Today we’re talking booms vs. busts vs. bubbles. This is a bit more theoretical than our advice tends to be. But I promise it’s important! You need to understand the difference between the two if you want to make flexible, resilient, realistic medium- to long-term plans for yourself.
And yes, this topic is dry. So I’ll do my best to blast some cool ranch flavor dust on it whenever possible. In fact, let’s start now!
Q: How is the free market under capitalism like a cock?
A: It expands and contracts, screwing everybody it can in the process!
Me, thinking of this joke in the shower: “I am amazing. I have the glowing-est brain. Our blog deserves every award it has ever won and more. Unless I read that joke somewhere, semi-forgot it, then accidentally stole it???”
If this joke belongs to you, I apologize. Tell it to the FBI agent wire-tapping your home’s smart devices, he’ll put a note in my permanent record.
What are booms?
Booms are periods of positive economic growth. People use the word “booms” most often when the growth is especially sudden or strong.
Regardless of how they’re structured or governed, economies never grow in a rock-solid, totally predictable way. That’s because markets exist to serve the needs of human beings. We’re strange and fickle primates who live in a constant state of low-grade chaos! (And sometimes we set up a new email address just to get another free three-month subscription to high-grade chaos.)
I mean, think about it. One minute, Game of Thrones is the only thing we’re talking about. It’s the Dragon Queen of Pop Culture, infinitely memed and referenced, poised to be remembered as one of the greatest television shows of all time. The next minute, it was so offensively bad that it disappeared itself from our collective zeitgeist practically overnight.
That’s kinda humanity in a nutshell. Unpredictability is our specialty!
What are busts?
Oh, so y’all weren’t listening when my boy Isaac tried to tell you “What goes up must come down”?
After booms come busts—periods of stagnant or negative economic performance.
A normal drop is called an economic contraction, a market correction, or a financial recession; an extreme fall is called a financial depression.
Together they’re called the boom and bust cycles. Also known as bull markets and bear markets. They happen all the time. If you’re old enough to be reading a personal finance blog that comes out swinging with a dick joke, you’re old enough to have seen at least two already in your lifetime. Inshallah, you’ll see many more!
Are busts avoidable?
A surprisingly tricky question! Even Nobel Prize-winning economists can’t fully agree.
On one hand, you can trace the origins of most individual busts to bad behavior by certain individuals, industries, or governments.
Most historians point to the bankruptcy of financial firm Lehman Brothers as a catalyzing moment for the Great Recession of 2008. It was caused by the collapse of the sub-prime mortgage industry, credit default swaps, governmental deregulation, and a bunch of other boring shit I ain’t in the mood to talk about—suffice it to say it was all greedy people acting like assholes.
It is both possible and necessary to trace that bad behavior and regulate it so that it can’t return to wreck our shit a second time.
However, most economists think busts are inevitable. I am trying with all my might not to use the phrase “fractional reserve lending” because it makes me want to slam this site’s tab shut even though I’m the one writing it. So let’s put it like this…
Trying to stop a bust is like trying to never be hungry. In theory, there is a precise amount of food you could eat, at super specific times, so that you would never feel either too hungry or too full, and you could exist in a perfect, neutral non-hunger space forever and ever. But that level of precision is just not realistic, given that our activity levels, meal preferences, ingredient sources, and daily schedules change all the dang time. That make sense?
Can you predict booms and busts?
Another interesting question with an interesting answer!
I would say “yes AND no.”
Between 1854 and 2020, the American economy went through 34 cycles of booms and busts. If you average them all out, a rough pattern emerges: about four years of boom, followed by about one year of bust.
It’s a predictably unpredictable gait. Exactly the way I walk if I’ve had several Long Island iced teas: step, step, step, step, STUMBLE, step, step, step, step, STUMBLE. I may face-plant at some point? But odds are better that I’ll get home just fine!
But for exactly that reason, you cannot ever truly predict how the market will behave. It’s foolish to try to “time the market,” or wait to make a big move because you’re sure you know when the market will stumble.
Averages are not assurances! Within those averages are huge outliers, many of them recent. The Great Recession was unusually terrible. It took us a decade to army-crawl out of it. And the recent pandemic came into global markets like Jesus into the temple, flipping the moneychangers’ tables ALL THE WAY OVER, whippin’ motherfuckers left and right. That’s why it’s wise to make decisions knowing that booms and busts will happen, but unwise to try to predict them or harness their power. You just can’t know what life has in store.
What’s a bubble?
A bubble is a unique kind of boom characterized by huge, sudden, unsustainable growth in economic activity. It’s usually localized, affecting only one industry or product at a time instead of the whole economy.
With bubbles, there’s an element of human psychology mostly absent from regular booms. People are excited about something. They’re buying something based not on need, but on its perceived value.
In other words: hype. The products at the center of bubbles are nothing but monetary fads and passing crazes.
