How to Spot the Next Asset Bubble Before it Pops

Asset bubbles can be tricky to spot unless you know which details to watch for. Here's what inflates bubbles and how to tell they're inflated.

If people are taking on debt, they must create enough money to maintain growth when the borrowing ends. Photo by Marc Sendra Martorell on Unsplash

The economy is a complex topic, and attempts to manage it are poorly understood. However, ordinary people feel an economic downturn’s consequences viscerally. Understanding how bubbles form and why their pops are so painful is the key to spotting possible bubbles early.

Throughout The Origin of Financial Crises, George Cooper builds on Hyman Minsky’s Instability Hypothesis to explain unreason’s role in financial markets. Near the end, Cooper writes:

“Hyman Minsky said ‘stability creates instability’ referring to our tendency to build up an unsustainable stock of debt in times of plenty only for that debt to then destroy the times of plenty.”

It’s a succinct summary of how the financial industry sows the seeds for its own booms and busts. Minsky’s thoughts also explain how to find the most likely candidates for the next economic bubble.