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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The Hoarding Cycle

In an economy that grows year-on-year, for centuries, the total amount of possessions will grow too. There is however a physical limit to what our houses can contain,  so either we stop buying and start saving, or we throw away faster, or we miniaturize our possessions. The miniaturization then is especially the investment  per cubic meter, so we can hoard more cumulative income in the limited space of a house. An iPod takes up less space than a CD-collection, which is again smaller than the same amount of music in vinyl. An Xbox is smaller than a baseball, an e-reader is smaller than a book case, a flat screen takes up less space than a classical TV-set and 100 euros worth of jewelry in gold is smaller than 100 euros worth in silver. But at some point the house is full and we have to throw things away if we want to buy new stuff. Despite the miniaturization and throwing away, the result over the centuries is that the amount of possessions increases. Let’s call this the Hoarding Trend.  

There is a big destabilizing effect of this amassment of goods: people have so many possessions that buying many types of new goods is for a large part discretionary. When a crisis hits, people may  decide to postpone buying new things.  The notorious Men’s Underwear Index describes this phenomenon, but it also applies to many other material goods. Some collections of material goods (“fleets” in Flostock terminology) will age fast and  at some time will need replenishment, whether the crisis is over or not, either because of wear or because of fashion (which could also be seen as a kind of wear).  This applies to cars, underwear, clothing in general and maybe it applies to music as well. But it does not apply so much to furniture, home decorations, books, kitchen utensils, sporting equipment or gardening. For those categories of fleets of material goods fashion is not changing so fast and a little aging is not directly visible (at least not for a middle-aged guy like me J). So in these categories people can postpone the rejuvenation of their hoard, their fleet of possessions over a longer period.

So what is the point? Point is these material possessions are a stock that in a crisis may undergo aging without changing in size, but with a big change in flow. Example:  Suppose the maximum life of a couch was 10 years before the crisis, so the fleet of couches had an average age of 5 years. In the crisis people decide to wait longer with buying a new sofa and thus to let it age to e.g. an average of 6 years. In that case the furniture retailers see a 17% drop in sales.  Underwear sales dropped in the crisis, but you cannot postpone buying new shorts longer than a couple of years, so sales must have recovered by now. So a crisis drives delays in buying for stocks of possessions, which delays worsen the crisis. For goods with a potential long life the effects are biggest.

After the crisis, when consumer confidence returns, people want to go back to the average age of their hoard and buy a bit more for a while, creating an upturn in the economy and creating a new, young fleet of stuff, ready to be aged again in the next crisis. This we can call the Hoarding Cycle. The Hoarding Cycle waves around the Hoarding Trend. Question is whether the Hoarding Cycle is driven by the long term economic cycle or the other way around. And since the discretionary part of the possessions is getting bigger over time as the Hoarding Trend curve goes up, the amplitude of the Hoarding Cycle might be growing as well, predicting bigger crises in the future.