Friday, May 16, 2008

Is there a commodities price bubble?

What economists know about price bubbles is precious little:
  1. Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet. Because it's so much harder to bet on prices going down than up, the bullish investors dominate.
  2. Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify.
  3. Manias can persist even though many smart people suspect a bubble, because no one of them has the firepower to successfully attack it. Only when skeptical investors act simultaneously -- a moment impossible to predict -- does the bubble pop.
Most importantly, they can't tell me when its going to pop.

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