The Hidden Pattern behind all Financial Bubbles

Tulip Mania. Imagine spending the equivalent of a luxury house on a flower. Welcome to the 1630s Netherlands, where tulips became the world's first documented financial bubble and taught us lessons about market psychology that we're still ignoring today. These exotic Turkish imports were already popular among the wealthy, but when a virus caused rare color patterns in the petals, they became the ultimate status symbol. The Dutch, who had pioneered modern banking and stock markets, were about to be undone by flowers.

At its peak in 1637, a single Seer Augustus bulb sold for 6,000 Florin, equivalent to 15 years' salary for a skilled craftsman. The market evolved beyond physical bulbs into futures trading, with some bulbs changing hands 10 times daily without ever leaving the ground. But on February 3rd, 1637, a routine auction had no buyers show up. Within weeks, prices crashed 90%. The Dutch learned their lesson, establishing the world's first financial regulations—well, at least until the next get-rich-quick scheme came along.

Speaking of schemes, the Mississippi bubble. Remember how the Dutch at least had actual flowers to show for their bubble? France was about to prove that you don't even need a real asset to crash an entire economy. By 1716, France was drowning in war debt when John Law, a Scottish economist and professional gambler, convinced the French regent he had a brilliant solution. His plan: create a national bank issuing paper money backed by shares in a trading company with exclusive rights to exploit France's Louisiana territory.

Think tulip mania, but with an entire colony's worth of imaginary gold. The Mississippi Company shares skyrocketed from 500 to 18,000 lever in just 2 years. At its peak, the company was worth 80% of France's entire GDP. Imagine if one company today was worth $20 trillion. The company's Paris offices became so crowded that a local hunchback made a fortune renting out his back as a writing desk. Then, investors started asking for real money instead of paper. Law desperately printed more currency, but that just led to hyperinflation. By 1720, shares crashed 97%, and France's economy collapsed. Law fled the country disguised as a woman—not exactly the exit strategy they teach in economics class.

Speaking of questionable financial schemes, England was watching closely and thought they could do even better. South Sea bubble. If you thought the French scheme was bad, the British said, "Hold my tea," and created an even bigger disaster. In 1720, the South Sea Company had a seemingly foolproof plan: take over Britain's national debt in exchange for monopoly rights to trade with South America. Just one tiny problem—Spain actually controlled South American trade and was at war with Britain. Oops.

But who needs actual trade when you have marketing? The company promised riches beyond imagination and even gave politicians shares to promote the stock. We wouldn't see that kind of manipulation again until crypto. Shares rose from 100 to 1,000 in months. Even Isaac Newton invested, saying, "I can calculate the motion of heavenly bodies, but not the madness of people." This from the man who discovered gravity, about to experience a different kind of falling. By September 1720, the stock crashed 90%. The aftermath was so severe that the British government banned the creation of new companies without royal charter—the world's first market regulations.

Though, as we'll see with railways in about 120 years, regulations don't always stop human nature. Speaking of human nature, let's fast forward to see what happens when you combine speculation with the next big technology: Railway Mania. From trading imaginary colonial riches to—well, at least railways were real.

Welcome to the 1840s Britain, where the Industrial Revolution was transforming everything. Investors were convinced that laying train tracks would be like printing money. Unlike our previous bubbles, railways actually did revolutionize the world. Trains could transport goods and people faster than anyone thought possible. The first railways were so profitable that investors rushed to fund any track that anyone proposed. Sound familiar? We'll see the same pattern with the internet in about 150 years.

At its peak, Parliament approved 272 railway companies in a single year. Track proposals were drawn on maps like a child with a crayon. One line was even approved to run straight through Windsor Castle. Whoops! The British poured more money into railways in 1847 than they spent fighting Napoleon. When the crash came, over half the proposed railways were never built. Turns out, just because something will change the world, doesn't mean every investment in it will make money. The dot-com investors would learn this lesson the hard way.

