Tuesday, August 21, 2012
Financial bubble bath
Anyone remember the Internet bubble? Wasn’t that a wacky fun time? Kids with any sort of crazy idea and the ability to sling a little computer code had millions thrown at them. Most of the money was pissed away, of course. Nice headquarters, on-site chair massage, skateboards in the office, junk food on demand -the sort of business one would expect from college drop outs.
The beauty of it was there were thousands of bright kids working crazy hacker hours for small money and big stock option promises. A few were smart enough to cash out and buy nice things in the real world. Most didn’t and saw all their work disappear into smoke and vapor.
We never learn. Hard on the heels of that bubble came the housing bubble. Not as much fun as the Internet bubble, but a more direct appeal to naked greed. Turn your house into a giant ATM! Exotic Vacations! Buy a honking big SUV! Get an even bigger house you can’t afford!
Anyone with a bit of common sense could see both of these bubbles for what they were -bubbles. A few good ideas did well (Amazon) others not so well. Whoever thought buying dog food on the ‘net was a good idea? Some companies could not even clearly state what the heck they were trying to sell. Most likely because they were trying to sell stock and promises.
Housing could not go up forever, especially at the crazy break neck speeds they were going up. Rising values only papered over bad loans for a relatively short time. Reality had to intrude sooner or later. When the music stopped, as it always does, there weren’t nearly enough chairs to go around. Quite a few people discovered that the “Greater Fool,” was not someone else but them.
Speculative bubbles have a certain smell to them. After experiencing a few bursting bubbles in recent history, a person’t nose gets educated. Anyone else out there getting a whiff of something? Are there people with vested interests saying things will go on like this for a lot longer? Are there cheer leaders saying that this time things are different?
The thing is, I’m not real sure what speculative bubble is giving off the foul smell. Something doesn’t feel right, but what is it?
Well there’s the whole frack the gas bubble that’s getting a little long in the tooth. It’s a weird little investment bubble, but where else can people put there money with any hope of double digit return? It might be popular with the institutional investors, but the average Joe isn’t overly inspired by it. The natural gas bubble smells, but it’s not enough to account for all the weird bubble smell out there -not by half.
So what is it?
I’m guessing that the next bubble is is a huge over investment in money itself. Money creation has gotten easier and easier. The printing pressings don’t even have to run. Ones and zeros in a computer are nearly free to create. With money so easy to create, it’s no wonder they make so much of it.
There are two economies out there. There’s the economy where things are made, traded, grown, goods exchanged and services preformed. Then there’s the fake economy of investment vehicles, derivatives and the like. That wouldn’t be a problem except that the fake and real economy use the same currency. That’s just weird. It’s like play money can be used to buy real things. Of course, it’s all well and good as long as most of the play money stays in make believe land. Problem is, I think that the make believe money itself is a bubble. When it bursts, people are going to have to draw on real world assets to cover their play money bets.
When that happens, the currency collapses. The financial system breaks and shuts down. It’s happened before. We tend to look at the last big depression of the 1930s. While there are lessons to learn there, we may actually have more in common with the whole slew of panics that took place in the 19th century. Most, of not all, of those panics had speculative bubbles that set them off. It’s a deep bit of history worth exploring.
So my bet is on some sort of currency collapse. Does the Euro look like a good brand? How about the dollar? As long as world trade and especially petroleum trading took place in dollars, a nation needed a pile of them. That’s not quite so true anymore. Trades are being made in everything from straight barter agreements to the use of precious metals. Don’t worry much about the sounder smaller currencies. When the big boys go belly up, it’s a game changer.
I’m I worried? Just a little. The big question is timing. When will the next bubbles burst? I’m surprised the game has kept going for as long as it has. Of course, nothing lasts forever.