Bubbles are not bubbles

Economic bubbles are always compared with soap bubbles, but that introduces a misunderstanding, because economic bubbles are always flows, never stocks, while soap bubbles are objects, so more like stocks.  Soap bubbles "accumulate".

People probably use the analogy because they have no better way of picturing a flow. In general it is difficult to draw a flow, any flow. When you want to draw a river, normally you draw the banks, and the meandering. The trees next to it. When you want to draw the wind, you show clouds or leaves, floating in the wind. Or you show a giant cloud with a face that is blowing stripes of wind from his mouth.   In the same way it is difficult to picture a stream of goods or a flow of money. Movement is difficult to catch and difficult to picture. An inflated flow is also difficult to picture. The picture is static, the flow is dynamic.  The tulip mania and the south sea bubbles were not called bubbles in their time, because people did not look at them in a graph!

Is a price bubble a stock or a flow? Price has a flow character, I believe, much more than a stock character. It depends on transactions, on demand & supply, typical flows. What about a sentiment bubble like confidence (e.g. in bitcoins)? Yeah, that is a stock and indeed a bubble, filled with thin air. When punctured it will deflate fast.  But this is just the confidence behind the real bubble, which is price and transactions, so the real bubble that we talk about is a flow. Confidence itself is normally not depicted as a bubble.

Another point where this analogy goes wrong is when an economic bubble bursts. In reality it means that a flow reduces fast in size. The feeling we get from the soap bubble analogy is that some protective shield (like the membrane of the soap bubble) is punctured with as result that some pressure escapes and pieces of membrane spat on the floor. In economic bubbles there is no membrane, and there is no escaping pressure.

"So what?", you might say.

This is relevant because the analogy sets us on the wrong foot: when we study an economic bubble, we have to see it as a flow, not as a stock. A stock responds to a pulse completely different from a flow. Most stocks are integrals of flows, that means they accumulate a flow or they bleed into a flow. Stocks are therefore much more inert and more stable over time than flows. This gives a false sense of stability to economic bubbles.
An economic flow is always going from one stock to another stock, based on decisions by people (or based on algorithms in computers programmed by people). If people decide to do nothing, the flows stop immediately, but the stocks remain stable.  When we would see economic flows as flows, people would easier understand that an economic bubble is always finite because the stock where the flow comes from is finite.

So bubble is the wrong word.

Is there an alternative? How should we call an inflated, a swollen stream?  A comparison with an overflowing river that rises above its dikes is maybe appropriate. Maybe a dike in which a small breach is broadened by the overflowing river and a small stream grows into a giant flow.

I don't know. Any of the readers maybe?
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Chinese Housing Market is in trouble

A Construction bubble has fuelled the economic growth in China over the last 15 years in the same way it has in Ireland and Spain since the Euro and as it did in Japan in the eighties. When the bubble bursts, it will hurt.

The prices of houses in China have already reached a peak and have now started to go down. In response buyers will delay purchasing in the expectation that prices will go down further. This will become a self-fulfilling prophecy if sellers cannot pay the cost anymore and have to reduce prices to find buyers.

Dropping prices will be a strong incentive for construction companies to stop building, also because there already is a large reservoir of unsold houses in China. Construction is 10% of the Chinese economy (acc Mr. Wei Yao of Societe Generale). In addition, following a dip in construction all supplying industries will loose turnover (for many a substantial part of their existence). Especially the upstream companies, at the beginning of the supply chains, will see a significant dip because the whole chain will de-stock. This supplying industry is a much bigger part of the economy than the 10% mentioned by SG.

Dropping prices will also give strain on the banking system if the value of the houses drops lower than the mortgages. A Chinese banking crisis will be felt throughout the world. And dropping housing prices will reduce Chinese end market consumption, affecting all other industries as well.

The Chinese government might want to keep their trillion in the pocket to solve these problems, in stead of investing it in Greece or Italy.

The only consolation is that housing prices in China have gone so high that many ordinary people cannot afford a house. So if the prices drop 50%, a whole new market may emerge.