Ye olde historical examples
Do you remember learning about the Dutch Tulip craze of the 1600s? If you don’t, here’s a refresher: for reasons that are fucking inexplicable and make no goddamn sense, ye olde Dutch ppl got so rock-hard for tulips that the price of a single tulip bulb rose to cost more than the average skilled worker made in a year.
A more delightful example is the Beanie Baby craze of the 1990s. Again, for reasons that are fucking inexplicable and make no goddamn sense, all of our moms got so rock-hard for Beanie Babies that the price of a single $5 children’s toy rose to cost more than the average skilled worker made in a year.
Wow. Crazy how history be cyclical like that!
I mean, was Tabasco the Bull cute? Sure. But a price tag of $6,000?
Why do I need to learn the difference between booms and bubbles?
It’s incredibly important to know the difference between regular booms and economic bubbles. Y’all think I write this shit for my health?!
Booms are something you may want to participate in. It’s like a cool party. Sure, it’s a shame you’re joining late—but if you go now, you might still have a great time! If you know the economy in general (or even one particular industry) is booming, you could leverage that knowledge to inform all sorts of medium- and long-term plans.
- What other jobs are available to you?
- How hard can you push when asking for a raise?
- How should you allocate your 401(k) and/or IRA investments?
- What’s a good time to make major decisions, like buying a house or having a child?
Conversely, a bubble is something to avoid at all costs. It’s like when an old friend from high school invites you to a party, but psych! It’s not a party, it’s a three hour MLM sales pitch. It’s something you should run away from. At top speed. Preferably while screaming.
Depending on your involvement, bubbles can be life-destroyingly bad. You might be one of a few to make a fortune overnight—but you’re much more likely to lose your shirt.
And not in the fun “spring break, woo–hoo!” way.
What’s the easiest way to tell booms and bubbles apart?
The easiest way to judge the difference between booms and bubbles is to ask yourself: do the people investing in this product actually need or use what they’re buying?
If the answer is yes, then it’s probably a boom. Basic staples like food or energy don’t really boom because the demand is consistent and real.
If the answer is no, then beware the bubble! Random “hot” investments like cryptocurrency and precious metals bubble so much I could boil pasta in them. People aren’t buying silver because they’ve gotten super into metallurgy or whatever. They’re squatting on it because they plan to sell it to someone else for a higher price.
That’s not investing; that’s speculating. And it’s an investment technique we will never advocate. You’re unlikely to be one of the handful of “winners.” And even if you are, you’re making money in a way that’s unnecessarily destructive, both to the economy and the individuals it exists to serve. Recessions kill people. That ain’t how we do it.
Now pardon me while I add “eat pasta boiled in gold” to my list of life goals. What kind of pasta do y’all think it should be? My first instinct was lasagna, but I’m open to suggestions!
Booms and busts are fickle beasts
Confusingly, the same thing can be both at different points in history! Housing is a great example.
The Great Recession was triggered in part by people and institutions buying tons and tons of houses. Did they actually live in the houses? Naw. They just bought them because they were on sale! The need was artificial, so the demand swung wildly up… and up… and up, until the bubble burst into spectacular, ultra-flammable smithereens.
But right now, the housing market is undergoing a boom that’s (pretty much) totally legit. The average first-time homebuyer has historically been in their low thirties. Guess who just hit that age en masse? That’s right: America’s largest generation and favorite dejected, half-dead punching bags, Millennials!
There aren’t enough houses to go around, so their prices are rising. The need is real, so it’s booming, not bubbling.
Asset diversification is the spice of life
And we do mean “spice” in the Dune sense. Always.
The easiest way to avoid the fallout from a bubble or a bust is to invest in diverse assets. That means having a little money here, a little money there. We explain diversification in greater detail (and through the requisite pop culture lens) here.
People who only invest in stocks lose their lunch when the market dips. People who own only real estate go bankrupt when home prices drop.
Oh, how I laughed and laughed at the people who bought up tons of real estate to build an AirBNB empire, only to see it collapse during the pandemic. I’ve got no sympathy for greedy people who put all their eggs into a flimsy-ass basket held together with “live, laugh, love” signs and gentrification.
The best investment can be yourself
If you’re not ready to be investing-investing yet, that’s okay! Pretty much everyone starts life without the means or stability to invest money. It doesn’t mean you’re too far behind or doing it wrong.
We’re here to remind you that investing in yourself is always an option.
Learning new skills, meeting new people, and keeping yourself sane and happy are all excellent investments you may choose to make instead of (or in addition to) traditional investing. And that’s something you can do at any stage of life.
If more crazy stuff happens and everything we know about finance changes, you need to be your own best, most diversified asset. Give yourself the skills and experiences you need to stay flexible, adaptable, and competitive in any market.
You don’t want to end up with the world’s most expensive, most useless Beanie Baby collection.