Why do we have bubbles?

[originalpckelly]

An example:

1. You are in a garage with your car. It has been on, and it is emitting CO2 and CO, as well as other less common noxious gases. Your garage has not only a CO detector, but we'll place a CO2 detector in their too.

Not before long, because of the limited volume of air in your garage, the detectors go off, saving your life.


2. You are now in an arena, running the same car, with the same detectors present.

It takes a looong time before the detectors go off, an unknown amount of time, but certainly longer. Why? Because there is more air volume in the arena than in the garage.


3. You are now outside, running the same car, with the same detectors present.

Within your lifetime, the detectors will never go off, due to the overwhelmingly massive air volume.


In each of these situations, it takes a longer and longer period of time until the detectors go off. This happens because the resource (air) is in larger quantities in each situation, and this allows the car to run longer before it triggers the detectors, until finally in the last example it's outside and it's such a large volume of air, it has practically no effect.

This is why we have bubbles, I allege, because in a larger and larger economy there are more and more resources through which an inefficient practice must burn before it triggers a response due to the resource exhaustion.

A single person, who's not an investor, has limited resources. A single person only has so much cash on hand and so much credit available to them at any one time. If they live beyond their means, there's only so much rope to hang themselves with.

A small business will tend to have more cash on hand and more credit access than a single person, so it takes a little longer to exhaust its resources.

A medium size business, will tend to have more cash on hand and credit access than a small business, so it takes a little longer to exhaust its resources.

A large business will tend to have more cash on hand and access to credit than a medium sized business, so it takes longer for it to exhaust its resources.

A national economy has more cash and access to credit than a single company, so it takes longer for it to exhaust its resources.

A global economy has even more access to cash and credit than a single country's economy.

The latency of self-regulation/self-correction of a larger organization/economy tends to be longer, because it takes longer for a larger organization to exhaust its resources, forcing self-correction or bankruptcy/collapse.

The downturn that follows a bubble is really just pent up self-correction. It's sort of like someone pulling back the arm of a catapult, only to let it go at the last moment.

It doesn't matter what regulations or lessons learned there are from a downturn, it's not about the people who do crooked things, or what practices caused the downturn, all of those things are just actors in a play that's always the same. It's all about the size of the system, and its latency of self-correction.

The only real way to avoid these bubbles is to reduce the size of the systems involved, so that there are fewer resources to exhaust before change must happen.

[no_hypocrisy]

1. Bubbles are a manifestation of unlimited credit and greed.

If they were "reasonable" and rational, they would be expected growth in the usual course of business. Bubbles are created through speculation instead of patient investment, unrealistic, hyped values for the true worth of a purchase, and snowball. Once something is overvalued, it usually stays overvalued, increases in appraised value until it plummets when the fiction is no longer sustainable.

[cali]

2. um, bubbles exist because of human nature every bit as much as systemic

causes.

[originalpckelly]

3. Ah, yes, but can you ever rid people of human nature?

Probably not.

Knowing that, we must attempt to create a system that checks and balances these greedy tendencies. Or we could try to keep putting people in situations where they have unlimited power and become corrupted by it, and hope that it works out better than the umpteen times it hasn't.

[Uben]

4. Bubbles are booms....

...and they will always keep re-appearing because they are as much a part of our economic system as recessions. One cannot exist without the other. Basic economics. Every boom is followed by a bust and every bust is followed by a boom. You can't change it, you can only lenghthen the or shorten their duration.

[Warpy]

5. I think you're missing the necessary ingredients for bubble markets

First, a large number of people have to be beggared so the normal economy just isn't working that well because they're not spending enough to keep the money rolling in to the upper class. Second, wealth concentration has to give the upper class lots of money looking for places to make more money.

You end up with too much wealth in too few hands looking for the next big thing. That resulted in the dotcom bubble leading to the Dow bubble leading to the real estate bubble and culminating in the commodities bubble last winter and spring. The wealthy create these bubbles by rushing in at the same time. As soon as enough suckers follow suit, they start easing out, leaving the suckers to take the hit when the bubble collapses.

Bubbles are easy to spot. Tracing who started them off is much more difficult, but hedge funds figured largely in the commodities bubble.

We've now had enough collapses that have taken enough money out of the economy that everybody is feeling the pinch, even the fat cats who caused the whole mess.

(yes, this is oversimplified. It's a post, not a book)

[originalpckelly]

6. All you're talking about are the specifics of what I said.

A system that enables what you talk about to happen is the problem. We will never rid ourselves of greedy people, the only hope we have is checking that greed.

[Warpy]

7. The economy of the Netherlands was quite small in the 1630s

but the things I cited were in place: a beggared lower class and a wealthy non aristocratic upper class looking for something big. They decided on tulip bulbs.

Your point was that bubble markets need large economies to originate and grow in. Mine was rather that they do not, that wealth disparity alone will create the conditions for them.

[originalpckelly]

9. No, that was not my point, and I will encourage you to re-read the OP.

And this time pay attention.

Larger economies will tend to produce more severe bubbles, but that doesn't prevent a small economy from being bubbly. I would agree with your wealth inequality point, because behind that inequality must be a system to produce it and enable richer people to have access to a larger pool of resources (a larger rope) to hang themselves with.

A bubble is produced in a situation where there is the ability to sell something for more than it's worth. This can only happen in a system with lots of resources to waste on over-valued goods. One person living alone cannot have a bubble, if they do not work, they will not have food.

The larger the system, the more resources. I don't think there is enough historical data to conclusively analyze those little tulip growers.

*Pay attention to the arena. The arena takes longer than a garage, but less time than outdoors. A larger arena takes more time than a school gym to run through its resources and trigger the detectors.

[no_hypocrisy]

8. Which also disproves the "trickledown" theory of economics.

The redistribution of wealth does not result in the largess being shared with non-wealthy. It results in seed money if you will to make more wealth which will continue to be reinvested endlessly and never intended to be shared and distributed.

[havocmom]

10. Only means fish have of getting their farts to us