Economic Bubbles: How Businesses are Affected

The history of capitalism proves that economic bubbles are commonplace. Their emergence is expected where liquid financial markets exist. We may already be on the verge of another economic bubble which can be dire by all measures. Most of the uninformed speculators wildly guess about the next boom and wait for the next major economic bubble and the inevitable collapse. The boom and the collapse cycle of the economy can be predicted by taking in account various markets and their growth. From asset management markets, stock markets, to debt markets, all indicate whether the economy is on the rise or is at the risk of doom.

INDICATORS OF AN ECONOMIC BUBBLE

Certain factors which indicate the probability of an economic bubble are:

Stock Markets

Stock markets play a vital role in creating an economic bubble. It is the first indicator which shows that an economic bubble is impending.

Liquidity

One of the most plausible factors which indicate the rise of an economic bubble is excessive liquidity in the economic systems. Excessive monetary liquidity includes; easy credit facilities, low interest rates, and large disposable income. Economic bubbles mostly occur when there is too much money available against too few assets, which in result causes both good assets and bad assets to appreciate excessively, thus creating an artificial monetary bubble.

Changes in Gross Domestic Product (GDP)

The economy’s current health can be easily determined by looking at the GDP. Increase in GDP of any nation indicates a strong economy.

Comparison of Income with the Cost of Living

Within an efficient economy, the cost of living should be in line with the wages and income earned by people. Increase in cost of living should keep up with the increase in income. If income is not increasing and cost of living keeps on climbing, this indicates the downfall of economy.

Unemployment Rate

The unemployment rate indicates the number of people working against the total labor force of a nation. It is an indication of the rise or decline of economy.

Interest Rates

Interest rates change when the economy is strong or weak. It shows the cost of borrowing money.

Currency Strength

With a strong currency, a country’s buying and selling power with other nation is strong.

 

STRATEGIES TO SAFEGUARD AGAINST A BUBBLE

Businesses need to make strategies to safeguard against the economic bubble and its impending doom. Some of the ways businesses can save themselves when there is economic bubble on the horizon are listed below:

Do Not Put All Your Eggs in One Basket

Never invest all your funds in one place. Always carry a diverse portfolio. When all your efforts and financial resources are tied down to one project or one sector of your business, its failure can lead you to lose everything.

Low Debt Strategy

Businesses should always focus on low debt strategy. With low debts, when things go wrong due to financial collapse, businesses can pay off their debts easily. If a business deals with high debt levels as compared to its assets, when it is time to settle the debts, business will not have anything left over after paying of the debts. Asset to debt ration should always be high.

Keep an Eye on the Indicators

The most important thing is to keep an eye on the financial indicators which show the rise or decline of the economy. If a business ignores the signs of an economic bubble, it is preparing itself for downfall. However, businesses which keep an eye out for the factors and indicators of a financial bubble can create strategies and implement them to cushion the effect of the downfall of the economy.

Low Risk Investments

Businesses should invest in low risk investments so that when an economic bubble bursts, some part of their portfolio is safe from its effect. Low risk investments though yield low profits, but they are still a safe choice.

The most important thing is to look at key indicators of an economic bubble and implement the strategies as soon as there is indication of a decline in economy.