In 1867, while standing in front of the Manchester Statistical Society, John Stuart Mill delivered the future template for market bubbles.
…that during each of those decades commercial Credit runs through the mutations of a life, having its infancy, growth to maturity, diseased over-growth, and death by collapse; and that each cycle is composed of well-marked normal stages, corresponding to these ideas in nature and succession. And as Credit is a thing of moral essence, the external character of each stage of its development is traced to a parallel change of mental mood…the malady of commercial crisis is not, in essence, a matter of the purse but of the mind.
Mill looked at previous panics thinking that some general pattern would emerge. He was right. He saw a dramatic shift in mindset throughout the cycle: from panic came revulsion, to caution, moderation, then euphoria, and back to panic. Mill hoped that being able to recognize the mood swings could help avoid future disaster.
Mill broke the cycle down into three stages, attaching a mindset to each. Continue Reading…