Asset Bubble

Extracted Attributes

• Definition

  A situation where asset prices rise rapidly and significantly above their intrinsic or fundamental value.

• Common Drivers

  Speculation, investor enthusiasm, excessive credit expansion, and loose monetary policy.

• Economic Consequences

  Debt deflation, financial panic, recessions, and systemic risk to the financial system.

• Primary Asset Classes

  Real estate, stocks, bonds, and commodities.

• Bessent's Bubble Duration

  15 years, spanning from the Great Financial Crisis to approximately 2024.

• Japanese Bubble Growth Rate

  0.1 percent increase in land prices finally recorded in 2018 after decades of decline.

Timeline

• Start of the Japanese asset price bubble characterized by inflated real estate and stock prices. (Source: Wikipedia)

  1986-01-01

• The Nikkei stock index plummets to half its peak value following monetary tightening by the Bank of Japan. (Source: Wikipedia)

  1990-08-01

• End of the Japanese asset price bubble period as asset prices begin a broad decline. (Source: Wikipedia)

  1991-12-31

• The Japanese bubble officially bursts, leading to the 'Lost Decade' of economic stagnation. (Source: Wikipedia)

  1992-01-01

• The Great Financial Crisis (GFC) begins, leading to the implementation of Quantitative Easing policies. (Source: Document 514d8ad8-2026-4107-9514-1e7e61217d6e)

  2008-09-15

• Start of the 15-year asset bubble period identified by Scott Bessent, driven by Fed intervention. (Source: Document 514d8ad8-2026-4107-9514-1e7e61217d6e)

  2009-01-01

• Japanese nationwide land prices increase by 0.1%, the first year-over-year rise since the 1991 bubble burst. (Source: Wikipedia)

  2018-01-01

• Scott Bessent critiques the long-term asset bubble and its role in creating a two-tiered economy during an interview. (Source: Document 514d8ad8-2026-4107-9514-1e7e61217d6e)

  2024-11-01

Japanese asset price bubble

The Japanese asset price bubble (バブル景気, baburu keiki; lit. 'bubble economy') was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. In early 1992, this price bubble burst and the country's economy stagnated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices were closely associated with excessive monetary easing policy at the time. Through the creation of economic policies that cultivated the marketability of assets, eased the access to credit, and encouraged speculation, the Japanese government started a prolonged and exacerbated Japanese asset price bubble. By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (BOJ). By late 1991, other asset prices began to fall. Even though asset prices had visibly collapsed by early 1992, the economy's decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing assets loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade. Japan's average nationwide land prices finally began to increase year-over-year in 2018, with a 0.1% rise over 2017 price levels.

Web Search Results

• What is an asset bubble? | Reference Library | Economics

  An asset bubble, also known as a speculative bubble, refers to a situation in which the prices of certain assets, such as stocks, real estate, or commodities, rise rapidly and significantly above their intrinsic or fundamental value. This upward price movement is often fueled by investor enthusiasm, speculation, and the expectation of further price appreciation. [...] Asset bubbles are generally unsustainable because they rely on speculative behavior rather than the underlying value of the asset. Eventually, the bubble bursts, leading to a sharp and significant decline in prices. This can result in financial losses for investors, disruptions in the economy, and potential systemic risks if the bubble affects the stability of the financial system. [...] Asset bubbles typically occur when there is a disconnect between the market price of an asset and its underlying intrinsic value. As more investors buy into the asset, demand increases, driving prices even higher. This positive feedback loop creates a self-reinforcing cycle, attracting more investors who hope to profit from further price increases. Several factors contribute to the formation of asset bubbles:

• How Do Asset Bubbles Cause Recessions?

