Chapter 1 - The Bubble Triangle

Summary

Chapter 1 explains why the study of bubbles is important. Bubbles can have huge economic, social and political costs, but some bubbles may be useful. The chapter discusses the origin of the ‘bubble’ metaphor and the definition of a bubble. It then develops a new metaphor and framework for bubbles based on the chemistry of fire - the bubble triangle - in order to better understand their causes and consequences. The three sides of the bubble triangle are marketability, credit and money, and speculation – these correspond to oxygen, fuel and heat in the fire triangle. The spark which sets the bubble fire alight is either technological change or a government policy decision. This analytical framework helps predict when bubbles will occur, when they will burn out and what their economic effects will be. The chapter concludes by outlining the catalogue of 12 historical bubbles that will be examined in the rest of the book.