But we're getting ahead of ourselves. Speaking of getting ahead of ourselves: the Great Depression. While the British were learning their railway lessons, across the Atlantic, America was busy creating the perfect conditions for the mother of all crashes. The Roaring Twenties were in full swing. The war was over, the economy was booming, and everyone was convinced stocks could only go up. Sounds familiar? Yet, by 1928, ordinary Americans were borrowing money just to buy stocks. Banks were happy to lend, letting people buy shares with just 10% down. Think of it as a mortgage but for stocks; what could possibly go wrong?

Meanwhile, sketchy investment trusts were popping up faster than speakeasies during prohibition. Our October 24th, 1929, the market wobbled. October 28th, it fell. October 29th, Black Tuesday; it collapsed. The Dow lost 25% in 2 days, equivalent to a $1 trillion loss today. Those borrowed shares? Banks wanted their money back, forcing investors to sell at any price. But, unlike our previous bubbles, this crash infected the entire economy. By 1932, stocks had lost 89% of their value, unemployment hit 25%, and 5,000 banks collapsed. The world learned you couldn't just let markets regulate themselves—well, at least until the 1980s when Japan decided to give it a try.

Japanese asset bubble. Welcome to the 1980s Japan, where they weren't content with just one bubble; they created two at once. The economy was booming so hard that experts predicted it would overtake America. Japanese companies were buying up everything from Hollywood studios to the Rockefeller Center. Remember how we mentioned market psychology way back in the tulip crisis? The Japanese stock market soared 450% in the '80s. But that was nothing compared to real estate.

Tokyo real estate got so expensive that the grounds of the Imperial Palace were theoretically worth more than all the real estate in California. One square meter in Tokyo's Ginza district: $300,000. A parking spot could cost $1.5 million. The perfect financial storm was brewing. Japanese banks were lending money against inflated real estate, which was used to buy more stocks— which were used as collateral for more loans to buy more real estate. If this sounds like a circular problem waiting to happen, well, you're getting better at spotting bubbles.

By 1989, reality finally caught up. The crash was so severe that Japan's economy still hadn't recovered 30 years later. They even have a name for it: the Lost Decades. But while Japan was dealing with its hangover, the rest of Asia was about to learn some hard lessons. Asian financial crisis. Just when everyone thought Asian economies were invincible, Thailand decided to teach the world a lesson about hidden risks.

It started with something seemingly boring: Thailand's currency, the baht, was pegged to the US dollar. Local companies were borrowing in dollars and living large. The problem: their income was in baht. Think of it like taking out a loan in gold to buy a house but getting paid in Monopoly money. It works great until the exchange rate moves. When Thailand's export growth slowed, investors started questioning if the baht was really worth what the government claimed.

On July 2nd, 1997, Thailand ran out of dollars defending the baht. The currency crashed 50% almost overnight, and companies suddenly owed twice as much on their dollar loans. But here's where it gets interesting: investors looked at neighboring countries and thought, "Hey, they're doing the same thing." Like dominoes, Malaysia, Indonesia, and South Korea watched their currencies collapse. Indonesia's rupiah lost 80% of its value in months. The IMF had to step in with $40 billion in bailouts. The world learned that in a connected economy, one country's problem can quickly become everyone's problem—a lesson the world would need to relearn in 2008 when American mortgages triggered a global meltdown.

But before we get there, Silicon Valley was about to show us how interconnected the world could really become. Dot-com bubble. Remember how Railway Mania convinced investors that tracks to nowhere were worth a fortune? In the 1990s, Silicon Valley proved that you didn't even need tracks. Just add "dot com" to your company name and watch the money roll in.

The internet was revolutionary, no doubt, but investors were so scared of missing out on the next Microsoft that they threw money at anything with a website. Companies were going public without ever making a profit—some without even having a product. Pets.com raised $82 million in an IPO despite losing money on every sale. But hey, growth over profits, right? The NASDAQ soared from 500 to 5,000 between 1990 and 2000. Internet entrepreneurs were becoming billionaires overnight. At its peak, a tiny software company called Qualcomm saw its stock rise 2,600% in one year. That makes our Dutch tulip prices look reasonable.

