Business Marketing Strategy Essentials
Your business marketing strategy is the single biggest factor which determines the success or failure of your business. It doesn't matter if you sell widgets from an office in your house, or run a multi-million dollar company. It is just that simple. Get it right and you prosper. Get it wrong and you go the way of many others who have failed before you. This is true on main street, and on the internet as well. No matter what you do, the proper business marketing strategy essentials remain the same, only the application of them has to adapt to the needs of your particular business. Do not confuse business marketing with simple advertising. Your business marketing strategy should affect every aspect of how you run your business. It is the heart and soul of a successful business.
BizRave has been founded to provide you the education, resources, and support needed to understand and implement the core business marketing strategies that will help you succeed in whatever business you may manage. BizRave is run by a consultant with almost 20 years of experience as a self employed business owner. The business marketing strategies we teach and promote are designed to help you succeed by showing you how to do the things that make customers love you and become your greatest assets.
If you are dedicated to building a business that thrives upon strong relationships with your customers and employees we can help you learn a business marketing strategy that allows you to succeed beyond your expectations. No instant wealth promises ,or hype about a lifestyle that allows you to just sit back and watch the money roll in. You still have to be one who implements the strategy in your business, but we are there to help and support you as you make this journey.
One word of caution. If you are one of the majority of business owners who are too lazy, unmotivated, or otherwise not interested in growing your business by exceeding the expectations of your customers we are not for you. However, if you do want to learn how to create an ongoing mutually beneficial relationships with your customers and grow your business to levels you never thought possible we would love to have you join us!
from - http://www.bizrave.com/
Saturday, February 26, 2011
Wednesday, February 23, 2011
New Bubble in Silicon Valley
New Bubble in Silicon Valley
In a memorable scene in the “The Social Network,” the actor Justin Timberlake, who portrays the Silicon Valley investor Sean Parker in the movie,
leans over the table and tells the founders of Facebook in a conspiratorial tone:
“A million dollars isn’t cool. You know what’s cool? A billion dollars.”
These days in Silicon Valley, a billion dollars seems downright quaint.
The enthusiasm for social networking and mobile apps has venture capitalists clamoring to give money to young companies.
The exuberance has given rise to an elite club of start-ups — all younger than seven years and all worth billions.
Successive investments in Twitter have reportedly increased its value 33 percent, to $4 billion,
while Zynga, creator of the popular Facebook game FarmVille, is worth more than $5 billion.
Google was willing to pay $6 billon for Groupon, an online coupon company that was valued at $1.35 billion only months ago
And Groupon was willing to reject the bid, presumably because it could sell for even more money later.
Less than a decade after the dot-com bust taught Wall Street and Silicon Valley investors that what goes up does not keep going up forever,
a growing number of entrepreneurs and a few venture capitalists are beginning to wonder if
investments in technology start-ups are headed toward another big bust.
The chief evidence, according to industry experts and analysts, is the way
venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea.
They are piling into me-too start-ups that imitate popular Web companies that already received financing.
Companies that involve social shopping, mobile photo sharing and new social networking
are finding it easy to attract investors because no one wants to miss the next big thing.
Yammer, a system for sending Twitter-like messages inside businesses, recently raised $25 million,
while investors reportedly signed a check for close to $30 million for a niche blogging site called Tumblr.
GroupMe, a new group messaging app for cellphones, raised $9 million.
Path, an iPhone app for sharing only photos on a social network limited to just 50 people, received $2.5 million.
Its competitor, Picplz, scored $5 million. And those are just within the last few weeks.
It has some venture capitalists scratching their heads.
“I’m not saying Quora, Foursquare, Square aren’t eventually worth a lot of money,
but the price to pay to get into those games is kind of amazing — $50 to $80 million?”
said Dave McClure, founding partner of 500 Startups, a technology incubator in Silicon Valley.
“These companies are in big markets with proven founders, so maybe not absolutely crazy -- but certainly eyebrow-raising.”
Fred Wilson, a prominent venture capitalist, said he had watched the trend accelerate over the last six to nine months.
“I am seeing many more unnatural acts from investors happening,” he said in a recent blog post.
He attributes it to competition among investors eager to participate in popular young start-ups.
And he notes, “I have never seen phases like this end nicely.”
No one really knows if there is a bubble until after one pops.
Nevertheless, there are many signs of froth.
For example, enthusiasm for closely held Facebook shares has run so high that private investors are trading derivatives of it.
“I always get a little nervous about bubbles when five different angel investors ask me to join their brand new angel funds” in one week,
said Alex Gould, leadership scholar of the Stanford Institute for Economic Policy Research.
And although the rapid-fire pace of investment in popular Web companies
feels reminiscent of the investing craze that led to the dot-com bust a decade ago,
there are a few significant differences.
For starters, this is not a stock market bubble.
None of the companies are publicly traded.
Mr. Gould said that while “bubble behavior doesn’t change,”
the culture of high-flying start-ups like Flooz.com, Pets.com and theGlobe.com making initial public offerings is largely nonexistent.
Those did not fare well, though companies like Amazon have continued to prosper.
Instead, entrepreneurs are increasingly looking to large technology companies like Microsoft, Apple or Google with mountains of cash, not the stock market.
Those three companies have about $90 billion in cash on their books.
McKinsey & Company calculates that the largest software and hardware companies have enough excess cash on hand to buy nearly all of the tech industry’s midsize companies.
Although the volume of deals is expected to swell, financiers are much more conservative in the amounts they are investing in each company.
“Back in the ’90s, companies got funded for five times the amount that Tumblr raised and didn’t have anything close to a business model,”
said Roger Ehrenberg, founder and managing partner of IA Ventures.
“People were getting $50 to $200 million a pop and it brought down an entire industry.”
The frenzy is as much the result of simple laws of supply and demand as the herd mentality.
Thanks to the constantly falling cost of computing power, a start-up needs less money to get off the ground.
Meanwhile, more wealthy people are viewing investing in technology as a hobby, which has increased the competition.
“Investing in technology has become fashionable,” Mr. Ehrenberg said.
“It used to be that angel investing was the province of wealthy men. Now its become the province of everyone.”
Some venture capitalists — hungry for growth and troubled by weak returns —
have moved toward smaller investments, hoping to catch the next Facebook in its infancy.
“I think at the high end, it’s not that frothy, but there’s a lot of exuberance in the early-stage stuff,”
said Chris Sacca, an angel investor who has decided to temporarily hold off on new investments until valuations drift lower.
“A lot of the valuations there don’t make a lot of sense.”
Most Silicon Valley investors still see no signs of gloom and doom.
Ron Conway, a San Francisco financier who has invested in more than 500 companies,
including Facebook, Zappos, Google and Twitter, says he does not think there is any bubble.
“All the start-ups today have business models and business cases that make them viable,” he said in an e-mail.
“In 1999 when the bubble happened many companies did not have business models and advertising on the Web was very immature.”
Jeff Clavier, managing partner at SoftTech VC and a well-known Silicon Valley angel investor who has financed companies like Mint and Ustream, said that over the next 12 to 18 months
the real challenge for start-ups flush with venture cash would be proving they were worth the investment or risk having to fold their companies.
“There may not be a big implosion, but down the road there will be a bunch of blood and tears,” he said to the New York Times.
“The music is going to stop and people will realize there aren’t enough chairs for companies to get the next round of financing.”
from - http://www.economywatch.com/economy-business-and-finance-news/new-bubble-in-silicon-valley.09-02.html
In a memorable scene in the “The Social Network,” the actor Justin Timberlake, who portrays the Silicon Valley investor Sean Parker in the movie,
leans over the table and tells the founders of Facebook in a conspiratorial tone:
“A million dollars isn’t cool. You know what’s cool? A billion dollars.”
These days in Silicon Valley, a billion dollars seems downright quaint.
The enthusiasm for social networking and mobile apps has venture capitalists clamoring to give money to young companies.
The exuberance has given rise to an elite club of start-ups — all younger than seven years and all worth billions.
Successive investments in Twitter have reportedly increased its value 33 percent, to $4 billion,
while Zynga, creator of the popular Facebook game FarmVille, is worth more than $5 billion.
Google was willing to pay $6 billon for Groupon, an online coupon company that was valued at $1.35 billion only months ago
And Groupon was willing to reject the bid, presumably because it could sell for even more money later.
Less than a decade after the dot-com bust taught Wall Street and Silicon Valley investors that what goes up does not keep going up forever,
a growing number of entrepreneurs and a few venture capitalists are beginning to wonder if
investments in technology start-ups are headed toward another big bust.
The chief evidence, according to industry experts and analysts, is the way
venture capitalists and established companies are clamoring to give money to young companies, including those with only a shred of an idea.
They are piling into me-too start-ups that imitate popular Web companies that already received financing.
Companies that involve social shopping, mobile photo sharing and new social networking
are finding it easy to attract investors because no one wants to miss the next big thing.
Yammer, a system for sending Twitter-like messages inside businesses, recently raised $25 million,
while investors reportedly signed a check for close to $30 million for a niche blogging site called Tumblr.
GroupMe, a new group messaging app for cellphones, raised $9 million.
Path, an iPhone app for sharing only photos on a social network limited to just 50 people, received $2.5 million.
Its competitor, Picplz, scored $5 million. And those are just within the last few weeks.
It has some venture capitalists scratching their heads.
“I’m not saying Quora, Foursquare, Square aren’t eventually worth a lot of money,
but the price to pay to get into those games is kind of amazing — $50 to $80 million?”
said Dave McClure, founding partner of 500 Startups, a technology incubator in Silicon Valley.
“These companies are in big markets with proven founders, so maybe not absolutely crazy -- but certainly eyebrow-raising.”
Fred Wilson, a prominent venture capitalist, said he had watched the trend accelerate over the last six to nine months.
“I am seeing many more unnatural acts from investors happening,” he said in a recent blog post.
He attributes it to competition among investors eager to participate in popular young start-ups.
And he notes, “I have never seen phases like this end nicely.”
No one really knows if there is a bubble until after one pops.
Nevertheless, there are many signs of froth.
For example, enthusiasm for closely held Facebook shares has run so high that private investors are trading derivatives of it.
“I always get a little nervous about bubbles when five different angel investors ask me to join their brand new angel funds” in one week,
said Alex Gould, leadership scholar of the Stanford Institute for Economic Policy Research.
And although the rapid-fire pace of investment in popular Web companies
feels reminiscent of the investing craze that led to the dot-com bust a decade ago,
there are a few significant differences.
For starters, this is not a stock market bubble.
None of the companies are publicly traded.
Mr. Gould said that while “bubble behavior doesn’t change,”
the culture of high-flying start-ups like Flooz.com, Pets.com and theGlobe.com making initial public offerings is largely nonexistent.
Those did not fare well, though companies like Amazon have continued to prosper.
Instead, entrepreneurs are increasingly looking to large technology companies like Microsoft, Apple or Google with mountains of cash, not the stock market.
Those three companies have about $90 billion in cash on their books.
McKinsey & Company calculates that the largest software and hardware companies have enough excess cash on hand to buy nearly all of the tech industry’s midsize companies.
Although the volume of deals is expected to swell, financiers are much more conservative in the amounts they are investing in each company.
“Back in the ’90s, companies got funded for five times the amount that Tumblr raised and didn’t have anything close to a business model,”
said Roger Ehrenberg, founder and managing partner of IA Ventures.
“People were getting $50 to $200 million a pop and it brought down an entire industry.”
The frenzy is as much the result of simple laws of supply and demand as the herd mentality.
Thanks to the constantly falling cost of computing power, a start-up needs less money to get off the ground.
Meanwhile, more wealthy people are viewing investing in technology as a hobby, which has increased the competition.
“Investing in technology has become fashionable,” Mr. Ehrenberg said.
“It used to be that angel investing was the province of wealthy men. Now its become the province of everyone.”
Some venture capitalists — hungry for growth and troubled by weak returns —
have moved toward smaller investments, hoping to catch the next Facebook in its infancy.
“I think at the high end, it’s not that frothy, but there’s a lot of exuberance in the early-stage stuff,”
said Chris Sacca, an angel investor who has decided to temporarily hold off on new investments until valuations drift lower.
“A lot of the valuations there don’t make a lot of sense.”
Most Silicon Valley investors still see no signs of gloom and doom.
Ron Conway, a San Francisco financier who has invested in more than 500 companies,
including Facebook, Zappos, Google and Twitter, says he does not think there is any bubble.
“All the start-ups today have business models and business cases that make them viable,” he said in an e-mail.
“In 1999 when the bubble happened many companies did not have business models and advertising on the Web was very immature.”
