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 cause deflation. In addition, unemployment rises, income falls, and 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 and inflation decreases and increasing deflation.
- It can occur simultaneously across all sectors or on an individual basis.
- It can also refer to cancellation of a trading order due to errors or when an investment tanks to zero.
A bust is part of the boom and bust economic cycle, which involves the rapid growth of a particular sector, called a boom, followed by a rapid contraction, or the bust. The alternation of the boom and bust paradigms form 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 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. A boom in one sector normally translates into an upward trend of the stock market overall, just as a bust in one sector translates 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 pharmaceutical 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. This can include an economic recession. A recession commonly involves falling gross domestic product (GDP) and rising unemployment. In turn, the recession can lead to rapid default 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 also is 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 Bust
Two of the most common examples of busts are the 1920s and the more recent dotcom bubble. During the 1920s, advances in steel and electricity led to a boom period for most Americans. The Republican 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.