During the period preceding the severe economic downturn of the 1930s, a particular type of financial activity played a significant role. This activity involved the purchase of assets, often stocks, commodities, or real estate, with the expectation of a rapid increase in their value. Individuals and institutions engaged in this behavior with the primary goal of profiting from short-term market fluctuations rather than from the underlying long-term value of the asset itself. An example of this is buying shares of a company based on rumors of a future breakthrough, not on its current earnings or established business model.
This type of investment activity, driven by anticipated future gains, can amplify market volatility. When many participants are focused on quick profits, market prices can become detached from fundamental economic realities. A widespread belief in continued price appreciation can create a self-fulfilling prophecy, drawing in more investors and driving prices even higher. However, this is inherently unsustainable. Once doubts about the continued rise begin to surface, a rapid sell-off can occur, leading to a sharp decline in asset values and widespread financial losses. This can severely damage the economy, leading to job loss and a drop in consumer demand.