Jeff Clavier, managing partner at SoftTech VC and a well-known Silicon Valley angel investor who has financed companies like Mint and Ustream, said that over the next 12 to 18 months
the real challenge for start-ups flush with venture cash would be proving they were worth the investment or risk having to fold their companies.
“There may not be a big implosion, but down the road there will be a bunch of blood and tears,” he said to the New York Times.
“The music is going to stop and people will realize there aren’t enough chairs for companies to get the next round of financing.”
from - http://www.economywatch.com/economy-business-and-finance-news/new-bubble-in-silicon-valley.09-02.html
Tuesday, February 22, 2011
Beyond Property Bubble
China's property bubble has peaked. In the Tier I cities the prices are unlikely to reclaim the peaks in late last year (e.g., Shanghai) or the first half of this year (e.g., Beijing and Shenzhen). The prices in some Tier II or III cities may make new highs, like the froth in the second board (创业板) after the main board is down 60% from the peak. The property bear market may last five years. At the bottom the price will likely fall by half, reaching average price per square meter at about two months of average salary then. The land prices will fall much more. In the hottest land market in Zhejiang the land price may fall by 80%.
The turning point is due to (1) tightening liquidity, (2) policy direction, and (3) supply and demand balance. Because of the loose monetary policy around the world, China doesn't face capital outflow pressure. China’s positive consumption trend can continue to attract capital. Hence, the bubble will likely deflate gradually. There are periods of Indian summer-the prices and transaction volumes perking a bit. Like the stock market's march from 6,000 to 1,600 between 2007-08, the property market will behave the same way though in slow motion.
China's economy will be affected less than expected. Many interested parties have been spreading fear by arguing that the economy would collapse without the property bubble. Yes, the economy will slow. But, with consumption, exports, and infrastructure rising at pretty good paces, the economy will perform quite well in the coming decade. Further, the property sales volume will drop much less than value, limiting the impact on GDP. With falling property prices and rising wages, Chinese masses will be much happier. People's happiness, not GDP growth rate per se, should be the ultimate goal of economic development anyway.
China's liquidity is tightening, though slowly and from a high level. The tightness reflects more the nature of credit demand than the supply level. The credit demand is overwhelmingly from the state sector and the speculators. The former is driven by funds availability rather than cost of funds. Last year's credit boom led to numerous new projects. They demand more credit to continue. Hence, even if credit supply grows at the same pace as before, the credit condition feels tighter due to more demand. Inflation expectation drives the speculators' demand for credit. Their inflation expectation is so high that their demand for credit is unlimited at the current interest rate. The property tightening measures have kept away some of the demand. Otherwise, the credit condition would be much tighter.
The government monetary and credit policies are clearly on the tightening side. Inflation is high and rising. To prevent an inflationary catastrophe, the money supply must grow slower than nominal GDP. The government's intention seems to be moving in that direction. The market, however, is moving faster. China's household contribution to banking liquidity seems to be close to zero, i.e., debt and deposit grow by similar amounts. The credit condition is tightening even if the government doesn’t want.
The other two main sources of liquidity are trade surplus and inflow of hot money. With rising commodity prices and double dipping of the western consumer economies, China's trade surplus isn't likely to rise. The hot money inflow seems to be slowing, though not reversing yet. The US's strong pressure on China to appreciate Rmb isn't causing the Rmb futures prices to rise dramatically in the NDF market. The reason for the market's subdued response reflects the psychological change in the financial community. The foreign exchange market with $4 trillion turnover per day is by far the largest market and involving most liquidity. The money has been chasing the Rmb story for years with little return. The fatigue seems to have set in, i.e., the market won't put money down on expectation alone. The Rmb premium in the NDF has been a leading indicator for China's forex reserves. And the change in forex reserves is the most important indicator for liquidity. The slower inflow of hot money is having a significant impact on liquidity.
An asset bubble requires liquidity to rise exponentially to sustain it. This is why no bubble lasts forever, because there won't be enough money to feed it one day. In an emerging economy, a bubble usually occurs when the global liquidity is plentiful. The symptoms for loose global liquidity are mainly a weak dollar and low US interest rate. It is not a coincidence that China's property price has risen since 2002 when the dollar went into a bear market. An emerging market bubble usually bursts when the US economy recovers and the Fed raises interest rate. What occurred in Latin America in 1980s and Southeast Asia in 1990s fit this model.
China's situation is different. It is big enough to affect the US economy. Hence, the US's interest rate partly depends on China's situation and vice versa. It is a twin star situation, not a star and a satellite. The equilibrium path is contingent on the policy decisions in both. As long as China's exchange rate doesn't appreciate big, the liquidity in China ebbs rather than evaporates. If the Rmb moves up big, the market may shift to Rmb depreciation expectation. It would be a powerful force for capital outflow, which would cause a collapse in liquidity and property. I don't think that China would move the currency big anytime soon.
On the other hand, the Fed isn't likely to raise interest rate quickly on a recovering economy. The US economy simply faces too many headwinds to see a strong recovery in five years. Only inflation would force the Fed to increase interest rate slowly and reluctantly. The inflationary pressure on the US depends on how quickly China's property bubble deflates. If it were to burst like in Hong Kong in 1998, commodity prices would fall big and the inflationary pressure on the US will ease, which would give the Fed more room to increase monetary stimulus, which would support China's property.
China's tightening bias nudges its property market downwards, which decreases the need for the Fed to tighten. But, the inflationary pressure is still there, just not accelerating fast enough to force the Fed to raise interest rate now. The Fed may need to move only by mid-211. When the US interest rate is high enough in 2012, say above 3%, China may face capital outflow pressure, but not intense enough to produce an adjustment like Hong Kong in 1998. The property prices in the Tier I cities are 10-15% off the peak and will likely decline by another 10-15% by end of next year. When the US's interest rate is high in 2012, the prices may decline by another 15-20%. The market may languish for another three years afterwards.
The policy direction is preventing the property bubble from making one last surge. A bubble can crash under its own weight. It happens when the bubble expands quickly. For example, NASDAQ surged quickly from 3,000 to 5,000. The A-share market surged from 3,000 to 6,000 in 2007. Without the policy bias, China's property market could surge quickly despite of tightening liquidity condition, because the speculators would pay more for credit to get it, i.e., the last hurrah would be accompanied by rising interest rates. But, when the interest rates are high enough to weigh down the speculative drive, the bubble bursts. This is the scenario I envisioned before. As the government isn't removing the credit restrictions on multiple property purchases, it is not likely anymore. Hence, I think that the property market will experience slow leak over many years rather than explode in one go.
The supply situation isn't like to cause the bubble to reflate. The residential properties under construction are around 3 billion square meters. At Rmb 10,000/sq m (my guesstimate), the purchase cost is Rmb 30 trillion. The current money supply is about Rmb 70 trillion. It's likely to rise by 50% or Rmb 35 trillion over the next three years. The property supply valued at current prices means very tight liquidity condition. The supplies are too big to be accommodated at the current prices.
The multiyear property adjustment gives the government an opportunity to promote consumption to keep the economy on a steady growth path. This is entirely possible. The view that China's economy cannot survive a property burst is totally wrong.
First, the negative effect of declining property prices is primarily on local government revenues. This is about how money is allocated, not how big the pie is. There are other ways to allocate money to local governments. Issuing bonds, for example, is one way. Further, many, probably most, local governments are spending too much. Many small cities shouldn't develop at all. Their prosperity is the result of investment itself. When the investment is done, such cities don't have the economies of scale to generate jobs. Their populations will dwindle, as people move to big cities for jobs. It would be good for them to receive less money. Hence, lower land prices would be good for the economy.
The property sector itself may not affect the economy so negatively. With declining prices, the demand from speculators will dry up. But, the genuine users will step in when the prices are affordable. The market keeps talking about inelastic demand. It is really propaganda. The current prices are so high that the people who need properties cannot afford it. Only affordable prices can generate demand from end users. Hence, the production volumes don’t need to decline much. The direct impact of declining property prices on the economy could be quite limited.
Declining property prices doesn't necessarily mean the destruction of property developers either. Declining land prices could completely offset the declining property prices in terms of profit impact. But the business model of the industry would change. Land appreciation so far accounts for all of the industry's profits. The quality of the property development itself is marginal in importance. Quality reputation will increasingly determine profitability in future. Many nationwide developers with good reputation would emerge over the next decade. The industry will be healthier and stronger due to the coming adjustment.
Second, the declining property prices will have a big positive effect on consumption. The people who need properties are saving to chase the prices. So far they haven't been able to. When the property price doubles, an average household needs to postpone purchase by ten years to save up. When the price declines by half, the consumption growth rate could accelerate by 5 percentage points, adding 1.5-2 percentage points to GDP growth rate. The accelerating consumption will lead to a boom in investment in consumption industries, which may add another one percentage point to GDP growth rate. The consumption's impact on employment is no less than construction. The service sector employs most people. Consumption stimulates service demand most effectively. Hence, the property adjustment won't lead to an employment crisis at all.
Lately everyone I speak to talks about property prices going up again. It sounds like a repeat of what occurred in 2007 and 2009. The talks are likely to remain so. The liquidity and credit conditions were loose and getting looser then. The property market surged in the past on declining mortgage interest rates and down payment requirements. At present the credit restrictions on multiple property purchases remain. The mortgage interest rates are significantly higher due to smaller discounts off the policy rates. The current transaction volumes in Tier I cities may be up 100% from the bottoms reached four or five months ago but are still much lower than the averages of the last three years. Unless the sales volumes are above the averages, the prices are unlikely to move up substantially. In the current liquidity environment there isn't enough money for the sales volumes to rise so high at the existing prices. The volumes can go above the averages only at lower prices to decrease the required credit support.
Despite the adverse liquidity condition the bullish sentiment on property remains prevalent. The world is full of horror stories from the property bubbles. Ireland is running budget deficit above 30% of GDP due to the cost of bailing out the banks that lent recklessly during the bubble. Spain's debt was just downgraded due to its weak government finance after its property bubble burst. The US's unemployment rate has doubled and the government deficit tripled to 10% of GDP since the property bubble burst in 2007. We are not talking history here. The economic calamities due to property bubbles are playing out before our eyes everyday. Why would so many, including so-called experts and some government officials, believe it would be different in China? What motivates the bulls is probably self interest. They are benefiting from it now and won't be around to suffer the consequences, just like the Wall Street traders and bankers in the US bubble.
China's banks will likely suffer most as the property market goes into a bear market. If the banks don't deal with the bad debts quickly, the economy could suffer more than just the direct impact from a slower property industry. Fortunately, the government balance sheet is strong enough to recapitalize the banking system quickly. Out of the total lending of Rmb 45.7 trillion probably one third is to property and related industries. It is possible that the banking system would suffer Rmb 1.5-2 trillion in total losses due to bad debts from declining land prices. The banks are raising capital by issuing stocks. It would alleviate the capital shortage ahead. But, when the banking system does suffer capital shortage and cannot lend, the government should move quickly to recapitalize it. China has the resources to contain the property market problems from spreading into the economy as a whole.
Rising wages and declining property prices will greatly help the consumption development in the coming years. Other reforms must occur for consumption to truly become China's growth engine. First and foremost, legal, regulatory, and institutional reforms must be undertaken to guarantee food security. While property is the biggest economic and social issue now, food safety is a close second. The government has been responding to food safety crises but has not built an institutional framework strong enough to prevent them.
Water pollution and overuse of pesticides and fertilizer in agriculture are the biggest problems to food safety. Unless agricultural practices are regulated effectively, all other efforts are not that meaningful. Of course, the processing industry should be regulated. Most companies, if not all, engage in price competition. It is the main strategy for survival. Without survival, one could hardly build a brand. But, price competition means that no one has the resources to build a brand. Hence, the industry is stuck in a vicious cycle. It takes years of tight regulation for the industry to shift into a virtuous cycle: the most important assets are brands and, without brands, one couldn't survive.
Second, education has become a huge cost in the household budget, perhaps the third highest after housing and food. China's education is state-controlled and is supposed to be free and of low cost. In really, schools and teachers exact all sorts of tolls from parents. Unless one's parents pay up, the student may be treated poorly. Indeed, favors for money permeate the system for enrollment into good schools or even universities. The practice brings discredit to the whole system.
Government-funded education system is supposed to be cheap but low in quality. A privately funded one is supposed to be expensive but high in quality. China's system suffers the disadvantages of both. China's education system behaves like a for-profit monopoly. The immediate solution is to open the system to market competition.
Third, like education, China's healthcare system stirs up the same fear among the people. China has numerous medicine manufacturers. They don't have intellectual properties, brand their products like candies, and sell through hospitals. Their success depends on sharing their profits with hospitals and doctors rather than the quality of their products. This is why healthcare is so expensive and low in quality. Again, the immediate solution is open the system to private capital competition. Reforming the existing system would take too long.
