Fred's Intelligent Bear Site

Past Bubbles


We are told that markets are efficient, so bubbles should be impossible. In fact, bubbles happen over and over throughout history because human nature never changes. Below are links to information about famous past bubbles.

Note: All external links on this page open in new windows.

Tulip Mania - 1637
http://www.tulipsandbears.com/tulip.htm
http://www.businessweek.com/2000/00_17/b3678084.htm

Mississippi Bubble - 1720
http://www.infoplease.com/ce6/history/A0833418.html

South Sea Bubble - 1720
http://www.infoplease.com/ce6/history/A0846104.html
http://www.historyhouse.com/in_history/south_sea/

The Roaring '20s / Great Depression - 1929
http://www.futurecasts.com/Depression_descent-'29.html

Japan Bubble - 1989
http://finance.yahoo.com/q/bc?s=^N225&t=my&c=

U.S. Tech & Large Cap Bubble - 2000
Obviously, this site makes the argument that the U.S. was in a bubble, and now it is in the long process of deflating. The question that begs to be answered is, "what caused the bubble?" Here is my list of factors that allowed the U.S. bubble to happen:
- The willingness of the U.S. consumer to over spend and take on debt.
- The willingness of U.S. businesses to take on excessive amounts of debt in order to fund their "growth" plans.
- The willingness of the Fed to expand the money supply to allow excessive spending and debt creation.
- Free trade policies, which opened up an endless supply of goods to buy.
- The trade deficit, which allows accumulation of real goods without using limited resources. It only requires the creation of paper to exchange for the goods.
- The cut in the capital gains tax rate without a corresponding cut in the rate on dividends and interest.

As with most bubbles, the creation of debt has caused the illusion of wealth, but no lasting wealth has been created. This is why most bubbles eventually deflate back to the point where they began.

Quotes
Those who cannot learn from history are doomed to repeat it.
- George Santayana

That men do not learn very much from the lessons of history is the most important of all the lessons of history.
- Aldous Huxley

We learn from history that we learn nothing from history.
- George Bernard Shaw

The farther backward you can look, the farther forward you are likely to see.
- Winston Churchill

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
- Ludwig von Mises, Human Action, A Treatise of Economics, Yale University Press, 1949

True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.
- Ludwig von Mises, Omnipotent Government, 1944


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