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REPLY TO THREAD
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my understanding of 'economic bubbles'
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Original Message
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Let me start off by saying, I don't post things on here to seem pretentious, or be like a know it all. What happens is I'll be studying something/thinking about something I do not understand. When I think I understand it, I post it on here for feedback because I respect the opinions, knowledge, and level of feedback I get on this site.
That being said, this is how I think of 'economic bubbles'
When I discuss economic bubbles with my friends, they say things like 'the money disappeared' or 'people lost their wealth overnight'.
I disagree.
A bubble is all about 'perceived value'.
So a group of people will start to pay larger and larger quantities of money for something, because they perceive it to be that valuable.
So they exchange their actual MONEY for a CONTRACT or object, like a house.
Then... they tell people, "I have a million dollars worth of houses or stocks or whatever"
But they don't actually have the Money. They just talk about the perceived value of their stuff in TERMS OF MONEY.
Then... when everyone realizes that their stuff isn't really that valuable after all,
the perceived value drops.
The contracts are still there. The money is still wherever it was. Nothing was destroyed.
It is simply the 'perceived value' that decreases rapidly.
So when the housing market collapsed, all that happened was people realized that the contracts the banks were holding weren't really that valuable.
Money isn't being destroyed or lost. Houses aren't being destroyed or lost. When bubbles burst, it's simply people uncovering a scam. That is all.
What I was confused about before, was that I somehow thought that 'actual money' had been lost or destroyed. Or had somehow traded hands on a large scale.
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