China's economic system is geared towards government investment and exports. It is a partnership between the Chinese government and multinational companies. Other elements in the economy, both on the demand and supply side, have been marginalized. As the existing system cannot prosper in the coming decade due to weak global demand, efforts must be made to elevate the importance of other components of the economy.
The global economy may be entering a lost decade. China can prosper on its own and make a big contribution to the global economy. But, structural reforms are necessary to achieve this goal. Otherwise, China could experience a lost decade too.
Andy XIe is an independent economist based in Shanghai, and former Morgan Stanley star chief Asia-Pacific economist.
from - http://en.21cbh.com/HTML/2010-10-25/1NMDAwMDIwMjc1NQ.html
The turning point is due to (1) tightening liquidity, (2) policy direction, and (3) supply and demand balance. Because of the loose monetary policy around the world, China doesn't face capital outflow pressure. China’s positive consumption trend can continue to attract capital. Hence, the bubble will likely deflate gradually. There are periods of Indian summer-the prices and transaction volumes perking a bit. Like the stock market's march from 6,000 to 1,600 between 2007-08, the property market will behave the same way though in slow motion.
China's economy will be affected less than expected. Many interested parties have been spreading fear by arguing that the economy would collapse without the property bubble. Yes, the economy will slow. But, with consumption, exports, and infrastructure rising at pretty good paces, the economy will perform quite well in the coming decade. Further, the property sales volume will drop much less than value, limiting the impact on GDP. With falling property prices and rising wages, Chinese masses will be much happier. People's happiness, not GDP growth rate per se, should be the ultimate goal of economic development anyway.
China's liquidity is tightening, though slowly and from a high level. The tightness reflects more the nature of credit demand than the supply level. The credit demand is overwhelmingly from the state sector and the speculators. The former is driven by funds availability rather than cost of funds. Last year's credit boom led to numerous new projects. They demand more credit to continue. Hence, even if credit supply grows at the same pace as before, the credit condition feels tighter due to more demand. Inflation expectation drives the speculators' demand for credit. Their inflation expectation is so high that their demand for credit is unlimited at the current interest rate. The property tightening measures have kept away some of the demand. Otherwise, the credit condition would be much tighter.
The government monetary and credit policies are clearly on the tightening side. Inflation is high and rising. To prevent an inflationary catastrophe, the money supply must grow slower than nominal GDP. The government's intention seems to be moving in that direction. The market, however, is moving faster. China's household contribution to banking liquidity seems to be close to zero, i.e., debt and deposit grow by similar amounts. The credit condition is tightening even if the government doesn’t want.
The other two main sources of liquidity are trade surplus and inflow of hot money. With rising commodity prices and double dipping of the western consumer economies, China's trade surplus isn't likely to rise. The hot money inflow seems to be slowing, though not reversing yet. The US's strong pressure on China to appreciate Rmb isn't causing the Rmb futures prices to rise dramatically in the NDF market. The reason for the market's subdued response reflects the psychological change in the financial community. The foreign exchange market with $4 trillion turnover per day is by far the largest market and involving most liquidity. The money has been chasing the Rmb story for years with little return. The fatigue seems to have set in, i.e., the market won't put money down on expectation alone. The Rmb premium in the NDF has been a leading indicator for China's forex reserves. And the change in forex reserves is the most important indicator for liquidity. The slower inflow of hot money is having a significant impact on liquidity.
An asset bubble requires liquidity to rise exponentially to sustain it. This is why no bubble lasts forever, because there won't be enough money to feed it one day. In an emerging economy, a bubble usually occurs when the global liquidity is plentiful. The symptoms for loose global liquidity are mainly a weak dollar and low US interest rate. It is not a coincidence that China's property price has risen since 2002 when the dollar went into a bear market. An emerging market bubble usually bursts when the US economy recovers and the Fed raises interest rate. What occurred in Latin America in 1980s and Southeast Asia in 1990s fit this model.
China's situation is different. It is big enough to affect the US economy. Hence, the US's interest rate partly depends on China's situation and vice versa. It is a twin star situation, not a star and a satellite. The equilibrium path is contingent on the policy decisions in both. As long as China's exchange rate doesn't appreciate big, the liquidity in China ebbs rather than evaporates. If the Rmb moves up big, the market may shift to Rmb depreciation expectation. It would be a powerful force for capital outflow, which would cause a collapse in liquidity and property. I don't think that China would move the currency big anytime soon.
On the other hand, the Fed isn't likely to raise interest rate quickly on a recovering economy. The US economy simply faces too many headwinds to see a strong recovery in five years. Only inflation would force the Fed to increase interest rate slowly and reluctantly. The inflationary pressure on the US depends on how quickly China's property bubble deflates. If it were to burst like in Hong Kong in 1998, commodity prices would fall big and the inflationary pressure on the US will ease, which would give the Fed more room to increase monetary stimulus, which would support China's property.
China's tightening bias nudges its property market downwards, which decreases the need for the Fed to tighten. But, the inflationary pressure is still there, just not accelerating fast enough to force the Fed to raise interest rate now. The Fed may need to move only by mid-211. When the US interest rate is high enough in 2012, say above 3%, China may face capital outflow pressure, but not intense enough to produce an adjustment like Hong Kong in 1998. The property prices in the Tier I cities are 10-15% off the peak and will likely decline by another 10-15% by end of next year. When the US's interest rate is high in 2012, the prices may decline by another 15-20%. The market may languish for another three years afterwards.
The policy direction is preventing the property bubble from making one last surge. A bubble can crash under its own weight. It happens when the bubble expands quickly. For example, NASDAQ surged quickly from 3,000 to 5,000. The A-share market surged from 3,000 to 6,000 in 2007. Without the policy bias, China's property market could surge quickly despite of tightening liquidity condition, because the speculators would pay more for credit to get it, i.e., the last hurrah would be accompanied by rising interest rates. But, when the interest rates are high enough to weigh down the speculative drive, the bubble bursts. This is the scenario I envisioned before. As the government isn't removing the credit restrictions on multiple property purchases, it is not likely anymore. Hence, I think that the property market will experience slow leak over many years rather than explode in one go.
The supply situation isn't like to cause the bubble to reflate. The residential properties under construction are around 3 billion square meters. At Rmb 10,000/sq m (my guesstimate), the purchase cost is Rmb 30 trillion. The current money supply is about Rmb 70 trillion. It's likely to rise by 50% or Rmb 35 trillion over the next three years. The property supply valued at current prices means very tight liquidity condition. The supplies are too big to be accommodated at the current prices.
The multiyear property adjustment gives the government an opportunity to promote consumption to keep the economy on a steady growth path. This is entirely possible. The view that China's economy cannot survive a property burst is totally wrong.
First, the negative effect of declining property prices is primarily on local government revenues. This is about how money is allocated, not how big the pie is. There are other ways to allocate money to local governments. Issuing bonds, for example, is one way. Further, many, probably most, local governments are spending too much. Many small cities shouldn't develop at all. Their prosperity is the result of investment itself. When the investment is done, such cities don't have the economies of scale to generate jobs. Their populations will dwindle, as people move to big cities for jobs. It would be good for them to receive less money. Hence, lower land prices would be good for the economy.
The property sector itself may not affect the economy so negatively. With declining prices, the demand from speculators will dry up. But, the genuine users will step in when the prices are affordable. The market keeps talking about inelastic demand. It is really propaganda. The current prices are so high that the people who need properties cannot afford it. Only affordable prices can generate demand from end users. Hence, the production volumes don’t need to decline much. The direct impact of declining property prices on the economy could be quite limited.
Declining property prices doesn't necessarily mean the destruction of property developers either. Declining land prices could completely offset the declining property prices in terms of profit impact. But the business model of the industry would change. Land appreciation so far accounts for all of the industry's profits. The quality of the property development itself is marginal in importance. Quality reputation will increasingly determine profitability in future. Many nationwide developers with good reputation would emerge over the next decade. The industry will be healthier and stronger due to the coming adjustment.
Second, the declining property prices will have a big positive effect on consumption. The people who need properties are saving to chase the prices. So far they haven't been able to. When the property price doubles, an average household needs to postpone purchase by ten years to save up. When the price declines by half, the consumption growth rate could accelerate by 5 percentage points, adding 1.5-2 percentage points to GDP growth rate. The accelerating consumption will lead to a boom in investment in consumption industries, which may add another one percentage point to GDP growth rate. The consumption's impact on employment is no less than construction. The service sector employs most people. Consumption stimulates service demand most effectively. Hence, the property adjustment won't lead to an employment crisis at all.
Lately everyone I speak to talks about property prices going up again. It sounds like a repeat of what occurred in 2007 and 2009. The talks are likely to remain so. The liquidity and credit conditions were loose and getting looser then. The property market surged in the past on declining mortgage interest rates and down payment requirements. At present the credit restrictions on multiple property purchases remain. The mortgage interest rates are significantly higher due to smaller discounts off the policy rates. The current transaction volumes in Tier I cities may be up 100% from the bottoms reached four or five months ago but are still much lower than the averages of the last three years. Unless the sales volumes are above the averages, the prices are unlikely to move up substantially. In the current liquidity environment there isn't enough money for the sales volumes to rise so high at the existing prices. The volumes can go above the averages only at lower prices to decrease the required credit support.
Despite the adverse liquidity condition the bullish sentiment on property remains prevalent. The world is full of horror stories from the property bubbles. Ireland is running budget deficit above 30% of GDP due to the cost of bailing out the banks that lent recklessly during the bubble. Spain's debt was just downgraded due to its weak government finance after its property bubble burst. The US's unemployment rate has doubled and the government deficit tripled to 10% of GDP since the property bubble burst in 2007. We are not talking history here. The economic calamities due to property bubbles are playing out before our eyes everyday. Why would so many, including so-called experts and some government officials, believe it would be different in China? What motivates the bulls is probably self interest. They are benefiting from it now and won't be around to suffer the consequences, just like the Wall Street traders and bankers in the US bubble.
China's banks will likely suffer most as the property market goes into a bear market. If the banks don't deal with the bad debts quickly, the economy could suffer more than just the direct impact from a slower property industry. Fortunately, the government balance sheet is strong enough to recapitalize the banking system quickly. Out of the total lending of Rmb 45.7 trillion probably one third is to property and related industries. It is possible that the banking system would suffer Rmb 1.5-2 trillion in total losses due to bad debts from declining land prices. The banks are raising capital by issuing stocks. It would alleviate the capital shortage ahead. But, when the banking system does suffer capital shortage and cannot lend, the government should move quickly to recapitalize it. China has the resources to contain the property market problems from spreading into the economy as a whole.
Rising wages and declining property prices will greatly help the consumption development in the coming years. Other reforms must occur for consumption to truly become China's growth engine. First and foremost, legal, regulatory, and institutional reforms must be undertaken to guarantee food security. While property is the biggest economic and social issue now, food safety is a close second. The government has been responding to food safety crises but has not built an institutional framework strong enough to prevent them.
Water pollution and overuse of pesticides and fertilizer in agriculture are the biggest problems to food safety. Unless agricultural practices are regulated effectively, all other efforts are not that meaningful. Of course, the processing industry should be regulated. Most companies, if not all, engage in price competition. It is the main strategy for survival. Without survival, one could hardly build a brand. But, price competition means that no one has the resources to build a brand. Hence, the industry is stuck in a vicious cycle. It takes years of tight regulation for the industry to shift into a virtuous cycle: the most important assets are brands and, without brands, one couldn't survive.
Second, education has become a huge cost in the household budget, perhaps the third highest after housing and food. China's education is state-controlled and is supposed to be free and of low cost. In really, schools and teachers exact all sorts of tolls from parents. Unless one's parents pay up, the student may be treated poorly. Indeed, favors for money permeate the system for enrollment into good schools or even universities. The practice brings discredit to the whole system.
Government-funded education system is supposed to be cheap but low in quality. A privately funded one is supposed to be expensive but high in quality. China's system suffers the disadvantages of both. China's education system behaves like a for-profit monopoly. The immediate solution is to open the system to market competition.
Third, like education, China's healthcare system stirs up the same fear among the people. China has numerous medicine manufacturers. They don't have intellectual properties, brand their products like candies, and sell through hospitals. Their success depends on sharing their profits with hospitals and doctors rather than the quality of their products. This is why healthcare is so expensive and low in quality. Again, the immediate solution is open the system to private capital competition. Reforming the existing system would take too long.
China's economic system is geared towards government investment and exports. It is a partnership between the Chinese government and multinational companies. Other elements in the economy, both on the demand and supply side, have been marginalized. As the existing system cannot prosper in the coming decade due to weak global demand, efforts must be made to elevate the importance of other components of the economy.
