Hand in Hand

Like cupcakes and sprinkles, or cookies and milk many things go well with financial crises. For example there is usually a bubble; in the most recent crises this was a housing bubble, in the late 1920s the speculative boom with fuelled rises in share prices created a bubble, and there is Japan's economic bubble which saw housing and share prices rise between 1986-1991. During these times the bubble starts to inflate. A vast range of people from banks to ordinary consumers leverage themselves, buying into the belief that prices can only keep rising. There could also be a supply of easy money as credit becomes more readily available. 



On the way up to the peak, demand will outstrip supply of the asset inflating the bubble. As long as demand outstrips supply prices will keep rising creating a self fulfilling cycle. This feeds the bubble making it bigger as it becomes a self sufficient entity. However every bubble has its failure load. Imagine someone blowing a bubble; the bubble can only grow so large as the pressure inside will eventually become unsustainable causing failure. The result is that the bubble bursts. In regards to markets supply will eventually be greater than demand. Prices will begin to fall and the easy money disappears. 


In regards to the aforementioned crises the aftermath of the bubble bursting resulted in the Great Recession, the Great Depression, and Japan's Lost Decade (ushinawareta junen). I should mention that not all crises are the same, the origins can be traced to different sectors or problems and the effects will vary, not every crisis is one that affects the global markets. However there is a pattern of similar events in the run up to a financial crisis. So one can wonder why no one sees them coming and why people by into the belief of never ending price rise each time.