongly from intrinsic values.
The concept of "bubbles" are also posited as a theory which holds that security prices will always rise above their real value and will continue to do so until prices drop and the bubble bursts. While some bubbles happen naturally as a part of the economic cycle, some also occur as a result of investor exuberance and serve as correctives.
The exact cause of economic bubbles has been disputed by many specialists. Some experts think that bubbles are related to inflation and therefore believe that the factors which cause inflation could also be the same factors that cause bubbles to occur. Other experts are of the opinion that there is a basic fundamental value to every asset and the bubbles represent an increase or rise over that fundamental value. This rising movement must eventually return to that fundamental value, which is its natural state.
There are also chaotic theories regarding the formation of bubbles. These theories maintain that bubbles come from certain critical states in the market that originate from the communication of economic players. Still a few others see bubbles as a necessary effect of unreasonably valuing assets based solely on their returns in the recent past without really thinking from a macro perspective or regard for economic fundamentals.
There are some economists who also theorize that a bubble is an imbalance in the way people perceive opportunities, because they try to chase the prices of assets instead of making purchases based on the intrinsic value of the assets (this could also be called a speculator’s mentality).
Now try closing your eyes for a second... go out on the streets... people bouncing all over, looking through the transparent walls of their bubbles, some squeezed so tight they can barely breathe, some uselessly trying to find an anchor point chaotically floating in the wideness of their bubble... I just wonder... If they could find out how much their souls really value, would they stop bouncing?