The global economy may be entering a lost decade. China can prosper on its own and make a big contribution to the global economy. But, structural reforms are necessary to achieve this goal. Otherwise, China could experience a lost decade too.
Andy XIe is an independent economist based in Shanghai, and former Morgan Stanley star chief Asia-Pacific economist.
from - http://en.21cbh.com/HTML/2010-10-25/1NMDAwMDIwMjc1NQ.html
Sunday, February 20, 2011
Economic bubble management: Is it worth the effort?
Vermont’s strict mortgage lending laws helped the state avoid a housing train wreck. However, Vermont missed out on any part of the boom. Is the trade off worth it?
That’s a question that continues to rattle around in my head following a Wall Street Journal story on Tuesday. The story detailed how some Vermont home buyers weren’t able to get credit due to the state’s mortgage laws. In the 1990s, Vermont pass laws that made mortgage lenders warn consumers about high rates and put brokers on the hook for defaults.
Given those laws it’s not too surprising that lenders didn’t give credit to just anyone. And that means some creditworthy buyers were locked out. The Journal notes that Vermont’s 10-year growth trails the U.S. average.
Today, Vermont’s move looks like a no-brainer, but how many folks would be able to curb growth to avoid a car wreck that may not come for decades?
It’s a question worth pondering since the U.S. is likely to launch a bevy of regulations to prevent bubbles in the future. Regulation will curb future growth, but keep bubbles from popping in the future. Call it bubble management if you will. Is this approach worth it?
Vermont certainly thinks so. Politicians are trumpeting success. Critics detail their views in this key excerpt:
Should we try to prevent and actively manage potential economic bubbles? Is it even possible?
from - http://www.smartplanet.com/business/blog/smart-takes/economic-bubble-management-is-it-worth-the-effort/291/
That’s a question that continues to rattle around in my head following a Wall Street Journal story on Tuesday. The story detailed how some Vermont home buyers weren’t able to get credit due to the state’s mortgage laws. In the 1990s, Vermont pass laws that made mortgage lenders warn consumers about high rates and put brokers on the hook for defaults.
Given those laws it’s not too surprising that lenders didn’t give credit to just anyone. And that means some creditworthy buyers were locked out. The Journal notes that Vermont’s 10-year growth trails the U.S. average.
Today, Vermont’s move looks like a no-brainer, but how many folks would be able to curb growth to avoid a car wreck that may not come for decades?
It’s a question worth pondering since the U.S. is likely to launch a bevy of regulations to prevent bubbles in the future. Regulation will curb future growth, but keep bubbles from popping in the future. Call it bubble management if you will. Is this approach worth it?
Vermont certainly thinks so. Politicians are trumpeting success. Critics detail their views in this key excerpt:
Vermont politicians are “patting themselves on the back because we saved ourselves from this catastrophe,” said Joel Schwartz, director of the economic development office for St. Johnsbury, a town in northeast Vermont. But developers and others “can’t march into the state and start doing business.”In any case, the debate over bubble management is likely to intensify. After all, the time for regulators to strike is now. Once the next bubble gets going, there’s no way that legislators will have the guts to put the brakes on an economic growth engine—even a fleeting one.
Should we try to prevent and actively manage potential economic bubbles? Is it even possible?
from - http://www.smartplanet.com/business/blog/smart-takes/economic-bubble-management-is-it-worth-the-effort/291/
Wednesday, February 16, 2011
12 Economic Bubbles That May Burst
12 Economic Bubbles That May Burst
Gun sales
Anticipating anti-gun legislation, certain Americans are snapping up guns to hoard, collect, or safekeep. Some are even stockpiling for investment purposes.
According a gun buyer mentioned in this Wall Street Journal article, a collection of “assault weapons” could triple in value if the federal government re-enacts a ban on their sale. Background checks on potential gun buyers increased by 27% in the past year, according to the article.
Some guns have already appreciated. For example, European-made AK-47s doubled in price between September-December 2008. For savvy buyers, the right to bear arms is also bearing fruit. The question is: When’s this bubble going to burst
China
Chinese stock markets have been surging, fed by easy credit from government-linked banks. The Shanghai Composite rose 16% in July alone. Banks extended $1.1 trillion in new loans during the first six months of 2009.
What’s more, a Chinese company enjoyed the biggest global IPO of the year. China State Construction Engineering Corp. raised $7.3bn in one day. The Shanghai Composite Index dropped 5% as a result: Investors feared that the same speculation that had increased CSCEC’s stock value by 56% was also overheating the market.
Unfortunately, China’s economy remains export-driven. The numbers are a smokescreen. The Chinese government is powerful enough to “make the right numbers appear” if it thinks the country’s economy needs stimulating, according to Contrarian Edge’s Vitaliy Katsenelson. “(T)he government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system restabilizes,” he says.
China is experiencing “asset bubbles that look like economic growth,” writes Bloomberg’s William Pesek. Will China’s market manipulation survive the recession, as the government has planned, or will the bubbles all burst?
Gold
To many investors, “quantitative easing” is synonymous with “buy gold as fast as you can!”
The problem is that more money in the mint doesn’t necessarily mean inflation. What if the Fed printed less money than was lost in the financial crisis? What if consumer demand remains low and producers can’t increase their prices? Or if, after banks recapitalize, there isn’t any extra money left? Or electronic money messes up the whole notion of quantitative easing?
Gold will spike when in inflation hits, but if there’s no inflation, speculators will be left empty-handed. Then again, if–as some goldbugs claim–the dollar weakens further, global financial systems collapse, and governments fail, it’ll be nice to have some bullion on hand.
FROM -http://www.businesspundit.com/12-economic-bubbles-that-may-burst/
Gun sales
Anticipating anti-gun legislation, certain Americans are snapping up guns to hoard, collect, or safekeep. Some are even stockpiling for investment purposes.
According a gun buyer mentioned in this Wall Street Journal article, a collection of “assault weapons” could triple in value if the federal government re-enacts a ban on their sale. Background checks on potential gun buyers increased by 27% in the past year, according to the article.
Some guns have already appreciated. For example, European-made AK-47s doubled in price between September-December 2008. For savvy buyers, the right to bear arms is also bearing fruit. The question is: When’s this bubble going to burst
China
Chinese stock markets have been surging, fed by easy credit from government-linked banks. The Shanghai Composite rose 16% in July alone. Banks extended $1.1 trillion in new loans during the first six months of 2009.
What’s more, a Chinese company enjoyed the biggest global IPO of the year. China State Construction Engineering Corp. raised $7.3bn in one day. The Shanghai Composite Index dropped 5% as a result: Investors feared that the same speculation that had increased CSCEC’s stock value by 56% was also overheating the market.
Unfortunately, China’s economy remains export-driven. The numbers are a smokescreen. The Chinese government is powerful enough to “make the right numbers appear” if it thinks the country’s economy needs stimulating, according to Contrarian Edge’s Vitaliy Katsenelson. “(T)he government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system restabilizes,” he says.
China is experiencing “asset bubbles that look like economic growth,” writes Bloomberg’s William Pesek. Will China’s market manipulation survive the recession, as the government has planned, or will the bubbles all burst?
Gold
To many investors, “quantitative easing” is synonymous with “buy gold as fast as you can!”
The problem is that more money in the mint doesn’t necessarily mean inflation. What if the Fed printed less money than was lost in the financial crisis? What if consumer demand remains low and producers can’t increase their prices? Or if, after banks recapitalize, there isn’t any extra money left? Or electronic money messes up the whole notion of quantitative easing?
Gold will spike when in inflation hits, but if there’s no inflation, speculators will be left empty-handed. Then again, if–as some goldbugs claim–the dollar weakens further, global financial systems collapse, and governments fail, it’ll be nice to have some bullion on hand.
FROM -http://www.businesspundit.com/12-economic-bubbles-that-may-burst/
Monday, February 14, 2011
economic bubble in thailand
Thailand's economic bubble first inflated in the mid-1980s. The yeast came from three separate sources. First was natural resources. The country was rich in a number of areas, including timber, precious stones and fisheries. Second was tourism. Tourists flocked to Thailand to take advantage of some of the world's finest beaches and friendliest people. Finally was Japan. In the mid-1980s, Japan's rising trade deficit with the US forced Japan to move production offshore. Much of Japan's industrial largesse floated south to Thailand. Indeed, during the 1985–1995 period, Thailand's combination of high interest rates and low labor costs made it a magnet for foreign investment, with the local economy leading the world in growth. This vast inflow of foreign dough produced a collective rise in the country's Levi's as cash-rich residents went on buying spree that would have done Imelda Marcos proud. The bleeding edge of Thailand's economic growth was the property sector.
Easy come, easy a-go-go
Residents in hyper-inflated economies typically turn to property to safeguard their money and this happened in Bangkok in a big, big way, with even lowly noodle nawobs morphing overnight into property princes. Asset inflation coursed through the rest of Thailand's economy like the drug-rich blood in a smack-shooting junkie. But rather than pump the money into improving infrastructure or education, the landed gentry (many of whom pay little tax) rushed out to buy expensive knickknacks, foreign imports with their new-found wealth. Two-thousand dollar bottles of French wine, solid-gold Rolex wristwatches, biscuit-sized diamond baubles, Italian sports cars and, lest we forget, that icon of Thai wealth, the Mercedes Benz. All these and more became ubiquitous sights in the Big Mango.
After a decade of hyper-expansion, this failure to make good use of the new wealth produced the opposite effect. Rising Thai wages priced the country out of the low-end labor markets for products like textiles and gem cutting, while the general neglect of education at the lower levels of society meant that the minimum-wage serfs didn't have the training to tackle more sophisticated work.
Once-plentiful natural resources like timber, precious stones and fish were now long gone. Even tourism suffered, as Thailand's pristine beaches succumbed to pollution and over-development. Today many beaches have been destroyed, with more dead things lying along them than even next door in Cambodia's killing fields
Saturday, February 12, 2011
Korea Grappling With Financial Bubble
By Frederic Neumann
Chief Korea Economist at HSBC
The last ten years or so were a bit of a roller coaster ride for the Korean economy as one financial bubble succeeded another with almost predictable frequency. First, in the run-up to the Asian crisis in 1997, the country’s conglomerates splurged on foreign debt, leading swiftly to a collapse of the exchange rate as capital fled the country.
Then, after two short years, technology stocks became the next big hit, with the Kosdaq scaling unheard of _ and since unseen _ heights: remember the good old days when the index was trading at over 2,600?
Even as tech stocks were losing their appeal, another bubble began to emerge. When Koreans discovered the joys of credit cards, spending soared along with household debt.
This bubble only popped in 2003 when the authorities put their foot down, in the process cooling consumption growth for years to come
Yet, the bulls were not easily cowed. After a couple years of rest, they moved on to real estate. Especially in 2006, property became red hot, seemingly defying gravity in some of Korea’s posher neighborhoods. As apartment prices are now easing in response to policy measures, one might reasonably ask, where the stampede is headed next.
Clearly, predicting the next bubble is an almost impossible task. Even if there are signs that savers are increasingly parking their cash in foreign equity funds, for example, it is too early to tell whether this trend will persist, let alone approach bubble dimensions.
Korean stocks have also done well in recent months, and there is always the chance that property speculation might re-ignite. Recent history, in any case, suggests that the next bubble is still some time away, given that these events seem to reoccur with an uncanny regularity every three years.
Apart from spotting the next big thing, one interesting question is why such bubbles have developed repeatedly over the last few years. Here, the views differ substantially, with some observers blaming excessively loose monetary policy while others suspect a cultural penchant for punting.
But, there is no single reason that might explain the regularity of Korea’s bubbles. Rather, a combination of factors provides an environment where such events can occur, not all of them being specific to Korea.
First, it is important to recognize that Koreans were not the only ones experiencing financial bubbles in recent years. The boom in technology, for example, and the recent surge of real estate investment occurred on an almost global scale.
Observers often point to the physical integration of international capital markets, which can raise the correlation among asset prices all over the world, as the reason for the synchronization of financial cycles.
However, a much more intangible factor may also be at work: Koreans, as much as anyone else, may be vulnerable to psychological spillovers as investment fads spread across the globe.
Second, loose monetary conditions indeed helped to drive up asset prices. Certainly, the Bank of Korea kept interest rates relatively low to help the economy come to terms with the consequences of one bubble, thereby inadvertently fueling the next.
But, to lay blame purely at the door of the central bank would be misguided. Monetary conditions internationally have been rather loose over the last several years.
There are many reasons for this, including Japan’s desperate attempt to re-inflate its economy and the purchase of US treasury bonds by Asian central banks.
