In the early 1600s, tulip mania hit Holland hard. The elegant and exotic flower, which had recently arrived to the tiny European nation via trade routes from the Ottoman Empire, was so prized by the aristocracy that the demand for the rare bulb caused prices to skyrocket.
By 1636, the tulip was being traded as a commodity on several Dutch stock exchanges, leading to widespread market speculation [source: Investopedia]. People spent exorbitant sums to get their hands on a bouquet of tulips in order to "flip" them to an even bigger sucker. Then one day, without explanation, the pool of suckers suddenly dried up. Mass panic ensued and prices fell through the floor as people became more and more desperate to sell [source: Frankel].
The Dutch tulip craze is one of the earliest recorded examples of an economic bubble. A bubble is created when any asset -- be it tulips, homes or Internet startups -- is allowed to irrationally and unsustainably increase in value [source: Cronin].
In the late 1990s, the United States witnessed the inflation and subsequent deflation of the dot-com bubble, marked by outrageous market speculation on the value of unproven Web companies. Most recently, the global economic crisis was spurred largely by the collapse of the housing bubble after a meteoric increase in the price of real estate.
From a purely economic perspective, bubbles aren't necessarily bad or good [source: Koba]. They're just natural extensions of free market forces. Humans, for better or worse, tend to flock wildly to the latest hot idea. When speculation on that idea reaches a tipping point, the market corrects itself, often with devastating results.
The real trick with bubbles is predicting which will be the next one to pop. If the goal of investing is simply to buy low and sell high, then you want to catch a bubble right when it reaches its peak, then sell before everyone else realizes the same thing.
Keep reading as we discuss what many analysts and experts believe are the next big bubbles to go bust.
Credit and Debt Bubbles
By 2010, consumer credit card debt in the United States will reach $1.177 trillion [source: NPR]. It's not hard to understand why: As of July 2008, a staggering 14.5 million Americans don't have a job and 46 million don't have health insurance [sources: BLS and NCHC]. As the bills pile up, desperate families turn to the only credit available: plastic.
Many people don't have the cash to make even the minimum payments on their credit cards, causing credit card defaults to reach a 20-year high [source: NPR]. While this will undoubtedly mean record numbers of personal bankruptcies, it could also bankrupt the entire economy. Here's why.
One reason the damage from the housing bubble was so widespread was that mortgage debt was securitized (transformed into a tradable asset) and sold to investors. As homeowners defaulted on their mortgages, lenders took huge losses, as did the global investors -- including some of the largest investment banks -- who had purchased these mortgage-backed securities.
The same ripple effect will occur when millions of Americans default on their credit card payments. Credit card debt has also been massively securitized. Securities backed by consumer credit card debt represent a $365 billion market [source: Huffington]. When those securities crash, expect the rest of the market to follow.
In other news, as the stock market careened ever downward, hordes of spooked investors flocked to safer pastures: the bond market. In the rush to buy T-bills -- traditionally one of the safest, if lowest yielding investments around -- investors have excessively inflated T-bill prices.
The price of a bond is inversely proportional to its yield [source: Investopedia]. So the more the price goes up, the less you make when the bond matures. This simple mathematical truth could mean big-time losses for bond investors. Investment guru Warren Buffet thinks the deflation of the "treasury bond bubble of late 2008" will be as bad, if not worse, than the housing bubble [source: Krantz]. Gulp.
To make matters worse, some economists fear that the Fed is printing too much money to finance its generous stimulus packages and corporate bailouts. When and if that money begins to circulate through the economy, there will be a glut of dollars that will increase prices. You know this as inflation.
What does this mean to bond investors? When bonds mature, not only will their yields be close to zero, but they will be cashed in for dollars that are worth a fraction of their original value. In other words: loss, loss, loss.
The "Green" Bubble
Back in 2007, so-called green investing became all the rage. With mutual funds like the Sierra Club Stock Fund and the Portfolio 21 Fund, investors could spread their dollars among environmentally friendly corporations and startups that develop alternative energy technologies. A few green technology companies saw their stock prices rise 150 percent or more over the 12 months between July 2006 and July 2007 [source: MarketWatch].
When stock prices soar into the stratosphere, it's a sure sign to many economists that an unsustainable bubble is forming. Some of those economists claim that the green bubble is being inflated by the federal government [source: Brady].
As part of the American Recovery and Reinvestment Act, the U.S. Congress voted to invest nearly $30 billion in programs like a "smart" national electricity grid, the "greening" of federal buildings, low-income home weatherizing and green job training [source: WhiteHouse.gov].
