A1 Bubble and crash

Topic

Property + Investment brings together—within a single channel—the structure of asset control (who owns what) and the market where those property rights are traded (the stock exchange and its associated tools), as both share the same underlying dynamics: prices, concentration, and capital flows. It is this channel—and not the other five—that supplies capital and credit to Production, infrastructure capital to Services, investment capital for exploration to Resources/Extraction, and R&D funding to Information/Knowledge; it is also the channel that receives the intellectual property rents generated by that last sector. Of the six channels, it is the one that circulates capital to the others.

The "bubble and crash" phenomenon describes what happens when the price of assets traded in this channel deviates drastically from their fundamentals, and that deviation abruptly reverses rather than gradually correcting itself. The trigger for this anomaly is that very price-versus-fundamentals deviation crossing an extreme threshold, followed by the reversal: as long as the price remains high without crossing that threshold, the channel can continue operating as if the valuation were sustainable; once the deviation crosses the threshold and the reversal occurs, the adjustment is abrupt rather than gradual.

This anomaly can be fueled by events in other channels without requiring a distinct mechanism of its own. The Information/Knowledge tech bubble, for instance, represents a market valuation sustained far above the sector's fundamental cash flows; it is precisely within the Property + Investment channel that this valuation manifests as the price of assets granting rights to technology companies. Thus, a tech bubble that fails to correct in time is one of the ways the price-versus-fundamentals deviation in this channel can cross its own extreme threshold, even though the deviation originated in a different channel. When the bubble bursts and the crash materializes, the adjustment is not confined to Real Estate and Investment; since this channel circulates capital and credit toward Production, Services, Resources/Extraction, and Information/Knowledge, an abrupt price reversal here can suddenly restrict the capital flowing into those four sectors through their existing channels, thereby shifting the correction from financial assets to the real economic activity that capital had been sustaining.

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