Meanwhile in China....

ging84

what does this mean?
it sounds like quite a big deal
like a global economic collapse as big as the credit crunch, or bigger kind of big
is that likely to be overstating thing or is this it? the global unwinding starts here, in 18months time we'll all be living in crumbling ruins of society, hiding from rouge drones and drinking our own !!!!

Generali

michaels wrote: »

But an equal profit will have been made by someone (else) on the way up. Sure those who got burned will have lost out but money is not being injected into or taken out of the economy overall (although of course the real economy can be impacted through changes to investment decisions and wealth affects).

True but what does happen, according to the Libertarians who are spot on with this IMHO, is that these bubbles drive a misallocation of resources away from productive investment and into what will ultimately be unproductive investment.

Take a simple idea of a housing bubble like the one in Ireland. People start to build houses speculatively in order to sell later at an inflated price. However these houses aren't 'wanted' as such, they are being demanded to increase a cash balance not to supply housing services. As their price increases, their value in terms of the provision of housing services is at best static or even arguably falling as the scarcity value of the provision of housing services has fallen.

Ultimately the bubble bursts and we are left with a bunch of empty houses, this is fixed capital which has been produced at the expense of something else. The money spent on building those houses could have been better employed on other forms of investment, building a beer factory or fitting out hair salons or whatever price signals tells you is a good business to start or grow. Bubbles temporarily swamp the price signals coming from the rest of the market.

Libertarians, over-simplistically IMHO, claim this is due to the Central Banks being able to set interest rates. When asset prices fall, CBs cut interest rates which causes a bubble to appear as inflation isn't spread evenly through the economy but at first shows itself as increasing asset prices. When that bubble bursts, more stimulus is needed and so on until we get a 'crack-up boom' where the inflation in asset prices spills out into the broader price level and fiat money ends up reverting to its real value which is 0.

I do think this second part has a whiff of twaddle about it but then again if you look at the Fed rate since Volker hiked in the early 80s the Libertarian interpretation of markets could be said to be shown. Each time asset prices have come down, so have interest rates.

Post the October 87 'Black Monday' crash, post the LTCM 'Asia Crisis', post the dot com crash and post the GFC rates have just fallen and fallen and each time the crash has been bigger. I'd hesitate to call the 'crack-up boom' theory correct on 4 data points however.

Generali

ging84 wrote: »

what does this mean?
it sounds like quite a big deal
like a global economic collapse as big as the credit crunch, or bigger kind of big
is that likely to be overstating thing or is this it? the global unwinding starts here, in 18months time we'll all be living in crumbling ruins of society, hiding from rouge drones and drinking our own !!!!

It's a good question.

The most likely outcome is.....very little. China still has a massively productive manufacturing sector which will keep on producing stuff. The problem here, except for the misallocation of resources I note above, is really one of small green pieces of paper.

However, if the Libertarians are right then we are all screwed and have been on an inevitable path since 1971 (end of Breton Woods).

cells

Generali wrote: »

True but what does happen, according to the Libertarians who are spot on with this IMHO, is that these bubbles drive a misallocation of resources away from productive investment and into what will ultimately be unproductive investment.

Take a simple idea of a housing bubble like the one in Ireland. People start to build houses speculatively in order to sell later at an inflated price. However these houses aren't 'wanted' as such, they are being demanded to increase a cash balance not to supply housing services. As their price increases, their value in terms of the provision of housing services is at best static or even arguably falling as the scarcity value of the provision of housing services has fallen.

Ultimately the bubble bursts and we are left with a bunch of empty houses, this is fixed capital which has been produced at the expense of something else. The money spent on building those houses could have been better employed on other forms of investment, building a beer factory or fitting out hair salons or whatever price signals tells you is a good business to start or grow. Bubbles temporarily swamp the price signals coming from the rest of the market.

Libertarians, over-simplistically IMHO, claim this is due to the Central Banks being able to set interest rates. When asset prices fall, CBs cut interest rates which causes a bubble to appear as inflation isn't spread evenly through the economy but at first shows itself as increasing asset prices. When that bubble bursts, more stimulus is needed and so on until we get a 'crack-up boom' where the inflation in asset prices spills out into the broader price level and fiat money ends up reverting to its real value which is 0.

