4 ms·

A bubble is the overvaluation of an asset class, or merely...inflation. "Inflation is always and everywhere a monetary phenomenon." And another way: The value

by tgrass 14y ago

A bubble is the overvaluation of an asset class, or merely...inflation. "Inflation is always and everywhere a monetary phenomenon." And another way: The value of any asset as evinced by its price is merely the willingness and ability of someone to pay for it. If you accept the EMH, then you understand we are incapable of seeing the big picture. Something can be valuable to your neighbor without being valuable to you. At the same time, if you do not know when to sell an asset, or know whom to sell it to, then you are a fool to buy it just because the price has risen for the last three weeks. Economics is not accounting. It does not prescribe value.

skylan_q 14y ago
"A bubble is the overvaluation of an asset class, or merely...inflation." Merely inflation? It's much more than that. It's dis-coordination within an economy.
- tgrass 14y ago
  What is inflation?
  - skylan_q 14y ago
    An increase in the money supply in an economy.
  - tatsuke95 14y ago
    It's an increase in the price level. Most of the "printed money" that has been generated by the Fed since 2008 has gone to the financial sector shrinking their balance sheets by something like $3.5 TRILLION (as opposed to the Fed expanding the balance sheet by $1.5TT). That's deflationary. The Fed has been on the gas since 2008 to maintain the price level. As far as the bubble in "tech", it's a misallocation of resources. This is what happens in all the hot sectors (Tech in 1999, Housing in 2005, Tulips in 1700). There's a lot of money chasing returns that are no longer availabe. So they look for riskier assets. It's not that there are no valuable tech companies, just that there aren't enough valuable tech companies. But everyone thinks they've got a winner. Bubbles are hard to predict, hard to stop and hard not to participate in. But one thing I learned from the real estate crash: you don't take advice about the bubble from realtors.
- ryanaAM 14y ago
  A bubble is the overvaluation of something. Overvaluation can only occur if there is surplus value in the market that's not needed in other places. Surplus value means there's more money in circulation than the market needs - That's inflation.
  - skylan_q 14y ago
    Prices get bid up, but price inflation is different from inflation. Price inflation is the increase in prices brought about through the auction mechanism. But in our circumstances, we get economy-wide price increases because of increases in the total stock of money. Price inflation causes money to lose value, so we can't really say there is an overvaluation simply because prices have increased. It could very well be the case that valuation hasn't drastically changed at all, but newer, cheaper money is flooding in which causes price inflation.
  - eli_gottlieb 14y ago
    There's obviously a market in need of that money, though. It's called the labor market. What's going on is that there are profits in the economy without an outlet for making more profits.
- tgrass 14y ago
  Is a home overvalued just because the bank determines it is not safe to offer a mortgage on it? Only to the bank. If I have cash and am willing to pay that amount, the home is reasonably valued/priced.
- tgrass 14y ago
  skylan_q: taking a step back, I'm being a bit liberal with the traditional use of inflation. Inflation is generally reserved for the 'general' price level. I don't believe we are capable of determining the 'general' price level, and the conflicts over various measures of inflation, what to include and how to modify it year to year, to my mind is evidence that it is not wholly agreed upon that we are capable of measuring it. So I assume you are suggesting that a bubble is when an industry is out of sync with the general economy, in terms of pricing and/or growth. I would argue that that is not critical to the notion of a bubble. A bubble is overvaluation of an asset class. To restrict it with dis-coordination would mean a bubble could not occur during hyper-inflation.
  - skylan_q 14y ago
    I'll agree to the above. Thank you for the clarification. I just like to see a little bit of nuance here and there. ;)

by tgrass 14y ago

skylan_q 14y ago

"A bubble is the overvaluation of an asset class, or merely...inflation." Merely inflation? It's much more than that. It's dis-coordination within an economy.

tgrass 14y ago
What is inflation?
- skylan_q 14y ago
  An increase in the money supply in an economy.
- tatsuke95 14y ago
  It's an increase in the price level. Most of the "printed money" that has been generated by the Fed since 2008 has gone to the financial sector shrinking their balance sheets by something like $3.5 TRILLION (as opposed to the Fed expanding the balance sheet by $1.5TT). That's deflationary. The Fed has been on the gas since 2008 to maintain the price level. As far as the bubble in "tech", it's a misallocation of resources. This is what happens in all the hot sectors (Tech in 1999, Housing in 2005, Tulips in 1700). There's a lot of money chasing returns that are no longer availabe. So they look for riskier assets. It's not that there are no valuable tech companies, just that there aren't enough valuable tech companies. But everyone thinks they've got a winner. Bubbles are hard to predict, hard to stop and hard not to participate in. But one thing I learned from the real estate crash: you don't take advice about the bubble from realtors.
ryanaAM 14y ago
A bubble is the overvaluation of something. Overvaluation can only occur if there is surplus value in the market that's not needed in other places. Surplus value means there's more money in circulation than the market needs - That's inflation.
- skylan_q 14y ago
  Prices get bid up, but price inflation is different from inflation. Price inflation is the increase in prices brought about through the auction mechanism. But in our circumstances, we get economy-wide price increases because of increases in the total stock of money. Price inflation causes money to lose value, so we can't really say there is an overvaluation simply because prices have increased. It could very well be the case that valuation hasn't drastically changed at all, but newer, cheaper money is flooding in which causes price inflation.
- eli_gottlieb 14y ago
  There's obviously a market in need of that money, though. It's called the labor market. What's going on is that there are profits in the economy without an outlet for making more profits.
tgrass 14y ago
Is a home overvalued just because the bank determines it is not safe to offer a mortgage on it? Only to the bank. If I have cash and am willing to pay that amount, the home is reasonably valued/priced.
tgrass 14y ago
skylan_q: taking a step back, I'm being a bit liberal with the traditional use of inflation. Inflation is generally reserved for the 'general' price level. I don't believe we are capable of determining the 'general' price level, and the conflicts over various measures of inflation, what to include and how to modify it year to year, to my mind is evidence that it is not wholly agreed upon that we are capable of measuring it. So I assume you are suggesting that a bubble is when an industry is out of sync with the general economy, in terms of pricing and/or growth. I would argue that that is not critical to the notion of a bubble. A bubble is overvaluation of an asset class. To restrict it with dis-coordination would mean a bubble could not occur during hyper-inflation.
- skylan_q 14y ago
  I'll agree to the above. Thank you for the clarification. I just like to see a little bit of nuance here and there. ;)