Discussion Question #12

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CH 19

THE NEXT GENERATION OF BUBBLES

For more than a decade the rapid inflation and subsequent bursting of several bubbles have defined the American economy. From dot-comsto thesubprimecrisis, optimistic financial forecasts combined with overeager investors worked to create moments of economic euphoria before the bottom eventually dropped out. In the case of the 2008 meltdown, the bursting of the American real estate bubble incurred consequences that reverberated around the globe. Three years later, some economists worry that the world's financial leaders have still not learned their lesson.

Analysts have outlined a number of areas where price increases don't mirror economic fundamentals. For instance, the price of gold has risen 464% since 2001 thanks to the increasing prominence of a trust that allows investors to speculate on the commodity. Some parts of the tech world also appear to be inflating disproportionately. The movie streaming serviceNetflixsaw its stock price skyrocket 304% over 2010 and 2011, 79 times larger than the earnings per share over the same time period. Economists worry about social media companies most of all, however. After all,Facebookmakes almost all of its money onclickableads, which some don't think translates into a venture worth $65 billion.

Worried financial pundits point the blame at the Federal Reserve for fostering a bubble culture due to theirultralowinterest rates. While the Fed remains committed to keeping rates low while the economy bounces back, some see the flood of money as little more than fuel for the bubble fire. Even China has requested an interest rate increase from the Fed in order to relieve its growing inflation problem. Others have blamed the organization for inciting the recent jump in commodities costs that has led to price increases on oil and food worldwide. The Fed cited "rising global demands and disruptions in global supply" in response. While the Fed may be correct on that point, it has still not addressed the alleged presence of new bubbles in the world economy. Only time will tell if its inaction will have global repercussions or if the world's outspoken economists are incorrectly convinced that the sky is falling.

Questions:

1. What key economic principles can we learn from "bubbles"?
2. Is it time for the Federal Reserve to increase interest rates? Why or why not?