Were the 1990s an economic bubble?
Posted by John Irons at December 06, 2002 11:56 AM
I've recently heard several people refer to the 1990s' economy as a "bubble." The latest being Lester Holt on CNN this morning. I think this is a bad misuse language.
Financial markets can probably be described as a bubble, which then burst. However, the real economy showed no real "popping" of a bubble. Real GDP might have slightly declined with the mild 2001-02 recession; but, there was no major decline as you'd expect to see with a bubble.
I think better language would be that the high growth rates of the late 1990s were at most "unsustainable." (Although the sustainability of the 1990s boom is debatable as well.)
Below are graphs of real GDP as well as the NASDAQ composite index from 1990 to the present. The NASDAQ shows what a bubble looks like. The GDP graph clearly shows the recessions of the early 1990s and the 2001-02 recession - but it looks nothing like a bubble.
source: NIPA Data
source: quote.com
Posted by John Irons at December 06, 2002 11:56 AM
It would seem plausible that the aggressive reductions in interest rates by the Fed has made this an atypical bubble, putting off the reductions in real GDP for the future as consumers get themselves into more and more debt now. But surely bubble refers to the market, not the real economy. Tulips in Holland are called a "bubble" because of what happened to the prices of tulips, not on what happened to GDP.
Is this the correct way to think of it:
GDP = Income, and there are 4 components to income: wages, rent, interest, and profits. Profits go to both the owners of private businesses and to public companies. The stock market is a claim on the current and future profits of public corporations (and only current profits are included in GDP).
So I guess there's no reason for the stock market to mirror GDP although I'm wondering what percentage of GDP is represented by profits?