Shocks, Crises, and False Alarms

CHAPTER 16 Learning to Love and Live with Bubbles

Between 1989 and 1993 the price of a breeding pair of emus, large birds heralded as the “new red meat,” went from a few hundred dollars to $28,000. In the mid-2010s, the fracking rig count went from a few hundred to well over a thousand amid talk of a new energy market. In the late 1990s, against the backdrop of a so-called new economy, the tech-heavy Nasdaq equity index shot up nearly 90% in fewer than five months.¹ And toward the end of the 1920s, equity valuations reached a multiple of over 30 times earnings.²

These are all examples of bubbles: unsustainable trends that build over time and typically deflate rapidly. They also have very different macroeconomic consequences—which is what ...