  An asset bubble occurs when the price of an asset, such as stocks, bonds, real estate, or commodities, rises rapidly without the underlying fundamentals to justify the price spike. The inevitable collapse wipes out the net worth of investors and causes exposed businesses to fail, potentially beginning a cascade of debt deflation and financial panic that can spread to other parts of the economy. This can result in a period of higher unemployment and lower production that characterizes a [...] Asset bubbles are formed when market prices in some sectors increase over time and trade far higher than the fundamentals would suggest. An expansion of the supply of money and credit in an economy provides the necessary fuel for bubbles. Technological factors, incentives created by public policies, and the particular historical circumstances around a given bubble help to determine which asset classes and industries are the focus of a bubble. [...] When this process is driven by money in its modern form of a fiat currency mostly made of fractional reserve credit created by the central bank and the banking system, then the bursting of the bubble not only induces losses to the then-current holders of the bubble assets, but can also lead to a process of debt deflation that spreads beyond those exposed directly to the bubble assets to all other debtors as well. This means that any sufficiently large bubble can crash the entire economy into a

• Bursting The Myth: Understanding Market Bubbles

  Understanding whether an asset is in a bubble or part of a cycle is important for investment decisions. Bubbles should be avoided due to the risk of widespread permanent loss of capital. On the other hand, cycles are part of normal market behavior and imply the need for patience and humility to achieve long-term returns. If an asset’s price appears excessively high and is likely to fall, it might not be a bubble—just typical market behavior. Excesses will correct, recover, and life goes on. [...] The term bubble in asset markets evokes images of rapid wealth accumulation, fueling a mania around an asset, ultimately followed by significant financial losses when the bubble bursts. This phenomenon has fascinated investors and economists for decades. Financial pundits frequently use the term across various topics—stock market bubble, AI bubble, real estate bubble, college tuition bubble—to the point where it seems everything is labelled a bubble. But what exactly is a market bubble, and how

• Asset Price Bubbles: What are the Causes, Consequences ...

  What causes asset bubbles to form? In a seminal piece (originally published in 2003), José Scheinkman and Wei Xiong observe that asset bubbles are characterized by high trading volume and high price volatility. They develop a behavioral model of asset bubbles, assuming short-sale constraints. An asset buyer is willing to pay a price above fundamentals because, in addition to the asset, the buyer obtains an option to sell the asset to other traders who have more optimistic beliefs about its [...] Evidence suggests that some bubbles can have a significant adverse impact on the macroeconomy when they burst. Is there evidence that asset bubbles may have additional adverse effects? Robert Chirinko and Huntley Schaller emphasize the distortive impact of asset bubbles, regardless of whether they burst, on aggregate investment. A fundamental function of the stock market is the efficient allocation of capital to its most productive uses. Chirinko and Schaller find empirical evidence supporting [...] In general, according to current economic theory, a bubble exists when the market price of an asset exceeds its price determined by fundamental factors by a significant amount for a prolonged period. The efficient market hypothesis asserts that extraordinary movements in asset prices are a consequence of significant changes in information about fundamentals. Thus, actual and fundamental prices are always the same, and bubbles cannot exist unless they are driven by irrational behavior or market

• Bubbles

  In a rational bubble setting an investor only holds a bubble asset if the bubble grows in expectations ad in…nitum. In contrast, in the following models an investor might hold an overpriced asset if he thinks he can resell it in the future to a less informed trader or someone who holds biased beliefs. In Kindleberger’s (2000) terms, the investor thinks he can sell the asset to a greater fool. [...] Bubbles Abstract Bubbles refer to asset prices that exceed an asset’s fundamental value because current owners believe that they can resell the asset at an even higher price in the future. There are four main strands of models that identify conditions under which bubbles can exist. The …rst class of models assumes that all investors have rational expectations and identical information. These models generate the testable implication that bubbles have to follow an explosive path. In the second [...] Evans, G. W. (1991): “Pitfalls in Testing for Explosive Bubbles in Asset Prices,” Amer-ican Economic Review, 81(4), 922–930. Flood, R. P., and P. M. Garber (1980): “Market Fundamentals versus Price-Level Bubbles: The First Tests,” Journal of Political Economy, 88(4), 745–770. Harrison, J. M., and D. Kreps (1978): “Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations,” Quarterly Journal of Economics, 89, 323– 336.