< What causes busts?<>
CB, my theory is herds of humans doing dumb things. When it's not a boom time, people go about their normal business, not unduly excited en masse about getting rich quick in the latest and greatest idea.
But now and then, a great new idea comes along and everyone is going to get rich.
Maybe it's kiwifruit, deer, ostrich farming, blueberries, OPEC, gold, shares, telecosmic stuff, tulips, canals, railroads, borrowed money, education or all sorts of things which can get more money out than put in.
Usually, the booms and busts are in small sectors and don't become front page news [such as when a lot of grape vines were planted in New Zealand a couple of decades ago and they ended up being pulled up - over-planting and no economic return].
When several excitements happen in harmony, there is a resonance and as interference patterns work by superimposed waves adding to each other, [as in waves approaching a beach] there is a sudden big wave which becomes unstable and collapses due to bottom friction. Everyone in the way gets swamped.
When there are huge numbers of people involved, such as huge borrowings or huge buyings of the stock market [or both borrowing and share-buying combined], there is the prospect of huge depressions as the stupid idea collapses.
Instead of doing their normal sensible activities, people quit their jobs, buy a computer, start day-trading, borrowing, spending profits they haven't made and there is an apparent boom.
Usually, when hordes of people are involved in something, it's a bad idea [people have a lot of trouble having good ideas even if not in a crowd of something like half the population - in a crowd, they do not have good ideas and the crowd will definitely not be expressing a good idea].
In NZ in the 1980s, we had financial deregulation, which gave many people the idea that borrowing was a great idea [which it had been for decades to buy inflating assets if the privilege of borrowing could be gained by friendly relations with a banker]. We had a stockmarket boom [buying shares became a great idea because they were going up]. We had companies being inflated like puff-balls with debt to buy more companies which were then also inflated with debt [borrowed from our neighbour in Woking who used to fly to NZ to lend a bunch more millions] which was then used to buy more and so on. Until interest rates and profits and share prices started going the wrong way.
So, what was a trivial crunch in the Dow [1987 being hard to see on the 50 year graph] was a huge crunch in NZ and the market never recovered and most companies went broke [most is about right - of the stock exchange listed companies].
Because of foreign trade, [such as the borrowings from our neighbour in Woking - he worked for a financial institution], a bust soon goes flooding over the borders and effects are global. Especially these days with vast global investments all interlinked.
So, watch out for dumb ideas being adopted en masse. Run like the wind if you see hordes of people all getting rich quick with a new idea [or hope to not be the one left holding the baby]. Of course, new ideas do make people rich, but not the last ones into the crowd.
The underlying mistake is that people let other people do their thinking for them. "A million people can't all be wrong, so I guess I'll do it too!"
Knowing when something has gone from "great idea, new thing, needs capital, get rich" to "every man and his dog on the bandwagon" is hard to judge. It's a shame to get out too soon.
I still think cyberspace has not even got warmed up and huge investment is still needed and the same in the telecommunications networks on which cyberspace will operate. So I think we are in a tidying-up phase rather than the end of the road.
Many busts are the end of the particular event and the target, be it tulips, kiwifruit, ostrich or deer farming, never returns to a pre-eminent position. But I don't think we are there with cyberspace and the telecosm. Separating the wheat from the chaff is the hard part.
The 1974 sharemarket bust was caused [in my opinion] by oil quadrupling in price when the economy was far more dependent on oil than now. In 1979 it quadrupled again [before falling dramatically during the early 1980s when the huge boom began]. So the 1970s saw a very flat sharemarket after huge gains in the 1960s.
I'm not aware of any mob 'get-rich-quick' mass hysteria at the moment. The poverty effect is in force. So, the bust phase continues while people struggle to survive and reorient their lives onto a day to day basis again after a lot of fun in the late 1990s.
But, the tidying up will be completed. Then, the techno revolution will continue unabated [as it has been doing - a few glitches aside, such as Globalstar and Global Crossing].
Full of theories!
Mqurice
PS: I know you said macroeconomics, not sharemarkets, but I think they are the same thing [the sharemarket measures the macro and interacts with it like those parallel mirrors where it feels like being in an endless tunnel with hundreds of images of yourself]. |
