Tommy Weir: Playing With Economic Bubbles

There is a lot of talk about Dubai experiencing another bubble as we are building on the growth trajectory of the past two years. Dubai experienced double-digit growth in the property market while the stock market index was the world’s second- best performer in 2013 with a gain of 107.6 per cent.

When we add to this growth trend the market speculation after winning the honour to host Expo 2020, many are concerned that another bubble may be forming.

Listening to all of this talk about a bubble concern reminded me of a dinner conversation, that I heard about, just after the Kuwait invasion in 1990. Journalist Bikram Vohra tells the story of being in a discussion about the dramatic growth Dubai was experiencing at that time when a fellow diner said, “Yes, but for how long? The bubble will burst one day.”

Vohra replied to that, “Bubbles always burst but maybe Dubai will just dig into its bag, pull out more soapy water and make another bubble and another and another and another ad infinitum.”

This is a well-said illustration of reality. Dubai, and every growing economy, has a history of bubbles – they form and burst. While we typically experience them in the real estate market, bubbles are an economic reality.

Bubbles are a market dynamic where trade in high volumes and prices are considerably at variance with intrinsic values. This means the asset prices appear to be based on implausible or inconsistent views about the future. Then the correction sets in and the prices readjust usually in the form of a sudden drop in prices – the bursting of the bubble.

Both the boom and the burst phases of the bubble are examples of a market feedback mechanism that determine the equilibrium price outside normal market circumstances. Prices in an economic bubble can fluctuate erratically, and become impossible to predict from supply and demand alone.

The imagery used by Vohra during that dinner conversation in 1990 reminds me of the childhood game of making bubbles. It’s interesting that the kids do not let the fear that the bubble will burst hold them back from enjoying the bubbles.

In the midst of playing with bubbles, the kids, and adults, work hard to create the longest-lasting bubble. They know it will dissipate at some point, but they work to enjoy it for as long as it can last.

While they are making the bubble and perfecting the conditions to make it last, other kids aimlessly run around the yard chasing after the bubbles – trying to catch them. They are almost like the speculators who come into a market running around trying to “catch a break” and make a buck.

The objective of the bubble is to enjoy it and help it to live as long as possible. Eventually they do burst, that is inevitable. And when they do, the kids learn what caused it to burst and work to make a bigger and longer lasting bubble next time. One that will make them proudly say, “Look at that bubble”.

We have a choice, we can try to get rid of bubbles and with that strip out significant growth. I would contend that we would not enjoy Dubai for what it is today if it were not for its history of bubbles.

Or we can learn to live with bubbles and see how long we can make them last. As we saw in the illustration, when the bubble burst it does have consequences that none of us like.

But after a bit of effort, we are able to regenerate growth and make another bubble and another as Vohra described nearly a quarter of a century ago