23 June 2015

Reality in a Bubble - Meconomics

Here’s a fun topic to explore – BUBBLES!!!

What do you know about blowing bubbles?
1. It’s fun
2. You blow air unto a film of soapy liquid and it starts creating a bubble
3. The more air you blow into it, the bigger the bubble becomes
3. Blow in too much air – and the bubble pops.

Bubbles exist in economics as well – they’re called ‘Speculative Bubbles’.

Here’s a definition from Investopedia (don’t worry if you don’t understand everything):

“A spike in asset values within a particular industry, commodity, or asset class.

A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest.

The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments.”

In the simplest terms, what is said here is: Air is put into a bubble and then the bubble bursts. What happens, is that the value of assets is inflated beyond their real value. So – you have an asset, say a house – that has a particular intrinsic value – say 3 million dollars. Through speculation, the price of the house is driven up, for instance from 3 million to 5 million dollars – but the actual value of the house doesn’t change – it’s still only actually worth 3 million dollars. The 2 million that gets added on top is just air – and the bubble bursts when the price decreases at a fast pace from 5 back to 3 million.

You can imagine how these bubbles can create economic disasters – because in the end, economics is about sustaining lives. When you don’t know whether the ground you’re walking on is real or could collapse any moment, you’re working with instability and uncertainty, which at the moment are two words that are embedded in our economic system, partly due to the nature of these speculative bubbles.

To give you an idea of the far-reaching consequences these bubbles can have, just think of the recent financial crisis. Greece was herein the unfortunate ‘posterchild’.  On the 17th of June the Debt Truth Commission, set up to investigate the truth about the Greek debt, presented their preliminary findings to parliament. I suggest you read through the entire article (http://cadtm.org/Summary-of-the-first-day-of-the), but for the purpose of this post, specifically read the following paragraph:

“The scientific coordinator recounted the history of the Greek debt in a way that has not been done by the mainstream medias during the last five years: “We realised that the usual explanations of a disastrous state of public finances were not confirmed”; he said. A strict analysis of the facts and the figures has allowed the commission to look at past events differently. As from the moment that Greece entered the Eurozone private capital rushed into Greece where it earned high yields. Wherever capital converges speculative bubbles are created! We have the figures that prove this happened: between 2001 and 2009 household loans increased sevenfold and small business loans increased fourfold, while State loans only increased by 20%. At end of the 2000s the finances that were suffering were heavily indebted private finances not State finances.”

Speculative bubbles were right at the center of the on-set of economic instability in Greece – this instability rapidly escalating and spiraling out into these disastrous consequences:

“• –– Vicious circle of recession.The continuous drop in GDP, in 2011 surpassing the historical maximum for the entire postwar period, led to a rapid reduction in domestic demand. Lower production led to dismissals and the loss of thousands of jobs, further amplifying recession.

• –– Unemployment had already more than doubled within the first three years of austerity and reached 25.4 percent in August 2012. More than half of the population between 15–24 years old is unemployed (57 percent; Eurostat 2012), while thousands of jobs have been lost under conditions of insufficient social protection. Given the continuation of the crisis, the new unemployed become the chronic unemployed.

• –– Rapid labor deterioration, as shown by the increase of precarious and uninsured work, insecurity, degrading payments, weakening of labour rights, and deregulation of labour agreements.

• –– Strangling of the lower middle class, traditionally consisting of small and medium sized enterprises. A great number of such enterprises (family-owned or not) were unable to survive declining consumption, lack of liquidity, and emergency taxes. More than 65,000 of them closed down in 2010 alone, resulting in a “clearance” of such enterprises and disaffecting the people dependent on them.

• –– Migration of younger, highly educated people has risen (“brain drain”), while those studying and living abroad are discouraged to return to Greece, and those who previously would have stayed, are now leaving.

• –– Homelessness increased by 25 percent from 2009 to 2011. Along with the pre-crisis and “hidden” immigrant homelessness, a generation of “neohomeless” now exists who include those with medium or higher educational backgrounds who previously belonged to the social middle.

• –– Suicides hit record levels, increasing by 25 percent from 2009 to 2010 and by an additional 40 percent from 2010 to 2011.

• –– Deterioration of public health evidenced by reduced access to health care services and an increase of 52 percent in HIV infections from 2010 to 2011. Drug prevention centers and psychiatric clinics have closed down due to budget cuts.

To this, one could also add a worrying political impact – that a country with a traditionally weak far right now has one of the largest organised Neo-nazi movements in Europe. In the 2015 legislative elections the ‘Golden Dawn’ secured third place in the popular vote.”

So – perhaps economic bubbles are not as fun as the bubbles you blow as a child. But what about the bubbles we blow in our daily lives – what do economic bubbles have to show us about the human condition? That’s what I’ll explore in posts to come. After all – the economic system is a human creation – created in our image and likeness.


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