March 2000, reality kicked in. By October 2002, the NASDAQ had lost 78% of its value. Amazon's stock fell from $17 to $7. Most dot-coms disappeared entirely, just like railways, though the technology that sparked the mania did change everything—even if most investors lost their shirts betting on the wrong companies.

With tech stocks in ruins, investors started looking for something more real to put their money in: oil, gold, wheat. Surely commodities couldn't crash like internet stocks, right? Commodities bubble. After getting burned by imaginary profits from dot-com companies, investors wanted something real. Oil you could touch, gold you could hold, wheat you could eat. What could be safer than actual physical stuff?

By 2006, everyone from pension funds to small investors was piling into commodities. Oil soared from $50 to $147 a barrel. Gold doubled to over $1,000 an ounce. Rice prices tripled, causing food riots in some countries. Even basic metals like copper hit all-time highs. The story was simple: China's booming economy would need endless raw materials, and supplies couldn't keep up.

Wall Street saw an opportunity, creating complex financial products that let anyone bet on commodity prices. Suddenly, your retirement fund could speculate on wheat futures—because what could go wrong mixing pensions with food speculation? By mid-2008, the bubble burst spectacularly. Oil crashed back to $30, gold tumbled, food prices collapsed. But this crash wasn't happening in isolation; it was just one part of a perfect storm brewing in the global financial system.

Remember all those fancy financial products Wall Street created? They had some other ideas about housing too. The housing crisis. While commodities were booming, Wall Street had discovered something even better: the American dream itself. After all, house prices never go down, right? It started innocently enough: low interest rates meant more people could afford homes. Banks were happy to lend; they just bundled those mortgages into complex securities and sold them to investors worldwide.

Soon, they ran out of qualified borrowers. But why let that stop a good thing? Enter the subprime mortgage—loans to anyone with a pulse. Remember how Japanese banks used real estate as collateral for more loans? Wall Street said, "Hold my champagne." By 2006, you could get a million-dollar mortgage with no job, no down payment, and no proof of income. They called them NINJA loans: no income, no job, no assets.

Mortgage brokers were making thousands per loan. Banks were making millions bundling them, and rating agencies were paid to look the other way. When housing prices finally started falling in 2007, the whole house of cards collapsed. By 2008, major banks were failing, and $8 trillion in housing wealth vanished. The global financial system nearly collapsed, triggering the Great Recession. The world learned you can't build an economy on bad debt—well, at least until crypto exchanges discovered leverage trading.

Crypto bubble. Welcome to the digital age, where we managed to recreate 400 years of financial mistakes in about 5 years. Bitcoin launched after the 2008 crisis as an alternative to banks and was about to show that you don't need banks to create a financial disaster. The 2017 rally saw Bitcoin surge from $1,000 to $119,000. Just like the South Sea Company, the market ran on promises and speculation. Companies could add "blockchain" to their name and see their stock price triple overnight. Long Island Iced Tea became Long Blockchain Corp, and its shares jumped 289%.

Who needs a business plan when you have buzzwords? But 2017 was just the warm-up. By 2021, crypto exchanges were offering the same toxic mix that crashed the housing market: leverage, derivatives, and questionable loans. The industry peaked at $3 trillion; NFTs were selling for millions. One cryptocurrency, inspired by a dog meme, was worth more than Ford Motor Company.

November 2022, FTX, the poster child of crypto, collapsed spectacularly. Like the Mississippi bubbles, John Law's CEO, Sam Bankman-Fried, fled as his empire crumbled. Customer funds vanished, Bitcoin crashed 70%, the entire crypto market lost $2 trillion. Different century, same story. When something seems too good to be true, it probably is.

Now, I had to leave some bubbles out of this video. The Chinese real estate bubble is still unfolding, the 2015 Chinese stock market crash needs more historical perspective, and don't even get me started on the Florida land boom of the 1920s. Want more financial history explained? Like, subscribe, and let me know in the comments what you'd like to see next.