In The New Republic magazine, conservative commentators Ted Nordhaus and Michael Shellenberger claim that the green bubble has already been popped by the current global financial crisis. The authors cite a survey from the Pew Research Center for the People and Press, which found that the number of Americans who listed the environment as their "top priority" dropped from 56 percent to 41 percent from January 2008 to January 2009 [source: Nordhaus].
If the green bubble has indeed sprung a leak, it could mean widespread failure for many aspiring green technology companies, much like the victims of the dot-com bust. But is that necessarily a bad thing? Newsweek magazine columnist Daniel Gross says, "No."
The dot-com boom led to heavy commercial investment in high-speed networking infrastructure, online payment systems and cyber-security. Even after the dot-com collapse laid waste to thousands of companies, that infrastructure was still in place to pave the way for the second wave of success stories like Google and Facebook [source: Gross].
Perhaps the same thing will happen with the green bubble. If a dozen new car companies spring up in a race to build the most fuel-efficient electric car, most of them will probably fail. But as Gross jokes, who's going to care once we're cruising around in a stylish sedan that gets 300 mpg (127.5 kilometers/liter) on the highway and 258 (109.6 km/l) in the city?
The Higher Education Bubble
Over the past 25 years, the average price of a four-year college education has risen 440 percent -- more than four times the rate of inflation [source: Cronin]. At the same time, more and more Americans have lined up to pay these skyrocketing tuitions. From 1987 to 1997, undergraduate college enrollment increased 14 percent. From 1997 to 2007, the increase was 26 percent [source: NCES].
But where is all of that tuition money coming from? The short answer is financial aid. The federal government offers both low-interest Stafford loans and Pell Grants, which do not have to be repaid. But even those loans and grants aren't enough to cover the four-year cost of tuition, books, room and board at four-year colleges: nearly $47,000 for public schools and $100,000 for private colleges and universities [source: Kristof]. Pell grants, for example, max out at $5,035 a year [source: Cronin].
For many students, the only option left is a private student loan. These loans are largely unregulated and carry much higher interest rates than Federal loans. In fact, commentator Kathy Kristof of Forbes magazine actually compares the tactics of private college lenders to those employed by the subprime lending market. Kristof accuses private lenders -- and college admissions offices -- of tricking naïve students into signing up for loans that they don't fully understand. Some of these loans have "teaser" interest rates that "adjust" after graduation to levels as high as 18 percent [source: Kristof]. Compare that to the highest Stafford loan rate of 6.8 percent [source: Stafford].
What this means is that millions of college students are entering an extremely tight job market saddled with tens of thousands of dollars in high-interest debt. That's not the way to start any career.
Even graduate and professional degree earners find themselves saddled with debt that they can't possibly repay. According to the Law School Admission Council, the average law school debt is $100,000 [source: LSAC]. Multiply that by a double-digit interest rate and that debt becomes very big, very fast.
There is evidence that the college enrollment bubble is already bursting. Two-thirds of private U.S. colleges expect lower enrollment in 2009 than 2008. They've been forced to freeze employee salaries and cut some benefits [sources: Hass and Fain].
For lots more information on economic topics, check out the links on the next page.
The Next Economic Bubble: Author’s Note
There is no shortage of economic doomsday reports in the media. The hardest part about researching this article was filtering through all of the bad news and apocalyptic financial forecasts to find the booms with the most potential for going bust. I was particularly interested in the bursting of the higher education bubble. It was fascinating to read dissenting opinions about the value of a modern college education compared to its cost. There are plenty of experts out there, inside and outside of academia, that question the alarming debt many students carry to obtain a college degree, particularly in such a tight job market. As a father of three, my hope is that none of these bubbles burst anytime soon.
