Bubbles have played an increasing role in US economic cycles since the 1980s. Identifying a bubble and recognising its role in generating growth, usually in the Late Upswing stage of the cycle, and then its potential to create or exacerbate the Slowdown and Recession stages is vital.

Everyone is aware of the early 2000s housing bubble which led to the Great Recession of 2008-9 but stock market bubbles in 1987 and 1998-2000 as well as commercial property bubbles iin the early 1980s and 1990s played a significant role in the cycle.

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In 2004 I published a book called Bubbles and how to Survive Them arguing that the US housing bubble would grow larger and soon could threaten a major financial crisis and aggravated recession. In the event what played out in 2008-9 was my worst case scenario. I published a follow up in 2009, When Bubbles Burst, updating the analysis. These books explain how to identify a bubble (using a checklist of factors - see opposite below) and what to do about them.

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Today the authorities pay much more attention to potential bubbles and have tried to develop financial stability policies to run alongside monetary policies, including measures such as controlled loan-to-value ratios for mortgages and special capital provisions. But these are largely untried in the US, while elsewhere, in Canada and Hong Kong for instance, their effectiveness is doubtful. They seem to provide some protection for the financial sector (which is of course useful by making a financial crisis less likely) but they do not prevent bubbles inflating, which can still leave the economy open to an abrupt asset price decline and the reversal of wealth effects.  

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Watching for bubbles remains a critical part of business cycle analysis and in the US we are currently monitoring closely commercial property, technology stocks and, more broadly, the bond market as QE unwinds for signs of danger. Also, one of the big questions for the world economy is whether China's massive credit expansion of the last 10 years is a bubble or not. If it is, a view to which I incline, then the bursting of that bubble will be a major event for the world economy at some point in the next few years.