In a lot of ways, the economy is like a bubble making machine. Bubbles slowly start to inflate, expand, and then finally, they burst. Unlike soap bubbles, economic bubbles don’t burst within seconds—at least, not most of the time. When bubbles pop in our economy, financial losses are significant for almost everyone involved.
With foresight, it is possible to sidestep a burst economic bubble and reduce financial loss. Though most people never see them until after the fact, there are some signs that an economic bubble is about to burst. Here are some of the most visible…
1. Everyone now seems convinced that something is “the new way to get rich.”
True fact: there’s no such thing as a golden ticket to wealth. If you’re hearing everyone you know talk about a certain kind of investment, watch out! Chances are that it’s getting overhyped, which is one of the biggest signs of a bubble blowing up.
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If you remember the early 2000s, the housing bubble started when everyone started buying up homes they really couldn’t afford because they were being told “housing is going to keep rising,” and that they “really couldn’t lose.” Before that, it was the dot-com bubble. History tends to repeat itself like that.
2. Prices start to spiral out of control.
There are two ways you can tell that a bubble is about to burst through the price of goods. The first is seen in increased volatility. If prices start to fluctuate really heavily, chances are you’re about to see a collapse.
The more insidious and dangerous sign of a bubble ready to burst is a melt up. A melt up occurs when the prices of goods begin to rapidly climb upwards—often until the price no longer matches what the real value should be.
In extreme cases, such as with healthcare or housing, the price will become unsustainable for the average person. At this point, a bubble burst is imminent unless government intervention prevents it.
3. Government regulations start getting increasingly lax.
Whether people want to admit it or not, there is a very strong correlation between lax policies on business regulation and bad economic performance. Regulations are there because they help keep the economy stable—at least, most of the time, that’s the case.
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In many cases, there have been direct causations drawn from deregulation to bubbles bursting. The Great Recession, for example, has been directly linked to the deregulation of the lending industry. If you notice sudden rule relaxations, hold onto your hat. It’ll be a bumpy ride.
4. People who are heavily invested in the industry start lashing out against naysayers.
Perhaps one of the most telling signs a bubble is about to burst deals with the way insiders react to criticism. Insiders are always going to be the first to know when a bubble is about to burst because they are seeing the money dry up before anyone else will.
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When a bubble is about to burst, the people who are in the industry are usually in a low-key panic. They want you to believe things will get better, because they need you to invest. If it starts sounding like insiders want you to drink the Kool-Aid, it may be time to sell your stocks, before the bubble bursts.
