Markets balance to find the best price, right? It’s common sense - once people think something is overvalued they sell, and buy that which is undervalued. This is the basis of the Efficient Market Hypothesis; the anchor point of economics teaching and practice.
Except that in the real world this idealistic model of people acting as independent & rational actors is simply not how human beings function.
People act in herds. They want to buy assets that will go up in price, and so they tend to buy assets that are rising in price. Increased demand for the asset causes its price to rise, which creates greater demand for the asset. Even the sane and intelligent who can see that prices are going away from their long term value will follow the herd if they believe others will pursue out-of-kilter prices. It becomes a game completely disconnected from business or economic fundamentals, and all about predicting what other people think.
Because of this, demand increases with increasing price, and falls with falling price - thus asset bubbles form.
The wealth of a nation can be simplistically thought of as all of the things in it’s possession totted up. If people are productive, they might craft beautiful new boats - increasing their wealth by “one boat” once that vessel is completed. That new wealth is kept when the asset is transferred over to it’s new owner - the boat builder has a chunk of money and the new owner has “one boat”. This is wealth creation at it’s purest - manufacturing.
Other items create wealth that is almost immediately destroyed, such as when food is grown - a new asset for the farmer - sold to a consumer; some of the consumer’s wealth is transferred to the farmer, but the asset is then eaten (the ‘asset’ being consumed). There is no overall gain to the country’s wealth as the farmer’s additional money is at the expense of the consumer.
Some assets sit in between - boosting the nation’s wealth for a slightly longer period - such as most cars, which deteriorate to a value of £0 but over the course of a couple of decades.
There is another way to raise the wealth of a country though, by increasing the price of existing assets - houses, companies, classic boats. A very large chunk of ‘wealth’ creation over the last 30 or so years has come from the growing financier class who make money by inflating existing asset prices. An effective way of doing this is to borrow money and buy things - their sticker price inevitably rising. You can then sell them again later at a profit and pay back your loans. It’s not rocket science, so even bankers can do it - and get paid handsomely for their “ingenuity”.
Complex modern financial instruments simply allow markets to borrow far money today than at any other time in history - allowing bubbles to balloon to ever increasing diameters.
QE - The Electronic Bubble Machine
Printing money is an extension of this. Quantitative Easing - the method of printing money du jour - swaps “digital money” for things people already own - which then become the property of the Bank of England or Fed. The previous owners then search for somewhere else to put their money - the stock market; classic cars; vintage wine - and the price of those things rises.
Eventually, asset prices start to resemble a Ponzi scheme - that is asset prices can only be sustained by people borrowing ever more money. At this point the bubble waiting to pop. There is a critical point when enough people start to think that the broken flat in Dalston isn’t worth £1m and point out that the Emporer has no clothes. Nothing pops a bubble like fear that the mega-bucks you “made” when your assets shot up might evaporate.
Politicians understand that allowing a bubble to burst - particularly the housing bubble - would make many voters considerably poorer. A normalisation of prices to long-term trends becomes an increasingly fearful risk, the further the economy pushes away from those norms. The obvious response of many in charge is to simply do as the financiers do - keep blowing and hope for the best. Help to Buy anyone?