Things You Need to Know About Credit Bubble

The Forbes Magazine contributor Jesse Colombo published his article online warning the republic for a credit bubble in relation to its high property values. On January 14, 2014, MAS (Monetary Authority of Singapore) responded to Colombo’s article. MAS assured the public and the investors that the financial system of the republic is healthy and strong. MAS stressed that the property market here is steadying while the household financial statements are sturdy. markets_1980043b

If you are not familiar with the term “credit bubble”, this is the perfect time to understand its basics. Here are the things that you need to know about credit bubble:

What is a Credit Bubble

Credit bubble is also called economic bubble, market bubble or financial bubble. Credit bubble is characterized by the outpouring in asset prices that are higher than its fundamental or intrinsic value. The presence of a bubble is hard to spot but you will know it once there is an abrupt drop in prices. The drop is known as the bubble burst or crash.

Impact of Credit Bubble

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The impact of credit bubble depends on the school of thought you adhere. In Austrian economics, credit bubbles have negative impact because they can be the source of disproportion of resources. In Mainstream economics, they believe that credit bubble cannot be prevented and cannot be pricked; any attempts to prick the bubble immaturely can lead to financial crisis. Robert Wright contends that bubbles can be recognized before the event with certainty. Irving Fisher said that the crash or burst can abolish a big amount of wealth.

Effect of Credit Bubble on Spending

The credit bubble can affect the spending habits. For example, if you have overvalued assets, you are inclined to spend more because you feel richer. When the bubble eventually erupts, those who clutch to their overvalued assets will feel the reduction of their wealth so they cut their spending. If spending is cut, it will surely hinder economic growth or worse, it can aggravate economic slowdown.

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