Friday, February 21, 2020

Why Some Financial Bubbles Are Necessary Economic Disasters

The history of the worldwide economy is punctuated by financial bubbles. They happen more often than we think. 

Fortunly’s infographic below provides a comprehensive overview of the formation and destruction of financial bubbles around the globe over the centuries.

The craziest example is the boom of the tulip market in the Netherlands in the 1630s. The product, a Turkish import, took the Dutch society by storm because of its unique variety of colors. The unusual characteristics of the flower made it an extremely desirable commodity at the time.

The price of the most expensive tulips matched that of a house. Tulip value surged almost 60 times in about a year and a half before hitting rock bottom in just a couple of months. After the dust settled, the most enthusiastic investors realized they traded the roof above their heads for mere flowers.

Moreover, Railway Mania, which happened in the United Kingdom in the 19th century, led to a major stock market crash after years of speculation. Fifteen years after the creation of the first commercial passenger railway linking Manchester and Liverpool in 1830, the British government authorized the construction of about 3,000 miles (more than 4,800 kilometers).

Half of the total investment that went to the railway during this period, accounted for 7% of the country’s GDP. The investor base grew rapidly, since the stocks could be bought with only a 10% deposit. Then, in 1850, railway stocks dropped significantly.

But, although financial bubbles are devastating to individual lives and the economy as a whole, they are not always bad for us. Yes, economic bubbles do negatively impact the finances of many, but sometimes they leave useful remnants behind that positively impact the economy in the long-run.

Unlike the explosion of tulip enthusiasm in the Netherlands, the railway development in the UK was transformational. It gave the country a network of 6,000 miles of tracks to fuel the industrial revolution, and the rest is history.

To learn more about the good and the bad of past financial bubbles, check out the infographic below!


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