It is a positive feedback loop. The same idea was at the heart of what John Maynard Keynes, the great economist, described as \u201canimal spirits\u201d; if businesses are confident, they will invest money and hire more workers, and this investment will boost economic growth.<\/p>\n
In terms of asset markets, the most obvious example of reflexivity comes from the link between banking and property prices. Initially, for whatever reason, banks start lending more money to people who are buying property. The availability of additional finance pushes up demand for property \u2014 whether it is office blocks or homes \u2014 and property prices rise. This makes the bankers more confident about lending money in the property sector, as their collateral is rising in value. And it makes investors and or speculators more willing to borrow money to buy property, since it looks like a very good bet.<\/p>\n
Debt does not have to be involved. For much of the life of cryptocurrencies, the price of digital assets such as bitcoin and ethereum has been sustained by the belief, among some investors, that they represent the wave of the future. Any weakness is thus a buying opportunity. And a rising price is a wonderful way of proselytising the crypto religion; more people are tempted to adopt the faith.<\/p>\n
Another way in which booms can sustain themselves, in both economic and asset-market terms, is through spending on goods and services. That is clearly the case at the moment with the rush to invest in artificial intelligence.<\/p>\n
This spending has done a lot to prop up US economic growth, at a time when job creation has stalled and consumer confidence has declined. In the first half of the year, JPMorgan estimated that AI spending contributed 1.1 percentage points to US GDP growth. In market terms, it plays a crucial role in convincing investors of the solidity of the AI boom, not least in the demand it creates for the chips made by Nvidia, the world\u2019s most valuable company.<\/p>\n
The buzz surrounding this spending also creates a kind of Fomo (fear of missing out) among other executives. If AI is the wave of the future, then any company that doesn\u2019t embrace it risks being left behind. And, true to the principle of reflexivity, the race to invest makes the AI boom seem all the more substantial to investors. The obvious parallel is the late 1990s when spending on fibreoptic cable, routers and telecoms equipment soared, spurring the dotcom bubble. <\/p>\n
The intoxicating nature of bullish sentiment indicates how these booms may eventually sow the seeds of their own destruction. In the late 1990s, it seemed that every twenty-something was either launching their own website or joining a start-up internet company with the hope of cashing in their share options. The appeal of the technology was so obvious that too many businesses were founded; only a fraction of them would ever be profitable. When it became clear, in the spring of 2000, that some businesses were running out of cash, sentiment changed.\u00a0<\/p>\n
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