- Brady, Jeff. "Could Energy Innovation Create a 'Green Bubble?" National Public Radio. May 1, 2009 (Aug. 12, 2009) http://www.npr.org/templates/story/story.php?storyId=103631430
- Bureau of Labor Statistics. "Employment Situation Summary." Aug. 7, 2009 (Aug. 14, 2009) http://www.bls.gov/news.release/empsit.nr0.htm
- Cronin, Joseph Marrr and Horton, Howard E. "Will Higher Education Be the Next Bubble to Burst?" The Chronicle of Higher Education. May 22, 2009 (Aug. 12, 2009) http://chronicle.com/article/Will-Higher-Education-Be-the/44400/?key=QGIlJAY4YHNFZ3U/fidMLiQCOnQpIkoqZCUUYHgaZ1pQ
- Fain, Paul. "Private Colleges Freeze Salaries and Slash Benefits, Survey Finds." The Chronicle of Higher Education. Aug. 12, 2009 http://chronicle.com/article/Private-Colleges-Freeze/47984/
- Frankel, Mark. "When the Tulip Bubble Burst." BusinessWeek. April 24, 2000 (August 14, 2009) http://www.businessweek.com/2000/00_17/b3678084.htm
- Gross, Daniel. "What the Green Bubble Will Leave Behind." The New York Times. June 29, 2008 (August 12, 2009) http://www.nytimes.com/2008/06/29/opinion/29gross.html?_r=1
- Hass, Nancy. "Enrollment to Drop at a Third of Private Colleges, Survey Says." Bloomberg. July 20, 2009 (August 14, 2009) http://www.bloomberg.com/apps/news?pid=20601103&sid=aYDoGp2XZkUo
- Huffington, Arianna. "The Credit Card Crisis: The Next Economic Domino." The Huffington Post. March 27, 2009 (August 12, 2009) http://www.huffingtonpost.com/arianna-huffington/the-credit-card-debt-cris_b_169657.html
- Investopedia. "Bond Basics." (August 12, 2009) http://www.investopedia.com/university/bonds/bonds3.asp
- Investopedia. "Dutch Tulip Bulb Market Bubble." (August 14, 2009) http://www.investopedia.com/terms/d/dutch_tulip_bulb_market_bubble.asp
- Koba, Mark.. "The Next Economic Bubble to Burst? Take Your Pick." CNBC. February 24, 2009 (August 12, 2009) http://www.cnbc.com/id/29348325
- Krantz, Matt. "Don't get caught if the Treasury 'bubble' bursts." USA Today. March 30, 2009 (August 12, 2009) http://www.usatoday.com/money/perfi/columnist/krantz/2009-03-30-treasury-bubble_N.htm
- Kristof, Kathy. "The Great College Hoax." Forbes Magazine. January 14, 2009 (August 12, 2009) http://www.forbes.com/forbes/2009/0202/060.html
- Law School Admission Council. "Repayment: An Overview." (August 14, 2009) http://www.lsac.org/Financing/financial-aid-repayment.asp
- MarketWatch. "Beware of a 'green' bubble." July 7, 2007 (August 12, 2009) http://articles.moneycentral.msn.com/Investing/Extra/BewareOfAGreenBubble.aspx
- National Center for Education Statistics. "Do you have information on college enrollment?" (August 14, 2009) http://nces.ed.gov/fastFacts/display.asp?id=98
- National Coalition on Health Care. "Health Insurance Coverage." (August 14, 2009) http://www.nchc.org/facts/coverage.shtml
- National Public Radio. "The Next Bubble to Burst?" Planet Money. March 24, 2009 (August 12, 2009) http://www.npr.org/blogs/money/2009/03/the_next_bubble_to_burst.html
- Nordhaus, Ted and Shellenberger, Michael. "The Green Bubble." The New Republic. May 20, 2009 (August 12, 2009) http://www.tnr.com/politics/story.html?id=6cd5578a-85ab-4627-b793-680ea8d44c7f&p=1
- StaffordLoan.com. "Stafford Loan Interest Rates." (August 14, 2009) http://www.staffordloan.com/stafford-loan-info/interest-rates.php
- Yahoo! Finance. "Interactive Chart: Dow Jones Industrial Average" (August 14, 2009) http://finance.yahoo.com/echarts?s=%5EDJI#chart2:symbol=^dji;range=5y;indicator=v
- WhiteHouse.gov. "Energy & Environment." (August 14, 2009) http://www.whitehouse.gov/issues/energy_and_environment/
The Next Economic Bubble: Cheat Sheet
Stuff you need to know:
- A bubble is created when any asset -- be it tulips, homes or Internet startups -- is allowed to irrationally and unsustainably increase in value.
- From a purely economic perspective, bubbles aren't necessarily bad or good. They simply signal the extreme variations of natural market forces.
- Credit card debt is one of the bubbles that could potentially burst. As millions default on their credit card payments, the effects could spread to the secondary markets, where the world's largest banks have invested hundreds of billions in securitized credit card debt.
- Environmentally friendly companies and services benefitted from a boom in "green" investments and a rising interest in protecting the environment. With the economic collapse, fewer investors and average citizens list the environment as one of their top priorities.
- Higher education is another potentially dangerous bubble. The rising cost of college has forced millions of students to take out private loans in addition to Federal loans. These private loans carry higher interest rates that could spell trouble in such a tight job market for recent graduates.
Now test your knowledge with these quizzes!
- Dollars and Sense: Recession Quiz
- The Top 25 Questions of 2009
- The Ultimate College Financial Aid Quiz
- The Ultimate Saving Taxes on College Debt Quiz
- Eye on the Money: Test Your Debt Knowledge
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