Bubble economy

“ The more certain the future value of streams of income, the more open the economic environment, the shorter the economic cycle, the more frequent and rapid the economic interactions – the more valuable assets become. Assets are mainly stores of expectations regarding future values. An assets bubble is created when the current value (=price) of money is low and the future value of money is certain and likely to grow through stable or decreasing prices. ”

“ The recent implosion of the global equity markets - from Hong Kong to New York - engendered yet another round of the semipternal debate: should central banks contemplate abrupt adjustments in the prices of assets - such as stocks or real estate - as they do changes in the consumer price indices? Are asset bubbles indeed inflationary and their bursting deflationary? Central bankers counter that it is hard to tell a bubble until it bursts and that market intervention bring about that which it is intended to prevent. ”

“ Unscrupulous men, versed in all the dark ways of the financial world, found their opportunity in those palmy days, and, purchasing and amalgamating, converted prosperous private firms into unwieldy and over-capitalised public companies. In the thick of all this juggling with millions, and snatching of commissions and vendors’ profits, the bubble burst, and an honourable and highly prosperous industry was wrecked, and became a bye-word and a reproach all the world over. ”

“ The hysteria was evenly distributed and fed on itself.
Subsequent investment fiddles were different, though.
Modern dodges entangle a large number of victims. Their size and all-pervasiveness sometimes threaten the national economy and the very fabric of society and incur grave political and social costs.
There are two types of bubbles.
Asset bubbles of the first type are run or fanned by financial intermediaries such as banks or brokerage houses. They consist of "pumping" the price of an asset or an asset class. ”

“ Any system which could at will open or shut the valves of American credit, stage an orgy of "inflation" or stage a debacle of "deflation," increase or decrease the money supply, make the tide of employment flow to prosperity's height or ebb to despair's depths, create a "bull" or a "bear" market at will—would justify the investment of hundreds of millions or even billions of capital! Its power would be practically boundless, its profits be fabulous and from its coign of vantage it could coin the sweat of scores of millions of toilers into its coffers of greed. ”

“ Let not this lesson be lost on the rampant and half-crazed speculators of the present day. Those who buy gold or flour, leather, butter, dry goods, groceries, hardware, or anything else on speculation, when prices are inflated far beyond the ordinary standard, are taking upon themselves great risks, for the bubble must eventually be pricked ”

“ Commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence; bankruptcy follows upon bankruptcy, execution upon execution. The stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again. ”

“ This year we're hearing a new variation of their gloomy refrain, not about inflation or interest rates taking off, not about the recovery that won't happen, but about the recovery that can't last. Government deficits, we're told, will kill the recovery by draining capital needed by business to keep the economy expanding. ”

“ Financial bubbles and asset price inflation are the result of euphoric and irrational exuberance – said the Chairman of the Federal Reserve Bank of the United States, the legendary Mr. Greenspan and who can dispute this? But the question that was delicately sidestepped was: WHO is responsible for financial bubbles? Expansive monetary policies, well-timed signals in the interest rates markets, liquidity injections, currency interventions, and international salvage operations – are all co-ordinated by central banks and by other central or international institutions. ”

“ All bubbles burst in the end – and so do these assets bubbles. This is the fifth phase. It is crucial because it signifies the termination of the bull part of the cycle. The prices of assets collapse precipitously. There are no buyers – only sellers. Firms find it impossible to raise money because their obligations (commercial paper and bonds) are rendered valueless. A credit crunch ensues. Investment halts.
The collapse of assets bubbles generates asset price deflation. ”

“ In city centers came a quick growth of stock-jobbers and speculators; and these set a debasing fashion in business which spread to the remotest parts of the country. Instead of satisfaction with legitimate profits, came a passion for inordinate gains. Then, too, as values became more and more uncertain, there was no longer any motive for care or economy, but every motive for immediate expenditure and present enjoyment. So came upon the nation the obliteration of thrift. ”

“ There has been a terrible race between the rising tide of bubble fortunes in the stock market and unemployment. Even in 1925 there were two million fewer men at work in the principal fields of employment than there had been six years previously, although the population and production had vastly increased and many new industries had appeared. A programme of buy more, owe more and spend more, caused the deluge of high-pressure selling, lavish extravagance, head-on plunges into debt and the wildest speculation the nation had ever seen. ”

“ No longer can we allow special interests to put their thumbs on the economic scales. No longer can we allow the unscrupulous lending and borrowing that leads only to destructive cycles of bubble and bust. ”

“ A great part of the current coin in the kingdom was locked up in the houses or banks of a few stockjobbers and speculators.
But the scarcity of gold and silver was felt, people's eyes were opened, and the bubble burst, but not until half of the national debt had been paid off by this swindling transaction.
The nation was furious. A panic spread among all classes; the bank had no money with which to redeem its notes; the shares fell almost to nothing; and universal bankruptcy took place. Those who, a few days before, fancied themselves rich, now found themselves poor. ”

“ What wealth is now pouring into the country! and, thank God, it is now somewhat better expended than it was in the bubble mania, which acted upon the plethora certainly, but bled us too freely and uselessly. The rail-road speculators have taken off many millions, and the money is well employed; for even allowing that, in some instances, the expectations of the parties who speculate may be disappointed, still it is spent in the country; and not only is it affording employment and sustenance to thousands, but the staple produce of England only is consumed. ”

