Asset price bubbles occur when prices for a particular asset rise far above the item's real value. Historical examples of asset bubbles include houses, internet stocks, gold, and even tulip bulbs and baseball cards.

Sooner or later, the high 🔜prices become unsustainable ☂and they fall dramatically until the asset is valued at or even below its true worth.

While most economists agree that asset bubbles are a real phenomenon, they don't always agree on whether a specified asset bubble exists at a given time. There is no definitive, universally accepted explanation of how bubbles form.

Let's take a look at two of the most common economic perspectives on the causes of asset bubbles.

The Classical-Liberal Perspective

The accepted mainstream view about central banks, such as the 澳洲幸运5开奖号码历史查询:Federal Reserve (Fed) in the United States, is that we need them to manage 澳洲幸运5开奖号码历史查询:economic growth and ensure prosperity through interest rate ma♛nipulation and other inte♌rventions.

Negative Influence of Central Banks

However, classical liberal economists think the Fed is unnecessary and that its interventions distort markets. This, in turn, yields negative economic and financial consequences. In fact, they see central bank 澳洲幸运5开奖号码历史查询:monetary policies as a prime cause of asset bubbles.

In his book, Early Speculative Bubbles and Increases in the Money Supply, Austrian-school ec♔onomist Douglas E. French writes that when the government prints money, interest rates fall below their natural rate.

This encourages 澳洲幸运5开奖号码历史查询:entrepreneurs to invest in ways that they otherwise would ꩲnot, and fuels a bubble that eventually mus𝐆t burst and force malinvestments to be liquidated.

He also writes, "History clearly shows that it is government meddling in monetary affairs that leads to 澳洲幸运5开奖号码历史查询:financial market booms and the inevitable busts that follow . . . ." Moreover, mainstream economists then deny that financial bubbles occur or claim that the "澳洲幸运5开奖号码历史查询:animal spirits" of market participants are to blame.

Late '90s/Early 2000s Internet Stock Bubble

The internet stock bubble of the late 1990s and early 2000s provides an example of how a central bank's 澳洲幸运5开奖号码历史查询:easy money policy can encourage unwise investments.

According to award-winning financial reporter Peter Eavis, under Fed Chair 澳洲幸运5开奖号码历史查询:Alan Greenspan, "credit growth was rampant through the late '90s, which led to excessive investment by businesses, particularly in high-technology items. This investment led to the Nasdaq boom, but it took only a small uptick in interest rates to cause the whole 澳洲幸运5开奖号码历史查询:technology sector to collapse in 1999 and 2000."

The Keynesian Perspective

The theories of early 20th-century economist John Maynard Keynes form the basis of the well-known Keynesian school of economics. Keynesian ideas are still alive today and are greatly at odds with the Austrian🐼 ideas mentioned above.

Whereas Austrian economists believe that government interventions cause periods of economic boom and bust known as business cycles, Keynesian economists believe that 澳洲幸运5开奖号码历史查询:recessions and 澳洲幸运5开奖号码历史查询:depressions are unavoidable and that an activist central bank can mitigate fluctuations in the 澳洲幸运5开奖号码历史查询:business cycle.

In his famous book, The General Theory of Employment, Interest and Money, Keynes asserts that a large proportion of individuals' positive activities depend on spontaneous optimism rather than on some specific mathematical expectation.

He adds that if the animal spi🐈rits, which ☂French later alluded to, are dimmed and this spontaneous optimism falters, then enterprise would die.

Keynes also writes that fears of loss may be just as unreasonable as the previous hopes for profit. His animal spirits thus refer to the tendency for investment prices to rise and fall based on human emotion rather than 澳洲幸运5开奖号码历史查询:intrinsic value.

The Heady 1920s

The boom years before the 澳洲幸运5开奖号码历史查询:Great Depression exemplify Keynes' animal spirits concept. In the 澳洲幸运5开奖号码历史查询:stock market boom that preceded the Depression,ꦡ suddenly everyone was an investor.

People thought the market would always go up and 🐻that thereꦬ was no risk in investing. The herd mentality of ignorant investors contributed to the run-up in stock prices and to their subsequent collapse.

The 2011 Gold Bubble

There is disagreement about whether there was a gold bubble in 2011. Investopedia analyst Arthur Pinkasovitch, for example, believed that a long-term change in 澳洲幸运5开奖号码历史查询:fundamentals drove up 澳洲幸运5开奖号码历史查询:gold prices slowly but steadily.

However, there is a compelling argument that the gold bubble was real and that the "everything is different now" philosophy had no relationship to rising gold prices, just as it turned out with the aforementioned internet stock bubble and the growing housing price bubble in 2005.

His🍰torically, gold prices have largely been flat orܫ grown incrementally. A spike to $615 an ounce occurred in 1980 followed by a crash to around $300 an ounce, where prices more or less remained until 2006.

After that, gold prices rose higher than $1,900 an ounce in 2011 before falling down to the $1,600 range in 2012.

At the time, the Wall Street Journal reported that gold returns over the previous five years were a compounded 25% per year, far above 澳洲幸运5开奖号码历史查询:average returns on most other assets.

Animal spirits might have driven gold prices higher, but so might central bank꧅ policies that contributed to (or at least failed to control) econo♏mic uncertainty and instability.

Uncertainty tends to make gold sought after because it is perceived to be a safe, 澳洲幸运5开奖号码历史查询:inflation-protected store of long-term value.

The Bottom Line

Any number of factors, from easy money or 澳洲幸运5开奖号码历史查询:irrational exuberance to 澳洲幸运5开奖号码历史查询:speculation or policy-driven 澳洲幸运5开奖号码历史查询:market distortions, may have a hand in🎐 the inflation and bursting of bubbles.

Purveyors of each school of thought think that their analysis is the correct one, but economists have yet to reach a consen💟sus on the truth.