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Following up with our first half, we are going to provide several synthetic examples as to how this method should be applied. As you will see from these examples it is not difficult Actually, the most difficult part is to plot the data in Excel because typically no two data providers use the same time variables. Some use years, some quarters and some months/years. You will have to do a little bit of data manipulation in Excel but this is not hard to do since the Internet is full of tutorials. Just pick the tutorial that applies to your case.

Also, keep in mind that it is possible to copy from webpages directly into Excel if you retain the original format and from there you can manipulate the data to your heart's content.
In the example below we see that there is inflation but no bubble since the "good" line rises at the same speed as the GDP line.

Inflation NO Bubble

In the example below we see that there is severe deflation but no bubble since the "good" line drops at the same speed as the GDP line.

Deflation NO Bubble

The next example represents moderate deflation. Both lines continue to rise but the "good" line rises slower than the GDP line.

Deflation NO Bubble

The following example represents a severe deflation of your "good". The GDP line rises while the "good" line drops rapidly.

"Good" Deflation NO Bubble

The following example represents a bubble. The "good" line rises far rapidly than the GDP line.


This next example also represents a bubble but in this case the "good" line crosses the GDP line. Any cross is irrelevant. The only important aspect is whether or not the "good" line rises faster than the GDP line.


And our last example seems like a borderline one. We still have a bubble but in this case the "good" line is rising moderately over the GDP line. This last example serves to emphasize that a bubble is a bubble is a bubble. Bubbles come in all kinds of sizes and this one is a small one. However, do not underestimate the damage that it produces. Even smaller bubbles are equivalent to high inflation!



And now let's take a look at few real life examples. The first one is the housing bubble in UK. See?

UK Housing Bubble

In the next example we see deflation. This is the USA Consumer and Electronics Price Index.

US Electronics Bubble

And so forth. Basically almost anything can be plotted using this methodology. Even money can be plotted in this manner.

If we choose to find out if money in a certain country is in a bubble we need to plot the Interest Rate in that country. As this rate represents the "cost" of borrowing money, it is possible to figure out if a specific currency is "costing" above and beyond what the growth of the country indicates.

If we choose to find out if money from a certain country is in a bubble in a different country, then we need to plot the exchange rate between currencies. For example, if we wish to find out if the USD is in a bubble against the JPY in Japan, then we will plot the ratio USD/JPY versus the Japanese GDP deflator. Presto! Instant answers.

Whether we are in a bubble or not is not the correct question. The correct question is what is in a bubble where?


Excellent question! The answer is that it is pretty good... when compared to anything else that it is "out there". Is it bullet proof? In two words: hell no! There are exceptions and unusual conditions and things to consider that may skew this method. However, in general terms and most of the time it works OK... but this does not imply that you can now shut your brain down and stop thinking. Many bubbles are irrational hence thinking won't help you but the origin of many other bubbles can be traced back to specific events which, almost always, begin with a stupid government decision.


But why did we spend some of your valuable time providing you with this simple tool? Because "out there" there are many, many mainstream economists who spend years of their lives and countless GigaWatts of electricity doing "research" and publishing electronically about this topic. And do you know what their standard saying is? That bubbles can only be identified after they have popped. Preposterous! Bubbles can be identified very easily indeed! The problem is that Monetarists want to differentiate fiat printing from bubbles from inflation. Of course this is ridiculous and irrational. Printing money creates inflation and bubbles. All printing money eventually creates bubbles but this is a very inconvenient truth. They want to differentiate "good" printing from "bad" bubbles, hence all the mumbo-jumbo and the mathematical fireworks. Look, it's simple. If the price of something is rising faster than the overall economic level, it's in a bubble. Period.

Now, having said that we also need to explain that the etiology (i.e. ultimate origin) of a bubble can be vastly different. Some bubbles are caused by a simple imbalance between supply and demand. Supply dries out, demand stays the same, price goes up. Think gasoline. It happens. However, most bubbles are caused by printing. This is by far the most common origin of most bubbles and this is something that Monetarists and politicians cannot accept because they would be out of a job in a second.


Milton Friedman (a mainstream monetarist) once said that "inflation is always and everywhere a monetary phenomenon". He was mistaken. Inflation (and bubbles) are almost always and almost everywhere a political phenomenon. F&P

As such, in this article we have provided you with the tools to figure out what is in a bubble and what is not. You don't have to guess any longer. You don't have to take economists' opinions at face value. You can find out by yourself. Freedom and power indeed!

But there are also people "out there" who do not wish to be empowered. They only wish for somebody else to "fix" the problem for them. Fair enough, that's their right. But if this is the case, they have abrogated their right to complain against governments forever. They can't have it both ways. There is no free lunch. If they side with the government, then they have sided 100% with it. Period.

Note: please see the Glossary if you are unfamiliar with certain words.

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