“ As time passes, however, and economies in operation commence to make themselves manifest, and especially as waste and extravagance are curtailed, the country as a whole commences to accumulate real liquid capital; that is to say, its total production leaves a surplus over the amount of consumption. In the state of business feeling which has been pictured, the undertaking of new business ventures or additions to existing properties would not be approved, so that the surplus wealth created finds its way into bank deposits as liquid capital. ”

“ The breakdown is a real decay that spreads and spreads. In a time of universal shortage there is an increasing paralysis in production; and there is a paralysis of production because the monetary system of the world, which was sustained by the honest co-operation of Governments, is breaking down. The fluctuations in the real value of money become greater and greater and they shake and shatter the entire fabric of social co-operation.
Our civilization is, materially, a cash and credit system, dependent on men’s confidence in the value of money. ”

“ It is unfortunate for the consumer because it makes prices uneven, and it inflicts cruel injury upon laborers and operatives, and through them upon the whole community.
Here, then, is the evil. Speculation inflames it; currency inflation stimulates it; but undiffused, unregulated, and unrestrained production throws the whole complex machinery of trade out of order; it stirs the whole energies of the people into producing at one period, and arrests energies at another; in suddenly stopping production, it reduces consumption, and hence renders recovery the very labor indeed of Sisyphus. ”

“ In more technical terms, inflation is a market pathology, a market failure.
Inflation disguises bad economic performance of firms and of the economy as a whole. "Paper" profits make up for operational losses. The incentives to innovate, modernize, and enhance productivity suffer. ”

“ Enterprise was chilled and business became more and more stagnant. Mirabeau, in his speech which decided the second great issue of paper, had insisted that, though bankers might suffer, this issue would be of great service to manufacturers and restore prosperity to them and their workmen. The latter were for a time deluded, but were at last rudely awakened from this delusion. The plenty of currency had at first stimulated production and created a great activity in manufactures, but soon the markets were glutted and the demand was diminished. ”

“ Everything seems to be going on as usual, commerce and industry vigorous and expanding, when suddenly there comes a shock, as of a thunderbolt out of a clear sky—a bank breaks, a great manufacturer or merchant fails, and, as if a blow had thrilled through the entire industrial organization, failure succeeds failure, and on every side workmen are discharged from employment, and capital shrinks into profitless security. ”

“ I just have one follow-up, which is, you're right in saying that this plan shouldn't be judged by a one-day market reaction, but one of the things that is really going to affect your ability to reboot the economy is the price that people who buy our debt demand in return for investing in it. ”

“ In an effort to overcome the pernicious effects of inflation, governments liberalize, deregulate and open their economies to competition. Firms innovate and streamline. Efficiency, productivity and competitiveness are the buzzwords of this phase. As trade barriers fall, cross border capital flows (=investment) increase, productivity gains and new products are introduced – the upward price spiral is halted and contained. The same money buys better products (more reliable, more functions, more powerful) . The same wages generate more products. This is technological deflation. ”

“ The fall being solely of money prices, if prices did not rise again no dealer would lose, since the smaller price would be worth as much to him as the larger price was before. In no matter does this phenomenon answer to the description which these celebrated economists have given of the evil of over-production. That permanent decline in the circumstances of producers, for want of markets, which those writers contemplate, is a conception to which the nature of a commercial crisis gives no support. ”

“ They then buy up everything that has value and a future, to sell it again when the storm has passed away and the skies are blue, at an enormous profit to the very same people who have just sold it at such ridiculous prices. They buy it up again during the next panic, at the same low rates, and play the cruel game as often as a few years of peaceful industry have refilled the emptied money drawers of the producing classes. Financial crises are simply the piston strokes with which the capitalists pump the savings of the Industrial classes into their own reservoirs. ”

“ The impact of drought, weak foreign demand, and strong import demand pushed the trade deficit up to $18 billion in 2003 and to $20 billion in 2004 from $8 billion in 2002. One other concern is the domestic housing bubble. ”

“ When one of these "bubble" companies collapses it is tacitly assumed by unthinking people that those who invested their money in it were foolish persons who might have sought and found some better investment. Yet a little investigation would have shown that at the time this company arose no opportunity of safe remunerative investment open to the outside public existed, every sound form of business being already fully supplied with capital. ”

“ Prices fall, production is checked, and a period of depression ensues. Gradually, however, the slackened rate of production allows the accumulated stocks to be cleared, perhaps below cost price, perhaps by waiting until demand grows up to supply. When this excess of demand over supply has once again become patent, business recovers. Depression yields to prosperity, competitors again vie with each other to increase their shares in the output, after a few years the market is glutted again, and a new crisis comes, to be followed once more by depression. ”

“ We attributed it then, and we attribute it now, to an unexampled glut in the money market, which we hold to be in this trading country the most destructive of any, saving and excepting a glut in agricultural produce and labour; and for this very plain reason, that a glut of money resolves itself sooner or later into a glut of goods, thereby carrying the amount of production in the country far beyond the amount of the consumption and demand, and so necessarily for a time closing the door against all the outlets of industry. ”