Question

To see the impact of the bubble in internet stocks on household wealth, plot on a monthly basis since 1980 the NASDAQ stock index (FRED code: NASDAQCOM) on the left axis and the market value of nonfarm nonfinancial corporations (FRED code: MVEONWMVBSNNCB) on the right axis. Comment on the impact of the bursting of the bubble on this measure of equity wealth. Aside from the NASDAQ decline, what else might have caused it to drop?

Answer 1

Stock market bubble means an economic bubble which occurs in the stock market. This happens when the parties in the stock market put their stock prices above its actual value depending upon the stock valuation system. Stock market crash means a decrease in the stock value. It will crash as a result of speculative stock market bubbles. Stock market bubbles and stock market crash affects the society and economy. When stock market crashes, various investors will face adverse after effects. The result of these crashes will be very very worse. Thus, speculative stock market bubble will reduce the money spend in those investments which has not been sold at that time.

Stock market bubbles will burst after a period. The investors should try to sell their investments before such a burst. Otherwise, the sale would be declined. Over-leveraged banks sell their stock holdings and makes the prices of the stock will suddenly reduce. This will shake the mind of the other investors and they will also sell their stock. A bull market was expected by the share market from the early recession of 2000. Thus, people used to think that the stock market bubble will eventually break in the recent past. Later, GDP of  household wealth became 500 % from the earlier 379%. This difference in the GDP level of household wealth again increases the expectation of a burst of the stock market bubble.

Credit swap securities create stock bubble because of demand-pull inflation. When demand of stock rises, price will also increase. Thus household wealth increases the actual value of the stock before the bursting of bubble. Various types of financial bubbles are leveraged housing bubbles, those with average growth on credit, credit fueled equity bubbles, those without credit bubbles etc.

The share market trend shows that the bubbles which does not supported by credit will make impact on the market. But those with less or average credit growth will be harmful for the market than all others. It will take so many years for the market to get recover from such a situation.