I do think this second part has a whiff of twaddle about it but then again if you look at the Fed rate since Volker hiked in the early 80s the Libertarian interpretation of markets could be said to be shown. Each time asset prices have come down, so have interest rates.

Post the October 87 'Black Monday' crash, post the LTCM 'Asia Crisis', post the dot com crash and post the GFC rates have just fallen and fallen and each time the crash has been bigger. I'd hesitate to call the 'crack-up boom' theory correct on 4 data points however.

Can you think of a 'bubble' that resulted in over building or producing of something?

Ireland didn't over build homes they just went from a poor European country to a not so poor one. Their homes per capita is still less than France or Germany and only a little more than the UK

what did the tech bubble of the late 1990s over produce?

im not sure bubbles result in overproduction as the overproduction before it got to that would have deflated the bubble. My guess is that most bubbles are nothing more than a group defaulting (or the threat of it happening) resulting in overshooting and headless chickens time.

There is of course a lot of misallocated capital all the time but its not called a bubble. For example HS2 is going to be a £50Billion misallocation of capital but there is no connection to bubbles. Arguably around a trillion dollars has been misallocated to ineffectivet wind and solar plants and its not called a bubble.



Regarding interest rates continuously fallig that is a natural progress of an economy as we get better at making things and more secure.

cells

In its most basic form interest rates are juat a signal to how far into the future you should invest. Even if you were the only human on the planet you would have your own 'interest rate' which would determine how you invested your time.

if you were in desperate need for essentials (food water warmth) your 'interest rate' would be sky high telling you to invest your time into the things that need doing in the next few hours.

If you had your basics covered but needes a better hut or to gather food for the winter months your interest rate would be lower telling you to invest unti the next few months

if you had those covered your interest rate would get even lower telling you to invest time into things that you would need a few years down the line (maybe running water)

If you had those covered your interest rate would be even lower telling you that you could invest time into things going a decade or few forward (maybe learning to play an instrument or doing long art projects)

If some time down the line you discover some magic berries that exten your life to a million years in good heath (effectively a government or state assumes it has a 'lofetime' much greater than 100 years) then yoir interest rate might even be getting towards zero. Telling you to invest into things maybe a hubdred or even a thousand years away.



or in short.....interest rates just tell us how far into the future we should be investing. As the world gets more secure and we build out our infrastructure interest rates will fall so as to allow the next stage of development

cells

The success to any nation is electricity. It is by far the most important discovery because it enables pretty much everything else.

It takes about 40-50 years to transition from undeveloped to developed once electricity arrives.

China only really entered the electricity age in 1990 and by 2030-2040 her journey will be complete and she will be a fully first world nation. My guess is by 2050 her per capita income will be plus or minus 25% of that of the USA

stock/bond/equities markets doing a dance now and then is irrelevant china now has electricity

michaels

There is a bit of truth in the 'If you build it, then they will come' story of investment - for example the railways or all that unlit fibre from 2 booms a century apart. However in most bubbles those who put up the capital got wiped out and the assets dumped whence marginal cost pricing bossted demand to the extent that the supply was utilised. Overall perhaps it was individually ruinous but socially useful...

padington

You've got a really interesting take on things cells, how did you come across your way of looking at economics ?

Generali

cells wrote: »

Can you think of a 'bubble' that resulted in over building or producing of something?

Yes, lots.

The Irish and Spanish housing bubbles led to massive over-production of houses.

The dot com boom led to massive overproduction of internet companies (pets.com anyone?).

The current boom in Chinese stock markets is leading to the overproduction of companies being created for the purposes of floating on the stock markets.

The financial bubble in the mid-2000s led to the overproduction of financial services. That can be seen by the fact that in 2007 there were 500,000 people in financial services in The City whilst the last time I looked there were 350,000.

padington

You could argue that the industrial revolution general boom created an oversupply of people.

The green revolution created an oversupply of pesticides, meat and unhealthy foods.

The free love sexual revolution created an oversupply of STD's.

Maybe the digital revolution boom created an oversupply of information too.