The Bank of Korea, therefore, had little scope for tightening the screws single-handedly: higher interest rates would only have served to attract capital, rendering the country’s currency itself a speculative asset.
Third, Korea’s financial markets remain relatively underdeveloped. As the country’s households rapidly built up their wealth especially over the past twenty years, the financial industry, for various reasons, did not keep pace.
The relative lack of financial products to recycle these massive funds, therefore, led to the periodic boom in certain financial assets, or to the excessive use of alternative forms of borrowing such as credit cards and foreign bank loans.
In this sense, Korea’s bubbles are less a product of an alleged cultural trait of financial frivolity but a by-product of the ongoing development of the country’s financial markets.
Will a new bubble emerge in Korea at some stage? Recent history certainly suggests that it might, although its exact form is hard to predict.
There are, therefore, two fundamental questions facing policy-makers.
First, should they care that asset prices periodically come under speculative pressure or that borrowers might occasionally splurge on new-found sources of cash? And, second, what can officials do to prevent financial bubbles from developing in the first place?
The first question is harder to answer than the second. Even if the bursting of bubbles can have severe macroeconomic consequences, this is not necessarily a justification for regulators to always step into the fray.
Apart from the technical difficulty of telling a speculative bubble apart from a sustainable rise in asset prices or the opening of new channels of finance, markets should generally be left to operate relatively unencumbered as the natural rise and fall of prices provides valuable signals to economic agents.
Of course, excesses can be harmful, but this does not always imply that government action is necessary. The return to earth of the Kosdaq index in 2001, for instance, left the wider economy relatively unscathed.
The second question is in many ways more relevant for Korea today, as the property frenzy has already been brought under control and the next big financial bubble has not yet formed.
The various factors contributing to the periodic occurrence of bubbles in Korea listed above suggest that the ability of Korean policy-makers to prevent another one from emerging is relatively limited.
Loose monetary conditions internationally are beyond their control, and aggressive tightening domestically is inadvisable in a world of great capital mobility. Also, the authorities appear ill-prepared to counter the spillovers of global investment fads.
But, this does not mean that Korean officials are entirely powerless. What does matter is a smoothly operating financial system to prevent some of the excesses forming in the first place.
By offering a wider range of investment and financing alternatives a mature financial system becomes relatively more immune to the possibility of bubbles and more stable should financial excesses threaten to unwind.
In this regard, plans by the government to push through the Capital Markets Integration Act are a step in the right direction. But, it may take some time before the financial system in Korea can adequately serve the needs of its citizens and corporations.
Luckily, the authorities have about three years ahead of them to implement reforms before the next bubble strikes.
from - http://www.koreatimes.co.kr/www/news/biz/2008/04/128_4703.html
Chief Korea Economist at HSBC
The last ten years or so were a bit of a roller coaster ride for the Korean economy as one financial bubble succeeded another with almost predictable frequency. First, in the run-up to the Asian crisis in 1997, the country’s conglomerates splurged on foreign debt, leading swiftly to a collapse of the exchange rate as capital fled the country.
Then, after two short years, technology stocks became the next big hit, with the Kosdaq scaling unheard of _ and since unseen _ heights: remember the good old days when the index was trading at over 2,600?
Even as tech stocks were losing their appeal, another bubble began to emerge. When Koreans discovered the joys of credit cards, spending soared along with household debt.
This bubble only popped in 2003 when the authorities put their foot down, in the process cooling consumption growth for years to come
Yet, the bulls were not easily cowed. After a couple years of rest, they moved on to real estate. Especially in 2006, property became red hot, seemingly defying gravity in some of Korea’s posher neighborhoods. As apartment prices are now easing in response to policy measures, one might reasonably ask, where the stampede is headed next.
Clearly, predicting the next bubble is an almost impossible task. Even if there are signs that savers are increasingly parking their cash in foreign equity funds, for example, it is too early to tell whether this trend will persist, let alone approach bubble dimensions.
Korean stocks have also done well in recent months, and there is always the chance that property speculation might re-ignite. Recent history, in any case, suggests that the next bubble is still some time away, given that these events seem to reoccur with an uncanny regularity every three years.
Apart from spotting the next big thing, one interesting question is why such bubbles have developed repeatedly over the last few years. Here, the views differ substantially, with some observers blaming excessively loose monetary policy while others suspect a cultural penchant for punting.
But, there is no single reason that might explain the regularity of Korea’s bubbles. Rather, a combination of factors provides an environment where such events can occur, not all of them being specific to Korea.
First, it is important to recognize that Koreans were not the only ones experiencing financial bubbles in recent years. The boom in technology, for example, and the recent surge of real estate investment occurred on an almost global scale.
Observers often point to the physical integration of international capital markets, which can raise the correlation among asset prices all over the world, as the reason for the synchronization of financial cycles.
However, a much more intangible factor may also be at work: Koreans, as much as anyone else, may be vulnerable to psychological spillovers as investment fads spread across the globe.
Second, loose monetary conditions indeed helped to drive up asset prices. Certainly, the Bank of Korea kept interest rates relatively low to help the economy come to terms with the consequences of one bubble, thereby inadvertently fueling the next.
But, to lay blame purely at the door of the central bank would be misguided. Monetary conditions internationally have been rather loose over the last several years.
There are many reasons for this, including Japan’s desperate attempt to re-inflate its economy and the purchase of US treasury bonds by Asian central banks.
The Bank of Korea, therefore, had little scope for tightening the screws single-handedly: higher interest rates would only have served to attract capital, rendering the country’s currency itself a speculative asset.
Third, Korea’s financial markets remain relatively underdeveloped. As the country’s households rapidly built up their wealth especially over the past twenty years, the financial industry, for various reasons, did not keep pace.
The relative lack of financial products to recycle these massive funds, therefore, led to the periodic boom in certain financial assets, or to the excessive use of alternative forms of borrowing such as credit cards and foreign bank loans.
In this sense, Korea’s bubbles are less a product of an alleged cultural trait of financial frivolity but a by-product of the ongoing development of the country’s financial markets.
Will a new bubble emerge in Korea at some stage? Recent history certainly suggests that it might, although its exact form is hard to predict.
There are, therefore, two fundamental questions facing policy-makers.
First, should they care that asset prices periodically come under speculative pressure or that borrowers might occasionally splurge on new-found sources of cash? And, second, what can officials do to prevent financial bubbles from developing in the first place?
The first question is harder to answer than the second. Even if the bursting of bubbles can have severe macroeconomic consequences, this is not necessarily a justification for regulators to always step into the fray.
Apart from the technical difficulty of telling a speculative bubble apart from a sustainable rise in asset prices or the opening of new channels of finance, markets should generally be left to operate relatively unencumbered as the natural rise and fall of prices provides valuable signals to economic agents.
Of course, excesses can be harmful, but this does not always imply that government action is necessary. The return to earth of the Kosdaq index in 2001, for instance, left the wider economy relatively unscathed.
The second question is in many ways more relevant for Korea today, as the property frenzy has already been brought under control and the next big financial bubble has not yet formed.
The various factors contributing to the periodic occurrence of bubbles in Korea listed above suggest that the ability of Korean policy-makers to prevent another one from emerging is relatively limited.
Loose monetary conditions internationally are beyond their control, and aggressive tightening domestically is inadvisable in a world of great capital mobility. Also, the authorities appear ill-prepared to counter the spillovers of global investment fads.
But, this does not mean that Korean officials are entirely powerless. What does matter is a smoothly operating financial system to prevent some of the excesses forming in the first place.
By offering a wider range of investment and financing alternatives a mature financial system becomes relatively more immune to the possibility of bubbles and more stable should financial excesses threaten to unwind.
In this regard, plans by the government to push through the Capital Markets Integration Act are a step in the right direction. But, it may take some time before the financial system in Korea can adequately serve the needs of its citizens and corporations.
Luckily, the authorities have about three years ahead of them to implement reforms before the next bubble strikes.
from - http://www.koreatimes.co.kr/www/news/biz/2008/04/128_4703.html
Thursday, February 10, 2011
Why Education Is the Next Economic Bubble
I’m calling it the education bubble.
What’s caused this bubble? Companies that are lousy at predicting who will be good at their job. In many cases, we rely on brand association to do the critical thinking for us. “You went to what college? You have what degree? Oh, then you can do this job.” Or even “You should be fast-tracked to senior management.” When the person fails to do the job, we tell our bosses how surprised we are because of where he or she went to school.
The same manager, when feeling overlooked for a promotion, obtains “proof” that he or she has what it takes by paying for one of the “right” graduate degrees from one of the “right” schools. (In fairness, some of the rise in tuition is coming from underfunded state schools needing to raise money, but the big privates, awash in cash, are joining in.)
Like all bubbles, this one has an “emperor has no clothes” element to it. In the real estate bubble, it was heresy to say, “This situation is nuts, and I’m not participating anymore!” But as soon as enough people started to think it, then whisper it, and finally to yell it from the roofs of their overpriced houses, the painful return to reality could begin.
In the education bubble, we think that we or our families are at a disadvantage if we don’t play this game of chasing education brand affiliations (i.e., degrees and schools). As a result, Americans are lining up to pay the increased tuition for private undergraduate or graduate education. After all, isn’t education the best investment? Sure, it is: but only if companies are discriminating buyers instead of brand-chasers. As long as hiring managers are as enchanted by the educational brands as the rest of us, the bubble will grow.
So what do we do about this bubble?
Managers at companies need to create a new obsession: finding and unleashing talent and passion in positions uniquely created for individuals. This approach needs to replace the current method many companies use: “Hire 10 Ivy League MBAs, and we’ll see who survives the first year.”
In many cases, the most brilliant people don’t have the “right” educational brand affiliations but, in the end, make better leaders because they don’t feel entitled. It’s hard work to find individuals with talent and drive, because they don’t wear T-shirts emblazoned with “Great Potential Employee” — or even, in many cases, with the name of a top university
Tuesday, February 8, 2011
economic bubble theory
foam to describe an economic entity rapid prosperity for some time, and then sharply rise and fall of the changes can be quite appropriate. Nature of the bubble occurs quickly, more quickly shattered. A drop of soapy water, breath can blow a dazzling eye-catching bubble. But did not last long, the larger the bubble, burst faster. Under normal circumstances, people bubble economy as a synonym of false prosperity. Like a soap bubble, there seems colorful, but there is no containing the middle, once the bubble burst, boom, like a sudden dream disappear as the replacement.
published by Palgrave in 1926 in the English dictionary definition of a bubble economy: “Any highly speculative bad business behavior.” This seems clear enough. Thus, in 1987 edition of the Palgrave Dictionary of Economics, quoted a famous economist, the former president of the American Economic Association Kindleberger (C. Kindleberger), then re-definition of a bubble economy: “the term bubble state, random point that is one or a series of assets in a continuous process of sharply rising prices, the prices start rising prices make it even produced the expected, so he has attracted new buyers – who generally just want to make a profit through the sale, but The use of these assets and their ability to generate profits is not interested. With the expected downturn in prices often, followed by the price drop, and finally end the financial crisis. usually 'boom' time longer than the bubble state, prices, production and profits increase is relatively modest number. that they might then is to fall (or fear) in the form of crisis or prosperity faded to an end rather than a crisis. “[1]
in modern economy, people are far less than the exchange of specific goods in exchange for some symbols, such as currency, stocks, bonds, foreign exchange, futures, options contracts, checks, money orders and so on. Peter Drucker (PeterDrucker) said: “capital mobility, currency exchange, financial and other signs the economy from products, services and other real economy out of a fully independent.” “This is one of the most striking changes but the hardest to understand.” [2] Because fewer opportunities for industrial investment, return on investment is relatively low, while the rate of investment return of financial assets is relatively high. In the false lure of high rates of return under a lot of money in the economy, ineffective idle symbol does not constitute real growth. With the real economy is not directly related to the proliferation of funds of Ling Yu, the real output and departments in response to lack of funds and the gradual decline, which Jiushi often been said of the economic bubble Huahuochanye hollowed out.
