Saturday, February 4, 2012

Asset Bubbles, Central Banks, and Libertarians

I am asserting that A)Bubbles exist independent of central banks(government intervention), how they react to asset bubbles definitely affects how the macro economy is effected by the bubble and its eventual popping, see for an excellent article detailing the back and forth on this very issue. B) Bubbles are an artifact of imperfection in the exchange of information(in the academic sense of the word, information travels in a variety of mediums Capital is a form of information, demand is a form of information, etc) between buyers and sellers. C) Governments and central banks can either mitigate or exacerbate the effects of bubbles on their host economies. D)Bubbles are a fundamental aspect of our economies because demand is never going to be perfectly inelastic(the exact opposite of bubble), sometimes people just want to have their furbies. E) Whenever a Bubble occurs in an interconnected international economy it will have repercussions in any attached country. F) Growth rates significantly above statistically normative growth = bubble, bubble growth can lead to collapse below minimum required growth rate to keep up with population if not managed correctly. Bubble economics, can in theory although not proven yet, be harnessed to provide additional tax income to state and local municipalities to help build out the foundation to support the new growth, this almost never happens because that excess capital that could be harnessed gets eaten up by graft, corruption, and middle men. 

I think a good example to illustrate A) is the dot com bubble of the 90s, which to be fair, was a combination of over speculation by the private market coupled with economic distortions caused by government investment in Silicon valley.The Dot-com bubble is a perfect example of what happens when state, local, and federal government do not step in to manage the bubble, people ultimately lose their jobs and the overall economy weakens. High-Tech Start-Ups and Industry Dynamics in Silicon Valley delves into the nitty gritty of what made Silicon valley such a success, and ruminates on the possibilities, that we all lived from 2007 till today.
Crash and reboot: Silicon Valley hightech employment and wages confirms what I just asserted.

What these three articles show is that bubbles occur when we grow too fast because we cannot expand and "fortify" at high rates and therefore a collapse is energetically required, from a physics standpoint. The systems entropy is too high and unstable, it has to devolve to a lower energy state, which to us looks like a bubble popping. Sillicon valley got way too much money and was trying to grow in too many different directions. No one forced people to invest in Silicon Valley but there was irrational exuberance and imperfect information flow. If the last investors had known that the money they were investing was essentially "fat", in that SV had already received more than it could statistically reliably invest with a solid return, they would not have made those investments, which would not have hurt SV, and maybe there would have not been a dot com bubble. Alas, perfect information exchange is not possible, and therefore regardless of whether or not there is government there will always be bubbles. Governments can only mitigate or exacerbate, and just like a gun is only a tool, government sucks, and is dangerous, when you give it too much power and/or when the people running it are incompetent, corrupt, or self absorbed. The same thing was true with the housing bubble, yes the central banks perpetuated it, and Congress made it so easy to be corrupt that if you weren't doing it you would lose your job to someone who was because the profit rates were incredible.

If you go to, and you compare the economic years 80-81, 81-82-83-84-84-85 you see what I am talking about. Extremely anemic growth early on, ty Carter for sucking at foreign relations, followed by Bubble growth from investments from overseas, followed by the required pop, over the whole decade we only avged 3.4ish percent growth, from 1989-1990 we only had 1.88% growth, when just 4 years earlier we were at 7%. What happened in between, the Japanese Housing Bubble, who was heavily investing in the US during the 80s, the Japanese, they have a bubble crisis investment dries up and US growth drops. 
The US needs about 3.5% growth to keep up with population, when we get above that I posit that there is a bubble somewhere to be found, either in Housing, in Financial derivatives, in commodities, or in some other kind of assets.

There was a housing Bubble that popped just a few years back, if you look at us growth rates they on the face don't appear to match up, but when you add in all the building we did on credit you can see that the bubble was not in assets, or really in homes, but was in credit, and when that credit dried up our economy tanked and we shed jobs because we had not built out the foundation to support all of our credit financed growth. The main things that have changed from 1950 to now is that we tax business and the wealth significantly less, while spending more on defense contracts, bailouts to the GE's and GS's of the world, and to the increasing costs of health care for old people. The newest bubble is the College debt bubble, I wish I could get you good empirical sources for that but since the bubble hasn't popped yet the only sources avail are either behind pay walls or aren't reputable.