Reply #22: The nature of economic bubbles

[TexasLawyer]

From the current issue of Harper's features a lead article entitled "An Illustrated Guide to the Coming Real Estate Collapse" by Michael Hudson.



<snip>

Hudson identifies several key points in all great speculative bubbles: a government which fosters the conditions for a bubble, and a speculative mindset which eschews actual investment for "making money with money." Referring to the classic South Seas Stock Bubble, he says:

Every stock market bubble in history, starting with the South Sea and Mississippi bubbles in the 1710s in Britain and France, has been sponsored by government. The driving force has been the government's attempt to cope with debt obligations beyond its foreseeable ability to pay. Creating a bubble has been a way to solve their public debt problem--and to pay off political insiders at the same time, thereby killing two birds with one stone.

Modern governments are not politically able to simply default on their debts--at least, not debts owed to their own bondholders in their own currency. The problem has to be solved through "the marketplace."

Stocks in the South Sea and Mississippi Companies were issued in tranches, permitting people to buy on margin with only a small proportion as down payment, so that they could quickly double their small initial payment as the stocks were engineered upward in price. It seemed that money could be made off money itself. This is a basic illusion that is necessary for bubbles to take off.

Saving, stock and bond speculation and real estate speculation do not by themselves lead to new investment. In fact, the higher speculative and financial returns are, the less incentive there is to actually tie down money in building new factories and expanding business.

<snip>

http://www.oftwominds.com/blogmay06/serfdom.html