2, the bubble does not mean the bubble economy.
booming economy will inevitably produce some foam. Like a mountain stream, water fast, inevitably aroused some of the bubble, but it does not thereby determine the water quality of streams what changes have taken place. Stream of bubbles and soap bubble blowing different. Stream water drinkable and soapy water is entirely impossible. Different water quality need to use different treatment methods.
bubble refers to the process of economic development imbalances often occur. Together these imbalances is the up and down the concrete representation of the economic cycle. Bubble economy, while others refer to as economic speculation, which led to the phenomenon of market price fluctuations. Because the causes of the two different damage caused by different solutions to this problem is different, so distinguishing the bubble economy and the economic bubble is not a simple word game. If you do not clear the distinction between the two, it is easy to real bubble economy and the general confusion of the economic bubble is often said, is not conducive to recognize the bubble economy, and to take corresponding countermeasures.
from the supply and demand point of view, in the normal market mechanism, price increases will inevitably lead to a drop in demand. However, when the onset of the bubble economy, on the contrary, the more prices rise, demand for the more prosperous, to buy up not to buy off. This is to determine whether the bubble economy, an important indicator identification.
bubble economy will result in volatility in some commodity prices, but the converse is not necessarily correct. Not according to some commodity price inflation fall to determine the bubble economy. Price changes caused by many reasons, the bubble economy is only one of them.
between the economic bubble and the bubble economy, the main difference is: the market mechanism will play a check and balance the economic bubble, the bubble growth rate regardless of speed, the ultimate effect of the market mechanism is always a balance, but the market mechanism of the bubble economy was completely helpless, because in the bubble economy that does not exist in equilibrium.
Third, the economic cycle and the bubble economy
in any economic system, there will be fluctuations in economic operations. In some periods, economic growth has accelerated, there prosperity, in other periods of economic recession, stagnation or recession, a cycle, which is often said that the economic cycle. Periodic fluctuations in macroeconomic and social development of the basic law.
source of cyclical fluctuations generated a social aggregate supply and aggregate demand contradiction and unity of two opposites. Government plans due to market expansion, or expansion, making the social demand and social needs of large industrial production rose led expansion. Because in the modern industry that exists between the various departments in close contact input — output, demand growth was progressively enlarged to form the multiplier. This often shows a sudden jump expansion expansion, leading to large-scale investment peak. Large-scale industrial investment, in turn caused a more dramatic expansion. The economy as if the engine starting up, like, and faster. [3]
in the process of economic development balance between supply and demand is temporary and relative; imbalance is often absolute. Economic development is not balanced state from a non-equilibrium state to another movement. In natural dialectics called “wave-forward” rule. [4] Cycle reflects both supply and demand within the system of self-regulation process of the unity of opposites. Impossible and unnecessary to eliminate fluctuations in the economic cycle. If volatility is too large or the frequency too high will cause a larger economic losses. Economic fluctuations, is not conducive to developing a long-term investment plan, a considerable part of the means of production can not be fully utilized, is not conducive to raising labor productivity and efficiency in the allocation of resources, shortage of many products 1:00, 1:00 backlog of unmarketable, causing serious waste. Volatility in economic and political stability and also affect people's lives, resulting in a series of social problems. Therefore, governments around the world regard the stability of macroeconomic policy as an important goal.
excessive investment will cause a certain degree of economic structural distortion, but eventually market forces will play a role in correcting these distortions. Thus, each over a period of time of economic adjustment will occur automatically, usually known as the business cycle. Images from the economic cycle, economic growth rate up and down, from the economic recovery to prosperity, then prosperity into recession, then declining into depression. In the period of recession and depression, within and through the economic system outside the system to adjust gradually towards recovery. This cycle is a cycle a few years. If the more serious the economic bubble up and down economic cycles of the amplitude is relatively large. Take appropriate measures to reduce the impact of the economic bubble, limiting the amplitude of the economic cycle. In general, the bubble is inevitable, the economic cycle is inexorable law of macroeconomic movements.
trajectory of the bubble economy and the different economic cycles. Movement cycle is a continuous process of repeated, but after the bubble economy, a sudden drop in the peak, this phenomenon of volatility for a long period of time will not be repeated reproduction.
4, two different logic
from information theory point of view, in considering an investment must be investments in the future to predict the price of each period and market demand . From the investment to come on the market, in time, there is a lag. When the time to market, market demand and prices and forecasts may have some access. Especially in the modern industrial and financial markets, the market is moving very high uncertainty. When people can not grasp the full investment decision information. It is because of incomplete market information caused a lot of investment mistakes. In the period of rapid economic growth, particularly vulnerable to over-investment, leading to distortions in economic structures. Incomplete information in this investment, the economic bubble and the bubble economy and there is no fundamental difference. One major difference between the two is that people expected future price in the logical way of thinking.
example, in the early '80s, the Chinese mainland market, a good washing machine sales, higher profits, so many manufacturers rush and on, have set up plants in preparation for production of washing machines. No matter how these investors forecast market demand conditions, their estimates of future price washing machines are only two possibilities: The wise investor will take into account if their products into the market, to ease the local shortage situation, the price will drop washing machine a range. Profit depends on whether the decrease in the price. Lack of market knowledge and those who will be very simple washing machine according to the current market price to estimate the profit after production. If the washing machine's function and quality did not improve significantly, then, in any case, no one will make such estimates: Our washing machine into the market but will increase after the market price. At the same time, in Shanghai and Shenzhen stock markets on the emergence of an enthusiastic, almost all investors are expected to invest in their stock prices following the rise again, you can make a profit. Although the investment in washing machines and invest in stocks there are problems with incomplete information, investors are quite blind, but they estimated the future price of a completely different way. Investment in the washing machine, people unconsciously recognized the market mechanism, but in the stock investment, it clearly deviates from the fundamental principle of market mechanism. Finally, the market mechanism will correct the errors in the washing machine investment, it gives the stock investment problems do nothing. This has created an economic bubble and the bubble economy of the watershed between.
5, mistaken identity, thereby adversely affecting the diagnosis
sometimes a commodity oversupply, resulting in more serious backlogs; some of the investment decision-making errors, repeated construction, all of a sudden opened many shops, international hotels, the result had to close down close down. Some people have criticized these phenomena as the bubble economy. Actually, this criticism is not the exact wording. When the market when the imbalance of supply and demand sides are based on market prices pass information to adjust their behavior accordingly. If prices rise, the demand side would be appropriate to reduce demand, but producers see profits will increase supply, the market mechanism will lead the market equilibrium to a new campaign.
Some people have borrowed heavily to invest as the emergence of false prosperity known as the bubble economy. This formulation is not very precise. Borrowing is a means of financing, is not the bubble economy, depends on these loans to be invested in what areas? If these loans were put into production areas, especially those used to develop competitive new industry, investment resulted in overall national strength has increased, this is definitely not a bubble economy. If the financial crisis, a period of time is difficult to repay the loan, even if the bad economic effects of investment, in any case, but also found a considerable number of conversion by the investment of assets. Obviously, this bubble burst, and after that nothing very different from the situation. However, if the loan is used to speculation in real estate, securities and equities, a charade, but not actually increase the overall national strength; Once the bubble burst, in addition to a lot of bad accounts, nothing was left outside, which is of course bubble economy.
Some critics said that some statistical data, inaccurate and exaggerated results, cover up weaknesses, it was a bubble economy. Others criticized that some official corruption, and some traders made money after the eating and drinking, debauchery, and this is the bubble economy. There is no doubt that these acts are wrong, but to argue these are summarized in the bubble economy.
6, the market mechanism
bubble economy because of the economic bubble and the operation of different mechanisms, measures should be taken not the same.
over-investment led to distortions in economic structures, the resulting bubble is inevitable. Note there is a market bubble is not a panacea, but that does not mean that market failure. Promote fair competition, promote the flow of information and reduce errors in the investment decision can effectively suppress and weaken the economic bubble. Strengthening market mechanisms to reduce the economic bubble fundamental way harm. In the period of economic restructuring, some government officials understand the economic laws, to use the power at whim, excessive intervention in economic activity led to many important reasons for the economic bubble. Therefore, separate government from enterprises, promote the modern enterprise system can effectively reduce the economic bubble.
the bubble economy, price increases, demand also increased, indicating that the bubble economy, the market economy does not follow the basic rules of operation. Bubble economy, market failure is a very special classic. Strengthening the market mechanism can not solve the bubble economy caused by a series of questions. Therefore, once identified some of the problem is the consequences of the bubble economy, you need to take some special measures. If at this time also that the market mechanism can finally solve the problem, then it is too bookish, is likely to lose time and jeopardize the overall situation
from - http://www.economic-theory.com/
link
http://meganfoxstar.blogspot.com/
http://elishasexycool.blogspot.com/
http://junkfoodtoday.blogspot.com/
http://japanesefoodyum.blogspot.com/
published by Palgrave in 1926 in the English dictionary definition of a bubble economy: “Any highly speculative bad business behavior.” This seems clear enough. Thus, in 1987 edition of the Palgrave Dictionary of Economics, quoted a famous economist, the former president of the American Economic Association Kindleberger (C. Kindleberger), then re-definition of a bubble economy: “the term bubble state, random point that is one or a series of assets in a continuous process of sharply rising prices, the prices start rising prices make it even produced the expected, so he has attracted new buyers – who generally just want to make a profit through the sale, but The use of these assets and their ability to generate profits is not interested. With the expected downturn in prices often, followed by the price drop, and finally end the financial crisis. usually 'boom' time longer than the bubble state, prices, production and profits increase is relatively modest number. that they might then is to fall (or fear) in the form of crisis or prosperity faded to an end rather than a crisis. “[1]
in modern economy, people are far less than the exchange of specific goods in exchange for some symbols, such as currency, stocks, bonds, foreign exchange, futures, options contracts, checks, money orders and so on. Peter Drucker (PeterDrucker) said: “capital mobility, currency exchange, financial and other signs the economy from products, services and other real economy out of a fully independent.” “This is one of the most striking changes but the hardest to understand.” [2] Because fewer opportunities for industrial investment, return on investment is relatively low, while the rate of investment return of financial assets is relatively high. In the false lure of high rates of return under a lot of money in the economy, ineffective idle symbol does not constitute real growth. With the real economy is not directly related to the proliferation of funds of Ling Yu, the real output and departments in response to lack of funds and the gradual decline, which Jiushi often been said of the economic bubble Huahuochanye hollowed out.
2, the bubble does not mean the bubble economy.
booming economy will inevitably produce some foam. Like a mountain stream, water fast, inevitably aroused some of the bubble, but it does not thereby determine the water quality of streams what changes have taken place. Stream of bubbles and soap bubble blowing different. Stream water drinkable and soapy water is entirely impossible. Different water quality need to use different treatment methods.
bubble refers to the process of economic development imbalances often occur. Together these imbalances is the up and down the concrete representation of the economic cycle. Bubble economy, while others refer to as economic speculation, which led to the phenomenon of market price fluctuations. Because the causes of the two different damage caused by different solutions to this problem is different, so distinguishing the bubble economy and the economic bubble is not a simple word game. If you do not clear the distinction between the two, it is easy to real bubble economy and the general confusion of the economic bubble is often said, is not conducive to recognize the bubble economy, and to take corresponding countermeasures.
from the supply and demand point of view, in the normal market mechanism, price increases will inevitably lead to a drop in demand. However, when the onset of the bubble economy, on the contrary, the more prices rise, demand for the more prosperous, to buy up not to buy off. This is to determine whether the bubble economy, an important indicator identification.
bubble economy will result in volatility in some commodity prices, but the converse is not necessarily correct. Not according to some commodity price inflation fall to determine the bubble economy. Price changes caused by many reasons, the bubble economy is only one of them.
between the economic bubble and the bubble economy, the main difference is: the market mechanism will play a check and balance the economic bubble, the bubble growth rate regardless of speed, the ultimate effect of the market mechanism is always a balance, but the market mechanism of the bubble economy was completely helpless, because in the bubble economy that does not exist in equilibrium.
Third, the economic cycle and the bubble economy
in any economic system, there will be fluctuations in economic operations. In some periods, economic growth has accelerated, there prosperity, in other periods of economic recession, stagnation or recession, a cycle, which is often said that the economic cycle. Periodic fluctuations in macroeconomic and social development of the basic law.
source of cyclical fluctuations generated a social aggregate supply and aggregate demand contradiction and unity of two opposites. Government plans due to market expansion, or expansion, making the social demand and social needs of large industrial production rose led expansion. Because in the modern industry that exists between the various departments in close contact input — output, demand growth was progressively enlarged to form the multiplier. This often shows a sudden jump expansion expansion, leading to large-scale investment peak. Large-scale industrial investment, in turn caused a more dramatic expansion. The economy as if the engine starting up, like, and faster. [3]
in the process of economic development balance between supply and demand is temporary and relative; imbalance is often absolute. Economic development is not balanced state from a non-equilibrium state to another movement. In natural dialectics called “wave-forward” rule. [4] Cycle reflects both supply and demand within the system of self-regulation process of the unity of opposites. Impossible and unnecessary to eliminate fluctuations in the economic cycle. If volatility is too large or the frequency too high will cause a larger economic losses. Economic fluctuations, is not conducive to developing a long-term investment plan, a considerable part of the means of production can not be fully utilized, is not conducive to raising labor productivity and efficiency in the allocation of resources, shortage of many products 1:00, 1:00 backlog of unmarketable, causing serious waste. Volatility in economic and political stability and also affect people's lives, resulting in a series of social problems. Therefore, governments around the world regard the stability of macroeconomic policy as an important goal.
excessive investment will cause a certain degree of economic structural distortion, but eventually market forces will play a role in correcting these distortions. Thus, each over a period of time of economic adjustment will occur automatically, usually known as the business cycle. Images from the economic cycle, economic growth rate up and down, from the economic recovery to prosperity, then prosperity into recession, then declining into depression. In the period of recession and depression, within and through the economic system outside the system to adjust gradually towards recovery. This cycle is a cycle a few years. If the more serious the economic bubble up and down economic cycles of the amplitude is relatively large. Take appropriate measures to reduce the impact of the economic bubble, limiting the amplitude of the economic cycle. In general, the bubble is inevitable, the economic cycle is inexorable law of macroeconomic movements.
trajectory of the bubble economy and the different economic cycles. Movement cycle is a continuous process of repeated, but after the bubble economy, a sudden drop in the peak, this phenomenon of volatility for a long period of time will not be repeated reproduction.
