What Is a Bust?
A bust is a period of time during which economic growth decreases rapidly. In the stock market, busts usually are associated with bear markets. During busts, inflation decreases, and in extreme cases, can give way to deflation. In addition, unemployment rises, income falls, and aggregate demand decreases.
Because of the cyclical nature of the economy, a bust usually follows a boom in what is called the "boom and bust" cycle.
- A bust is characterized by decreasing economic growth, decreasing inflation, and increasing deflation.
- It can occur simultaneously across all sectors or on an individual basis in one or more sectors.
- It can also refer to the cancellation of a trading order due to errors or when an investment tanks to zero.
Understanding a Bust
A bust is part of the boom and bust economic cycle, which involves the rapid growth of a particular sector or an entire economy, called a boom, followed by a rapid contraction, or the bust. The alternation of the boom and bust paradigms forms the boom and bust cycle. This cycle is seen to be fairly common, particularly in a capitalist society, though the event is not exclusive to capitalist economies.
Due to the stock market trends present during the cycle, the boom is associated with a bull market and the bust is associated with a bear market. A boom or bust can take place in one market sector while other market sectors see more modest, if not contrasting, results. Money can flow out of the sector experiencing a bust and into other sectors. This is likely to mean that the bust is driven by factors that are linked to the circumstances of that one market sector.
However, a boom in one sector might also translate into an upward trend of the stock market overall, just as a bust in one sector might translate into an overall downward trend. It also has a more notable impact on industries with close ties to the one experiencing the boom or bust. For example, a bust in the automotive market has a greater impact on tire manufacturers than paper goods manufacturers.
Implications of a Bust
Depending on the scale of the bust, some economic side effects may occur beyond the original sector responsible for the boom. A general bust that spreads across the stock market is especially likely to have similarly widespread consequences. These can include an economic recession.
A recession commonly involves falling gross domestic product (GDP) and rising unemployment. In turn, the recession can lead to a rapid rise in defaults in the consumer debt marketplace, worsening the situation as a whole.
Alternate Definitions of Bust
A bust can also refer to the cancellation of a trading order that a broker has already completed. The most common cause of a bust, in this sense, is when an error occurs as part of the transaction. This can include a mistake in how the order was executed, a technical error resulting in an inaccurate transaction, or a misunderstanding in what was being requested of the broker. This use of the term bust is also called a "break."
A more common use of the term bust involves any circumstance upon which an investment reaches zero. This can include personal losses experienced while gambling.
Examples of Busts
Two of the largest stock market busts are the market crash of 1929 leading to the Great Depression of 1930s and the 1990s dotcom bubble. During the 1920s, advances in steel and electricity led to a boom period for most Americans. The government at that time adopted a laissez-faire attitude and cut taxes for the wealthy, enabling them to spend lavishly. However, the good times did not last and the 1929 stock market crash marked the beginning of a prolonged depression. Inflation fell into negative territory and the country's GDP crashed.
Similarly, the dotcom boom was characterized by high expectations from tech startups on the then-emerging Internet medium. Venture capitalists and the stock market bid startup valuations to wild highs for companies without sustainable business models or revenues. Sanity was restored in 2000 as the startups crashed and burned. A bust in fortunes, followed by startup bankruptcies, was the price paid for the boom years.