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A deflationary event or.. ? Also, I'm interested in seeing if it's as negative as a bubble or it has positive effects.

closed as off-topic by C. Ross Oct 22 '13 at 12:21

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10

A financial panic is in my mind would be the opposite of a bubble.

A bubble is irrational exuberance -- uncontrolled exhilaration. People will ignore anything negative and exclusively focus on the positive. People are focused on investments that offer huge returns in a short timeframe. If you recall 1999, there were books published about the Dow being at 30,000 by 2010.

A panic is the direct opposite -- people are irrationally fearful. Any negative news is focused on exclusively, and positive things ignored. People are focused on preserving wealth and by pursing "safety". Today, you turn on the radio and people are advertising canned food and gold coins.

  • 1
    Usually a panic is tightly coupled with a bubble. Recognition of the bursting of a bubble causes a rush to get out of the bursting asset class, which is usually disorderly and often becomes a panic. The initial urge to sell the asset is usually rational but can become irrational. – mgkrebbs Aug 8 '11 at 21:35
  • Panics are also a great time to buy assets at low prices, while bubbles are a terrible time to buy assets because they are at high prices. Of course, if you were part of the bubble, chances are you won't have the cash on hand to take advantage of this because you spent it all on overvalued assets... – fennec Feb 7 '12 at 1:01
3

The opposite of an economic bubble is a bubble burst :p!

Jokes aside though, an economic bubble occurs when the economy is in bull market mode and asset prices are growing very fast. It's usually measured by ratio's like price to earnings and the levels of various market indices. So, the opposite would be when valuations are falling very fast or are very low, and price to earnings ratios are low.

This condition is usually a recession. A recession is a market slowdown, generally after a bubble bursts, and severe recessions can become depressions if they last long enough (Great Depression, 1930s).

A bubble is not necessarily negative - stock prices usually rise a lot so paper wealth is greatly magnified. If you can get out in time, you're golden. Similarly, a recession isn't bad for everyone. Some investors keep large amounts of cash waiting for recessions so they can "buy low, sell high". For most people, however, recessions are negative because unemployment increases and some people get fired, and the economy slows down. Asset prices have fallen so their investments are worth less than they used to be (on paper), and people mainly have to bide it out until the market starts growing again.

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