Nothing brings in the readers like “Apocalypse!”…
Jesse Colombo’s new post on Forbes (“Disaster Is In Inevitable When The Two Decades-Old Stock Bubble Bursts”) is just another in a long list of his bubble prediction posts that seem designed to gather web stats, inspire facebook shares and responsive-posts-such-as-these, and request donations at the end for “a powerful new media campaign to help prevent the next global financial crisis”.
Which makes him the economic equivalent of a Doomsday Cultist leader.
So don’t let him look you in the eyes directly.
Some pontifications in the last 10 days:
The general formula seems to go something like this:
- Pick a country/market/market-in-a-country.
- Find graphs.
- Declare Doom.
Thus far, apart from the latest stock market bubble prediction (although, to be fair, this is really a rince-and-repeat of a longstanding series of stock market bubble predictions), here’s a list of his other predicted “Current Bubble” bursts:
- New Zealand
- The Philippines
- South Africa
- Social Media
- Emerging Markets (Russia, India, China and Brazil)
- US Colleges
- US Healthcare
- A Post-2009 US Housing Bubble AKA Global Crisis 2.0
- Housing Bubbles in:
- The UK
- The Netherlands
Which is a thoroughly neat way of keeping your bases covered: just predict bubbles in everything (except for Japan, apparently?). Because then, obviously, at the first sign of swings, you can prance around telling people so.
That said, Mr Colombo is probably right about a lot of things: provided that you agree with his underlying assumptions. At least, that’s what I feel.
The Underlying Assumptions
Here is how I think a bubble-man sees the world:
- Economies are always mostly the same. People buy and people spend.
- But governments and Central Banks intervene, messing up the natural balance of things. And when they stop intervening, then the balance has to restore itself.
- The restoration of balance is a horrid affair.
Here are my problems with that world view:
Economies are not mostly the same.
Economies change over time. The consumption patterns of the upper class are not the same as the consumption patterns of the lower and middle classes. The return criteria of any investment are directly linked to those consumption patterns.
You get short term shifts in consumption patterns – which are usually linked to government and Central Bank intervention.
And you get long term shifts in consumption patterns – caused by things like capital accumulation, etc.
Meaning that: what you’re looking at could be a short-term distortion, or it could be a long-term fundamental change.
Governments and Central Banks Won’t “Eventually Stop Intervening”
Governments and Central Banks have shown themselves willing and able to intervene for as long as they think it’s necessary.
Why should that suddenly stop in the future?
In Mr Colombo’s own words:
The U.S. Federal Reserve also created a Bubblecovery in the early-2000s to recover from the Dot-com bust, which led to the housing bubble. After the housing bubble burst, the Fed inflated the post-2009 Bubblecovery. After each bubble/Bubblecovery ends, the Fed simply inflates another bubble to recover from the last one. In essence, the U.S. economy and stock market has been in a bubble cycle for the past two decades. Each time, the bubble gets larger, and the Fed has to keep re-inflating it to avoid the economic Depression that would occur if asset prices were allowed to find their true value.
I guess the implication is that the bubbles get larger and larger and eventually, the Fed won’t be able to do it anymore.
This is crazy talk.
Central Banks have unlimited reserves of money to create. Technically, the size of the bubble can be infinite.
This may seem troubling, but it shouldn’t be – because money supply is simply a measurement of proportion. Here’s an example to illustrate that:
- I earn R30,000 a month, and my rent costs me R12,000 per month;
- I earn R300,000 a month, and my rent costs me R120,000 per month;
- I earn R3 million a month, and my rent costs me R1.2 million per month;
- I earn R3 billion a month, and my rent costs me R1.2 billion per month.
- In all of the above, my purchasing power has not changed.
- All that has changed is the numerical description of what I’m spending.
- Of course it’s a bit shocking to move between those numbers in a heartbeat (and on that scale!) – but if the adjustment is gradual, then I’ll barely notice it.
And the true value of “assets” is simply their relative value to everything else – not their original value back when we measured things on a different scale.
My point is this: the money supply is not like a balloon whose rubber must eventually run out of stretch. There is infinite stretch, provided that you don’t have dramatically sudden increases in the pressure (like the money-printing that takes place in a hyperinflation)*.
*because if you have that, then the balloon shoots off the edge of the pump.
The Restoration of Balance could just as easily be a non-horrid affair
The adjustment could be gradual. In fact, it’s more likely to be gradual – especially if governments and central banks are busily and indefinitely intervening to make the landings soft, if they permit any landings at all.
But I guess that’s a whole lot less interesting to see in digital print.
Far more exciting to read about the coming Collapse of the Financial System?