If Tesla Bubble Bursts, Catastrophe Won’t Follow

If Tesla Bubble Bursts, Catastrophe Won’t Follow

Recent experience and financial lore have created the impression that the bursting of market bubbles brings economic destruction. But it isn’t always so. The excess in today’s story stocks—electric cars, clean power and cannabis in particular—surely poses a threat to the wealth of their shareholders. Even if there is a wider bubble, it might not be a catastrophe for the country.

The experience of the past few decades suggests the opposite. Japan is still scarred by the 1980s property and stock bubble, the dot-com bubble led to massive losses and the subprime crash created a global crisis.

But not all bubbles are equal. The economic dangers of a stock bubble come from people taking on debt to buy shares and from companies overinvesting. When the bubble pops, overextended shareholders have to cut spending or go bankrupt. Companies suddenly faced with investors demanding a return have to lay off workers and slash investment.

None of this is an issue for the obvious bubbles under way in the fashionable stocks of the moment. Tesla is valued so highly it is now the U.S.’s fifth-biggest company by market capitalization. Even if the electric-car maker vanished tomorrow, it would have an insignificant effect on the economy, as Tesla’s operations are tiny. It is mostly equity-financed, so its failure wouldn’t start a domino line of bank failures. And while shareholders would be hurt, there’s no reason to think that would lead to a collapse in spending across the country.

The closest parallel is not the dot-com bubble, for all the similarities, but the British bicycle mania of the 1890s. Bicycles were the electric cars of their day: breakthroughs in tire and gear technology made them into convenient and environmentally friendly transport, albeit still expensive. Investors rushed in and stock promoters spotted the opportunity to float any company with a connection to the industry, mostly in Birmingham. Heavy investment led to further breakthroughs; and, at the peak, bicycle-related patents made up 15{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} of all the patents issued.

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