4, two different logic
from information theory point of view, in considering an investment must be investments in the future to predict the price of each period and market demand . From the investment to come on the market, in time, there is a lag. When the time to market, market demand and prices and forecasts may have some access. Especially in the modern industrial and financial markets, the market is moving very high uncertainty. When people can not grasp the full investment decision information. It is because of incomplete market information caused a lot of investment mistakes. In the period of rapid economic growth, particularly vulnerable to over-investment, leading to distortions in economic structures. Incomplete information in this investment, the economic bubble and the bubble economy and there is no fundamental difference. One major difference between the two is that people expected future price in the logical way of thinking.
example, in the early '80s, the Chinese mainland market, a good washing machine sales, higher profits, so many manufacturers rush and on, have set up plants in preparation for production of washing machines. No matter how these investors forecast market demand conditions, their estimates of future price washing machines are only two possibilities: The wise investor will take into account if their products into the market, to ease the local shortage situation, the price will drop washing machine a range. Profit depends on whether the decrease in the price. Lack of market knowledge and those who will be very simple washing machine according to the current market price to estimate the profit after production. If the washing machine's function and quality did not improve significantly, then, in any case, no one will make such estimates: Our washing machine into the market but will increase after the market price. At the same time, in Shanghai and Shenzhen stock markets on the emergence of an enthusiastic, almost all investors are expected to invest in their stock prices following the rise again, you can make a profit. Although the investment in washing machines and invest in stocks there are problems with incomplete information, investors are quite blind, but they estimated the future price of a completely different way. Investment in the washing machine, people unconsciously recognized the market mechanism, but in the stock investment, it clearly deviates from the fundamental principle of market mechanism. Finally, the market mechanism will correct the errors in the washing machine investment, it gives the stock investment problems do nothing. This has created an economic bubble and the bubble economy of the watershed between.
5, mistaken identity, thereby adversely affecting the diagnosis
sometimes a commodity oversupply, resulting in more serious backlogs; some of the investment decision-making errors, repeated construction, all of a sudden opened many shops, international hotels, the result had to close down close down. Some people have criticized these phenomena as the bubble economy. Actually, this criticism is not the exact wording. When the market when the imbalance of supply and demand sides are based on market prices pass information to adjust their behavior accordingly. If prices rise, the demand side would be appropriate to reduce demand, but producers see profits will increase supply, the market mechanism will lead the market equilibrium to a new campaign.
Some people have borrowed heavily to invest as the emergence of false prosperity known as the bubble economy. This formulation is not very precise. Borrowing is a means of financing, is not the bubble economy, depends on these loans to be invested in what areas? If these loans were put into production areas, especially those used to develop competitive new industry, investment resulted in overall national strength has increased, this is definitely not a bubble economy. If the financial crisis, a period of time is difficult to repay the loan, even if the bad economic effects of investment, in any case, but also found a considerable number of conversion by the investment of assets. Obviously, this bubble burst, and after that nothing very different from the situation. However, if the loan is used to speculation in real estate, securities and equities, a charade, but not actually increase the overall national strength; Once the bubble burst, in addition to a lot of bad accounts, nothing was left outside, which is of course bubble economy.
Some critics said that some statistical data, inaccurate and exaggerated results, cover up weaknesses, it was a bubble economy. Others criticized that some official corruption, and some traders made money after the eating and drinking, debauchery, and this is the bubble economy. There is no doubt that these acts are wrong, but to argue these are summarized in the bubble economy.
6, the market mechanism
bubble economy because of the economic bubble and the operation of different mechanisms, measures should be taken not the same.
over-investment led to distortions in economic structures, the resulting bubble is inevitable. Note there is a market bubble is not a panacea, but that does not mean that market failure. Promote fair competition, promote the flow of information and reduce errors in the investment decision can effectively suppress and weaken the economic bubble. Strengthening market mechanisms to reduce the economic bubble fundamental way harm. In the period of economic restructuring, some government officials understand the economic laws, to use the power at whim, excessive intervention in economic activity led to many important reasons for the economic bubble. Therefore, separate government from enterprises, promote the modern enterprise system can effectively reduce the economic bubble.
the bubble economy, price increases, demand also increased, indicating that the bubble economy, the market economy does not follow the basic rules of operation. Bubble economy, market failure is a very special classic. Strengthening the market mechanism can not solve the bubble economy caused by a series of questions. Therefore, once identified some of the problem is the consequences of the bubble economy, you need to take some special measures. If at this time also that the market mechanism can finally solve the problem, then it is too bookish, is likely to lose time and jeopardize the overall situation
from - http://www.economic-theory.com/
link
http://meganfoxstar.blogspot.com/
http://elishasexycool.blogspot.com/
http://junkfoodtoday.blogspot.com/
http://japanesefoodyum.blogspot.com/
Sunday, February 6, 2011
Fears China's economic bubble may burst
from - By China correspondent Stephen McDonell
But more and more economists are worrying that China has developed a bubble economy and the bubble could soon burst.
One of the key indicators they are looking at is the real estate market.
From the roof of the Shanghai skyscraper known as the Bottle Opener, the view is something to behold.
We walked up through a series of trapdoors and ladders and emerged on top of the highest building on the Chinese mainland.
From here when you look out over China's sprawling financial capital it would seem that this country's building boom could go on forever and drag the Australian economy along with it.
But there are fears that property speculators chasing quick profits are creating a real estate bubble.
On the top of the Bottle Opener we meet Michiho Kishi from the Japanese company that built the tower, Mori Building.
Mr Kishi believes the residential sector is partially a bubble economy.
"The current situation I can say is partially a bubble, partially there's a real economy," he said.
"Especially the residential market seems part of the bubble economy. Because now real demand for the people living in Shanghai. They can't afford their residence to buy - especially younger people, the people to be married. It's getting difficult for them to find houses for them to live."
The Chinese Government is also worried about this and is now capping prices and making some building loans harder to get.
But this theory that China is facing serious overcapacity problems goes beyond real estate.
Professor Michael Pettis lectures at Peking University:
Professor Pettis says China's understandable efforts to try and shield itself from the world economic crisis with a massive stimulus package may end up making its situation worse.
"Many people believe that we've reached a point in China where we're producing stuff or investing in infrastructure that is not economically viable; that in the future we're still not going to be able to use this stuff and we're still going to have to pay for it," he said.
"And when that happens that will exchange future growth in exchange for the growth that we got today.
"What we've seen in the last year has been a very robust reaction to the contraction in the export sector and to the threat of rising unemployment."
Professor Pettis says China entered the global financial crisis with an investment rate that was probably much too high.
"The economy was way too heavily dependent on investment. And because investment rates were so high there's a very, very strong reason to believe that a lot of this investment is being wasted," he said.
"So in reacting to the crisis they increased the level of investment and they made it much, much easier for investment projects to raise capital.
"Almost certainly one of the consequences will be that even more of this investment is going to be wasted. A lot of money is going into projects that have a negative economic value.
"All that money has to be repaid at some point in the future. So what you're doing is you're taking future growth and moving it forward. And you may be doing it very inefficiently."
When talking specifically about fears of a real estate bubble bursting there is probably nowhere that indicates it that more vividly than Kangbashi in Inner Mongolia.
This brand new city has been constructed in the desert because in China it has been ridiculed as a "ghost city".
There are rows and rows of new apartment blocks with nobody living in them. The odd car drives down the road. And there are no problems getting a seat at one of the few restaurants that has bothered to open up.
They are building a huge new theatre, museum and library but with barely a soul available to use them.
This may yet prove to be a bold piece of future planning which is yet to reach fruition as China once again confounds the critics.
Then again it might turn out to be the massive white elephant that marked the turning point for the once unstoppable Chinese economy
from - http://www.abc.net.au/news/stories/2010/05/19/2903142.htm
China's prosperity has huge future impacts for Australia's economy, but there are now fears the economic giant has developed a bubble economy.
Chinese growth rates of 8 per cent and up in recent years have powered Australia's resources export boom.But more and more economists are worrying that China has developed a bubble economy and the bubble could soon burst.
One of the key indicators they are looking at is the real estate market.
From the roof of the Shanghai skyscraper known as the Bottle Opener, the view is something to behold.
We walked up through a series of trapdoors and ladders and emerged on top of the highest building on the Chinese mainland.
From here when you look out over China's sprawling financial capital it would seem that this country's building boom could go on forever and drag the Australian economy along with it.
But there are fears that property speculators chasing quick profits are creating a real estate bubble.
On the top of the Bottle Opener we meet Michiho Kishi from the Japanese company that built the tower, Mori Building.
Mr Kishi believes the residential sector is partially a bubble economy.
"The current situation I can say is partially a bubble, partially there's a real economy," he said.
"Especially the residential market seems part of the bubble economy. Because now real demand for the people living in Shanghai. They can't afford their residence to buy - especially younger people, the people to be married. It's getting difficult for them to find houses for them to live."
The Chinese Government is also worried about this and is now capping prices and making some building loans harder to get.
But this theory that China is facing serious overcapacity problems goes beyond real estate.
Professor Michael Pettis lectures at Peking University:
Professor Pettis says China's understandable efforts to try and shield itself from the world economic crisis with a massive stimulus package may end up making its situation worse.
"Many people believe that we've reached a point in China where we're producing stuff or investing in infrastructure that is not economically viable; that in the future we're still not going to be able to use this stuff and we're still going to have to pay for it," he said.
"And when that happens that will exchange future growth in exchange for the growth that we got today.
"What we've seen in the last year has been a very robust reaction to the contraction in the export sector and to the threat of rising unemployment."
Professor Pettis says China entered the global financial crisis with an investment rate that was probably much too high.
"The economy was way too heavily dependent on investment. And because investment rates were so high there's a very, very strong reason to believe that a lot of this investment is being wasted," he said.
"So in reacting to the crisis they increased the level of investment and they made it much, much easier for investment projects to raise capital.
"Almost certainly one of the consequences will be that even more of this investment is going to be wasted. A lot of money is going into projects that have a negative economic value.
"All that money has to be repaid at some point in the future. So what you're doing is you're taking future growth and moving it forward. And you may be doing it very inefficiently."
When talking specifically about fears of a real estate bubble bursting there is probably nowhere that indicates it that more vividly than Kangbashi in Inner Mongolia.
This brand new city has been constructed in the desert because in China it has been ridiculed as a "ghost city".
There are rows and rows of new apartment blocks with nobody living in them. The odd car drives down the road. And there are no problems getting a seat at one of the few restaurants that has bothered to open up.
They are building a huge new theatre, museum and library but with barely a soul available to use them.
This may yet prove to be a bold piece of future planning which is yet to reach fruition as China once again confounds the critics.
Then again it might turn out to be the massive white elephant that marked the turning point for the once unstoppable Chinese economy
from - http://www.abc.net.au/news/stories/2010/05/19/2903142.htm
Thursday, February 3, 2011
ECONOMIC BUBBLE IN CHINA
In China, fear of a real estate bubble
Monday, January 11, 2010
BEIJING -- With property prices soaring in key cities, many investors and bankers worry that China has the next great real estate bubble waiting to be popped.
The Chinese government is worried, too. On Sunday, the nation's cabinet, citing "excessively rising house prices" in some cities, said it will monitor capital flows to "stop overseas speculative funds from jeopardizing China's property market." It also said that any Chinese family buying a second home must make a down payment of at least 40 percent.
For investors, many of the usual bubble warning signs are flashing. Fueled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled again. Most Chinese home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements for bank loans.
Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.
"It's definitely a bubble," said Beijing real estate broker Xu Xiangdong, a 24-year-old former nightclub cashier. "But it won't break because there is lots of support beneath the bubble because buying power is really strong."
Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to the cities, pent-up demand for housing, and a banking system much less exposed to residential mortgages than banks in the United States or Japan could protect China, they say, from a real estate meltdown for years to come.
If not, then development firms and Chinese banks might teeter and construction could slow down, tossing millions of Chinese people out of work. A real estate bust might also shake confidence here just when the world is looking to Chinese consumers to start spending more to bring global trade into better balance.
Arthur Kroeber, a Beijing-based analyst and managing director of Dragonomics, said China's economy is "not even close" to being a bubble like those seen in Japan, which endured more than a decade of sluggish growth after prices retreated, or in the United States, which helped bring about the current sharp global downturn.
"At some point the music will stop," Kroeber said. But he predicted that it would not happen in China for at least 15 years, when urbanization slows.
The bigger real estate problem in China now is access to housing. For many people -- especially the young or people moving to the cities from rural areas -- the dream of owning a home is more and more difficult to attain. The Xinhua news agency quoted Goldman Sachs as saying that housing price increases had outpaced wage hikes by 30 percent in Shanghai and 80 percent in Beijing in recent years.
A popular television soap opera known as "Snail House" depicts two sisters' desperate struggle to buy an ever more unaffordable home. One sister resorts to becoming the mistress of a corrupt, married official to get money for an apartment. Last month, after a broadcast official said the 33-part series was having a "vulgar and negative social impact" and using "sex to woo viewers," viewers lashed out at him on the Internet and accused him of owning multiple luxury homes.
Working out of an east Beijing building decorated with Ionic and Corinthian pedestals, Xu, the real estate broker, has seen apartment prices in the complex double in the past year, to $380 a square foot. Prices had already doubled over the three previous years. Now the sales-agent manager of a Century 21 franchise, his take-home pay is more than four times what he earned as a cashier. But Xu, a vocational school graduate and son of corn farmers in Jilin province, still rents
Speculation has become common. Wang Zhongwei, a 35-year-old stock market analyst who owns the apartment where he lives, bought two apartments in 2004 for investment purposes. He borrowed from family and friends to meet mortgage payments twice as big as his take-home pay. But in the middle of last year, he sold the apartments for twice what he paid and made $145,000, a fortune here.
"It's much easier than working every day to make money," Wang said. "I work very hard and compete for my so-called career every day, but I don't make that much money from work." In November, he bought two more apartments.
The government has helped pump up the property market by keeping interest rates low, the currency undervalued and the fiscal spigots open. Standards for bank lending have been lax, with lending rising at a 30 percent annual pace in 2009, according to a report by the Los Angeles-based bond investment firm Pimco. Since the government exerted restraint in July, lending has risen at a slower, but still brisk, 15 percent annual rate.
Now top leaders are worried. In a year-end interview with the official Xinhua news agency, Premier Wen Jiabao said that "as the property market is recovering rapidly this year, housing prices in some cities are rising too fast, which deserves great attention of the central government." He vowed to "crack down on illegal moves, including hoarding of land and delaying sales for bigger profits." And he said the government would do more to provide affordable housing.
Last week, the government also nudged a key interest rate higher.
Still, many economists are sanguine.
"One of the legacies of China's prolonged stagnant growth prior to economic liberalization is an overwhelming shortage of residential property that meets its new living standards," Koyo Ozeki said in a report published by Pimco. "It will likely take a considerable period of time for supply to catch up to demand." That wasn't true in the Japanese or U.S. bubbles.
Ozeki, an executive vice president for Pimco in Tokyo, noted that the total credit for the property sector in China has grown to 40 percent of gross domestic product; in the United States, it hit 80 percent in 2007. For Chinese banks, exposure to real estate is less than 20 percent of assets, much smaller than in the United States. That should reduce the chances of a banking crisis.
In addition, while property prices are soaring in such areas as Beijing and Shanghai, price increases are more modest elsewhere. Government statistics say housing prices nationwide rose only 5.7 percent last year.
Moreover, China's homeowners carry less debt than homeowners abroad and the economy's rapid growth can probably keep incomes rising fast enough to cover mortgage costs. Kroeber said that mortgages issued from 2002 to 2008 equaled only 40 percent of the value of housing sold nationwide.
Liu Renping, a 30-year-old construction engineer originally from the countryside of Inner Mongolia, is typical of many first-time Chinese home buyers. After deciding to get married, he hunted for four months before buying a two-bedroom, 900-square-foot apartment on the northern edge of Beijing last March, even though it won't be completed until this October. He paid $162 per square foot and took out a mortgage out for half the money needed. The other half came from his mother, friends and his savings.
About 30 percent of the couple's pay will cover mortgage payments. "And my salary will increase in the near future. So I don't feel big pressure from my mortgage," Liu said.
Since he bought the apartment, prices in that development have jumped more than 50 percent. "I am lucky to have bought it early," he said. "If the price was this high when I bought the apartment, I wouldn't buy at all because it would have been too expensive and I wouldn't have been able to afford it."
from- http://www.washingtonpost.com/
By Steven Mufson
Washington Post Staff Writer Monday, January 11, 2010
BEIJING -- With property prices soaring in key cities, many investors and bankers worry that China has the next great real estate bubble waiting to be popped.
The Chinese government is worried, too. On Sunday, the nation's cabinet, citing "excessively rising house prices" in some cities, said it will monitor capital flows to "stop overseas speculative funds from jeopardizing China's property market." It also said that any Chinese family buying a second home must make a down payment of at least 40 percent.
For investors, many of the usual bubble warning signs are flashing. Fueled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled again. Most Chinese home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements for bank loans.
Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.
"It's definitely a bubble," said Beijing real estate broker Xu Xiangdong, a 24-year-old former nightclub cashier. "But it won't break because there is lots of support beneath the bubble because buying power is really strong."
Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to the cities, pent-up demand for housing, and a banking system much less exposed to residential mortgages than banks in the United States or Japan could protect China, they say, from a real estate meltdown for years to come.
If not, then development firms and Chinese banks might teeter and construction could slow down, tossing millions of Chinese people out of work. A real estate bust might also shake confidence here just when the world is looking to Chinese consumers to start spending more to bring global trade into better balance.
Arthur Kroeber, a Beijing-based analyst and managing director of Dragonomics, said China's economy is "not even close" to being a bubble like those seen in Japan, which endured more than a decade of sluggish growth after prices retreated, or in the United States, which helped bring about the current sharp global downturn.
"At some point the music will stop," Kroeber said. But he predicted that it would not happen in China for at least 15 years, when urbanization slows.
The bigger real estate problem in China now is access to housing. For many people -- especially the young or people moving to the cities from rural areas -- the dream of owning a home is more and more difficult to attain. The Xinhua news agency quoted Goldman Sachs as saying that housing price increases had outpaced wage hikes by 30 percent in Shanghai and 80 percent in Beijing in recent years.
A popular television soap opera known as "Snail House" depicts two sisters' desperate struggle to buy an ever more unaffordable home. One sister resorts to becoming the mistress of a corrupt, married official to get money for an apartment. Last month, after a broadcast official said the 33-part series was having a "vulgar and negative social impact" and using "sex to woo viewers," viewers lashed out at him on the Internet and accused him of owning multiple luxury homes.
Working out of an east Beijing building decorated with Ionic and Corinthian pedestals, Xu, the real estate broker, has seen apartment prices in the complex double in the past year, to $380 a square foot. Prices had already doubled over the three previous years. Now the sales-agent manager of a Century 21 franchise, his take-home pay is more than four times what he earned as a cashier. But Xu, a vocational school graduate and son of corn farmers in Jilin province, still rents
Speculation has become common. Wang Zhongwei, a 35-year-old stock market analyst who owns the apartment where he lives, bought two apartments in 2004 for investment purposes. He borrowed from family and friends to meet mortgage payments twice as big as his take-home pay. But in the middle of last year, he sold the apartments for twice what he paid and made $145,000, a fortune here.
"It's much easier than working every day to make money," Wang said. "I work very hard and compete for my so-called career every day, but I don't make that much money from work." In November, he bought two more apartments.
The government has helped pump up the property market by keeping interest rates low, the currency undervalued and the fiscal spigots open. Standards for bank lending have been lax, with lending rising at a 30 percent annual pace in 2009, according to a report by the Los Angeles-based bond investment firm Pimco. Since the government exerted restraint in July, lending has risen at a slower, but still brisk, 15 percent annual rate.
Now top leaders are worried. In a year-end interview with the official Xinhua news agency, Premier Wen Jiabao said that "as the property market is recovering rapidly this year, housing prices in some cities are rising too fast, which deserves great attention of the central government." He vowed to "crack down on illegal moves, including hoarding of land and delaying sales for bigger profits." And he said the government would do more to provide affordable housing.
Last week, the government also nudged a key interest rate higher.
Still, many economists are sanguine.
"One of the legacies of China's prolonged stagnant growth prior to economic liberalization is an overwhelming shortage of residential property that meets its new living standards," Koyo Ozeki said in a report published by Pimco. "It will likely take a considerable period of time for supply to catch up to demand." That wasn't true in the Japanese or U.S. bubbles.
Ozeki, an executive vice president for Pimco in Tokyo, noted that the total credit for the property sector in China has grown to 40 percent of gross domestic product; in the United States, it hit 80 percent in 2007. For Chinese banks, exposure to real estate is less than 20 percent of assets, much smaller than in the United States. That should reduce the chances of a banking crisis.
In addition, while property prices are soaring in such areas as Beijing and Shanghai, price increases are more modest elsewhere. Government statistics say housing prices nationwide rose only 5.7 percent last year.
Moreover, China's homeowners carry less debt than homeowners abroad and the economy's rapid growth can probably keep incomes rising fast enough to cover mortgage costs. Kroeber said that mortgages issued from 2002 to 2008 equaled only 40 percent of the value of housing sold nationwide.
Liu Renping, a 30-year-old construction engineer originally from the countryside of Inner Mongolia, is typical of many first-time Chinese home buyers. After deciding to get married, he hunted for four months before buying a two-bedroom, 900-square-foot apartment on the northern edge of Beijing last March, even though it won't be completed until this October. He paid $162 per square foot and took out a mortgage out for half the money needed. The other half came from his mother, friends and his savings.
About 30 percent of the couple's pay will cover mortgage payments. "And my salary will increase in the near future. So I don't feel big pressure from my mortgage," Liu said.
Since he bought the apartment, prices in that development have jumped more than 50 percent. "I am lucky to have bought it early," he said. "If the price was this high when I bought the apartment, I wouldn't buy at all because it would have been too expensive and I wouldn't have been able to afford it."
from- http://www.washingtonpost.com/
Tuesday, February 1, 2011
Bubble economy - Definition
An economic bubble occurs when speculation in a commodity causes the price to increase, thus producing more speculation. The price of the good then reaches absurd levels and the bubble is usually followed by a sudden drop in prices, known as a crash.
Economic bubbles are generally considered to be bad things because they cause misallocation of resources into non-productive uses. In addition, the crash which follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise as was the case of the Great Depression in the 1930s and Japan in the 1990s.
Another important aspect of economic bubbles is their impact on spending habits. Participants in a market with goods that are over valued e.g. the housing market in the United Kingdom, Spain spend more because they "feel" richer.
When the bubble occurs in equity markets, it is called a stock market bubble. It is usually very difficult to differentiate a stock market bubble from an ordinary bull market until it is over.
The cause of bubbles in some dispute. Some regard bubbles as related to inflation and thus believe that the causes of inflation are also the causes of bubbles. Others take the view that there is a "fundamental value" to an asset, and that bubbles represent a rise over that fundamental value, which must "inevitably" return to that fundamental value. Finally there are xaotic theories of bubbles which assert that bubbles come from particular "critical" states in the market based on the communication of economic actors
Economic bubbles are generally considered to be bad things because they cause misallocation of resources into non-productive uses. In addition, the crash which follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise as was the case of the Great Depression in the 1930s and Japan in the 1990s.
Another important aspect of economic bubbles is their impact on spending habits. Participants in a market with goods that are over valued e.g. the housing market in the United Kingdom, Spain spend more because they "feel" richer.
When the bubble occurs in equity markets, it is called a stock market bubble. It is usually very difficult to differentiate a stock market bubble from an ordinary bull market until it is over.
The cause of bubbles in some dispute. Some regard bubbles as related to inflation and thus believe that the causes of inflation are also the causes of bubbles. Others take the view that there is a "fundamental value" to an asset, and that bubbles represent a rise over that fundamental value, which must "inevitably" return to that fundamental value. Finally there are xaotic theories of bubbles which assert that bubbles come from particular "critical" states in the market based on the communication of economic actors
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