The Thing About Economic Bubbles

By Jeff Fitchett

There are tell-tale signs of bubbles.  All throughout history bubbles have been formed, popped, a depression ensued and then another bubble formed.  The characteristics of bubbles are very similar. Group think is one of the key components.  Rational thinking is set aside as more and more people crowd into a purchasing frenzy to buy up a sought after item.  The value of the said item rapidly increases in price and in the end the price collapses and humans suffer financial ruin.

In the 1600s, the Dutch experienced what is now called tulip mania.  People flocked into buying tulip bulbs.  The masses bid up the price of tulip bulbs to prices that were in some cases 10 times the income of a craftsman or worth more than acreage of property.

The history of the South Sea Company is another example of an extreme bubble that occurred in the 1700s.  England was deep in debt and had devised a plan to convert debt into equity of a newly created trading company: The South Sea Company.  The idea was to create a company that would conduct trade in South America and use the profits to pay a dividend of 6% to shareholders.  There was no reasonable prospect that trade would occur, but the company expanded rapidly and the share price moved significantly higher as a herd of people scrambled to buy shares.  The bubble eventually popped and fortunes were lost.

In the 1800s, Britain had passed hundreds of Parliamentary Acts to build railways.  The masses bought the shares of railway companies and as the price moved higher so too did the number of people buying shares.  Over a third of promised railway lines were never built and the bubble popped.

In the late 1990s, the Internet was becoming much more accessible to the greater population.  Financial pundits and tech gurus described the tech sector as the “new economy.”  Investors swarmed into any stock that was considered technology related.  Initial public offerings were hitting the markets at an unsustainable rate.  The valuations of companies, that had no revenue, skyrocketed.  Eventually panic occurred and stock prices collapsed as investors sold off worthless shares of soon-to-be bankrupt companies.

The biggest bubble in human history is building right now.  The first signs of this bubble occurred in the US mortgage market and it temporarily wrought havoc on the global economy in 2007 through into 2009.  Instead of allowing the bubble to pop; central banks, cheered on by politicians and the media, printed money to keep the bubble from popping.  In essence, the powers that be kicked the proverbial can down the road and have allowed the good times to continue for a bit longer.  The bubble will pop and a depression will negatively impact our civilization.

The thing about bubbles is that the general population moves in concert, embraces fiction and literally buys into an unsustainable set of circumstances.  The psychology of people is very fascinating.  Insanity can be defined as repeating the same action over and over and expecting a different outcome.  It’s interesting to note how people are corralled into joining the hype.  In the early to mid 2000s there were many TV shows about flipping houses.  All of a sudden, everyone was wanting to buy rental properties and fixer-uppers to flip.  Mortgage standards declined in most countries and people who should not have qualified for getting a mortgage were granted access to mortgages.  As you know, when the mortgage bubble popped; home prices collapsed in many countries.

Today, if you can fog a mirror, you can be approved for car loans, credit cards and lines of credit.  We are bombarded with commercials from lenders that state: “No Credit Check, No Income Verification” “Contact Us For An Instant Loan.” Globally, governments are taking the lead and going further into debt.  Western culture has become a “buy now and worry about the consequences later” society.  The most concerning aspect of this bubble is that our entire way of life is based on debt.  After all, fiat currency is created through the issuance of debt.  We have robbed the future in an effort to enjoy the present.  When the good times end the piper will need to be paid.  The unfortunate part for us is that it is impossible to pay back the mountain of debt that has been accumulated.  Every country is dealing with too much debt within a system that has been corrupted to its core.  We are about to be crushed under the weight of debt defaults and debt monetization.  It doesn’t matter if we experience extreme deflation or inflation.  The effect on the average person will feel the exact same.  Either way we will struggle to provide the basic necessities of life.  Few people will be able to profit and succeed in a world that is mired in depression and adversity.  The luxuries we enjoy today will seem like a pipe dream from a bygone era as life continues to grind down into the abyss of history.

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You can read more from Jeff Fitchett at Trivium Analytics Canada, where this article first appeared.