Standard Of Living Bubble
Categories: Econ
All around the economist's shop, the monkey chased the weasel...
Bubbles grow...then pop. That’s all good and fun for soap bubbles and bubblegum. Not so great for standard of living.
The standard of living bubble is the idea that people are living beyond their means for longer than a short-term period. It’s not sustainable, and requires going into debt. Think: credit card debt, personal debt, auto debt, and even mortgage debt.
If people are living beyond their means for an extended period of time, it’ll eventually catch up with them and collapse. All that debt adds up, and if your income isn’t rising to cover it, you’re going to find yourself in a pickle. Well, a bubble. And a pickle. Maybe bankruptcy, too.
While this could happen to anyone, generally people with good credit scores don’t end up in standard of living bubbles...you know, people with a good record of financial responsibility with debt. That means lenders are likely lending to borrowers with bad scores, maybe when they shouldn’t.
But...why? Well, ask the lenders that caused the Great Recession of 2008 that question. Long story short: they packaged a bunch of low-rate mortgages (borrowers with bad credit) into pretty packages with bows on top and pretended they were highly rated mortgages (borrowers with good credit). And they made bank doing it. And then got bailed out for doing it, too.
Borrowers, lenders, regulators...everybody sucks here. They all contributed to the "pop."
Related or Semi-related Video
Finance: What is a Bubble?5 Views
Finance allah shmoop what is ah bubble All right well
this is a bubble See what happened there got bigger
and bigger and bigger And then it popped and here's
the stock market from about nineteen Ninety two until about
two thousand It got bigger and bigger and bigger And
then it popped And yet was a bubble not just
a big fat bull market It was a crazy ludicrous
tulip mania Kind of time like start ups with almost
no revenues trading and billions of dollars Yep And tulip
mania That was a really thing One tulip sold for
forty grand go figure wasn't like if you ate it
you lived forever So yeah it was a bubble So
what caused the ninety nine bubble Well greed and it
wasn't good At least for some The internet had come
along It was a new thing consumers by the millions
could download in the privacy of their homes Art films
Yeah That's what we'll call them art films by the
terabyte money was flowing from silicon valley investors into startups
at record pace hoping to take advantage of this new
amazing internet thing and the valuations of companies got higher
And higher and higher Nasdaq went up some four hundred
percent in just half a dozen years and the blessed
cos traded at one hundred times trailing revenue not earnings
but revenue So if you think about the idea that
if you invest a dollar and you want to get
more than that back and that dollar comes from profits
of companies than one hundred times revenues cos we're probably
something like five hundred times earnings or more So for
one hundred dollars oven investment you've got like a dollar
of revenues in twenty cents of potential earnings Like maybe
a a decade later maybe yeah that's a bubble and
it burst At least you don't have that danger with
actual tulips or bitcoins Yeah they take bitcoins when you
buy tulips Would be kind of a good marriage there