Can speculative bubbles occur in the unhampered market? Certainly there would be relatively less, but is there any merit to the notion of so-called positive-feedback loops in the absence of credit expansion? Is it really impossible, in absolute terms, for a speculative bubble to exist without it being financed by credit expansion?
I've searched the forum and have come across a few threads that didn't delve too deeply into this question, so I hope this thread might really dig into it a little more.
I know that some French guy published a book about speculative bubbles that says that Tulipmania was really a result of newly circulating money (forgive me, I haven't gotten around to reading it yet so I don't yet know the specifics), but had the money supply been more stable, could such "irrational" behavior still have occurred?
With intrinsic value I didn't mean the Marxian term but the concept from investment calculation with discounted cash flows.
nirgrahamUK: in a free market, with such blips, the pain falls on those responsible for the blips, and everyone else needn't take notice.
in a free market, with such blips, the pain falls on those responsible for the blips, and everyone else needn't take notice.
There might be also secondary-deflation effects in the short term, harming market participants outside the bubble sectors.
It occurs to me that some people here argue more Chicagoan than Austrian. All human beings fail sometimes (with the difference that market failures are less harmful than government failures). And occasionally, a huge number of people fail collectively (herd behaviour). If people were always perfectly rational, the FED could have printed money forever without there appearing business cycles. Yes, monetary policy aggravates the problem of business cycles, but as long as people cannot foresee the future and are irrationally optimistic or pessimistic, there will be cycles of boom and bust.
But that's okay - in a world of uncertainty, there is sometimes no better method than trial and error.
Tobbog:It occurs to me that some people here argue more Chicagoan than Austrian.
Tobbog:If people were always perfectly rational, the FED could have printed money forever without there appearing business cycles.
The Austrian prespective is that bubbles occur from monetary intervention. Anything else is not a bubble at all but somethign entirely different. Speculative bubbles cannot occur without the means to finance them. IE Easy money.
Tobbog:Yes, monetary policy aggravates the problem of business cycles, but as long as people cannot foresee the future and are irrationally optimistic or pessimistic, there will be cycles of boom and bust.
This is not the Austrian prespective.
You need to go back and read up on the ABCT. We just got done hamemring this on Mickanomics, we don't want to do it again. :(
Tobbog: The only reason for a change of the amount of savings is a change of time preference.
The only reason for a change of the amount of savings is a change of time preference.
If there is hyperinflation there is no reason to save at all. Just saying.
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It's easy to refute an argument if you first misrepresent it. William Keizer
filc:The Austrian prespective is that bubbles occur from monetary intervention. Anything else is not a bubble at all but somethign entirely different.
filc: This is not the Austrian prespective.
Tobbog: filc:The Austrian prespective is that bubbles occur from monetary intervention. Anything else is not a bubble at all but somethign entirely different. This is your private definition. Most people would explain bubbles as a large number of malinvestments that happen at the same time. And as long as people aren't perfectly rational godlike creatures, it is possible for bubbles to occur. filc: This is not the Austrian prespective. The Austrian School sees market participants in a constant struggle to estimate the future. If the majority or a large fraction of the market participants misestimate the future, a boom bust cycle can occur even without monetary intervention. Please tell me the reason why you think that is impossible.
In a world ruled by statistical mechanics, almost anything is possible. If all the atoms in your building randomly moved upward, the whole building would rise. But it's highly unlikely.
In the world of human beings, it is certainly possible that everyone in the world may decide of their own free will to run lemming like into the sea. No one can say that it is impossible. But it is highly unlikely, so unlikely as to be laughable to even discuss when dealing with the real world.
In the world of economics, most people care about their hard earned money and are extremely reluctant to risk it unless the odds heavily favor their success. This is especially true about professional investors, who are mostly walking around with money because they have a track record of success. So they often know what they are doing, many more times than not.
Only monetary intervention, which makes rational people rationally think, "If I do nothing my money will be inflated away to nothing, will make them prefer the unlikely [profit from doubtful speculation] to the inevitable [loss of their bucks to inflation].
Only monetary intervention, which provides free loans to the irrational, allows nut cases to throw their money away on the impossible bubble.
So yes, it is POSSIBLE that a large fraction of the world will all decide to invest in a bubble without monetary intervention, just as it it possible to throw heads on a fair die a trillion times in a row. But both are highly unlikely.
nirgrahamUK: in a free market, with such blips, the pain falls on those responsible for the blips, and everyone else needn't take notice. under state governance, easy money props up the bubble and both widely distorts the structure of production and encourages over consumption across the broad span of the economy. so when the bubble pops, everyone feels the pain. you can say its such a quantitative difference that it can be considered as pseudo-qualitatively different. certainly one bears thinking about and the other doesn't. much like the difference between losing skin through gentle friction of ones clothes throughout a normal day, and being flayed alive by a sadistic torturer. two ways of losing skin.
under state governance, easy money props up the bubble and both widely distorts the structure of production and encourages over consumption across the broad span of the economy. so when the bubble pops, everyone feels the pain.
you can say its such a quantitative difference that it can be considered as pseudo-qualitatively different. certainly one bears thinking about and the other doesn't. much like the difference between losing skin through gentle friction of ones clothes throughout a normal day, and being flayed alive by a sadistic torturer. two ways of losing skin.
Smiling Dave:But it is highly unlikely, so unlikely as to be laughable to even discuss when dealing with the real world.
Did you ever hear the term "herd instinct"? It governs which movies we watch, what kind of clothes we wear and which music we listen to. And every few decades, it becomes extremely fashionable to buy stocks, since the Joneses and the Smiths bought them too.
The dotcom bubble I mentioned beforehand was fueled mostly through the stock market and most investors don't borrow any money in order to buy stocks. The fact was that people saw teenagers becoming millionaires through internet companies and millions of people wanted to be like them. The stocks of internet companies rose ten- or twentyfold which made many people believe that the only direction high tech stocks can take is up, which made even more people invest in them, and so on.
Many people do things, just because many others do it too, they believe things they want to believe and they often think that patterns of the past will transcend into the future. I think the main advantage of the Austrian School was that it sees people as they are, mostly rational, in contrast to the Chicago School that sees people as perfectly rational.
Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, “Oh, I’m really sorry. You seem to meet all the tests to get into heaven. But we’ve got a terrible problem. See that pen over there? That’s where we keep the oil prospectors waiting to get into heaven. And it’s filled—we haven’t got room for even one more.” The oil prospector thought for a minute and said, “Would you mind if I just said four words to those folks?” “I can’t see any harm in that,” said St. Pete. So the old-timer cupped his hands and yelled out, “Oil discovered in hell!” Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. “You know, that’s a pretty good trick,” St. Pete said. “Move in. The place is yours. You’ve got plenty of room.” The old fellow scratched his head and said, “No. If you don’t mind, I think I’ll go along with the rest of ’em. There may be some truth to that rumor after all."
the dotcom bubble was fed-induced.
Wiki - for the what
The "dot-com bubble" (or sometimes the "I.T. bubble"[1]) was a speculative bubble covering roughly 1998–2001 (with a climax on March 10, 2000 with the NASDAQ peaking at 5132.52) during which stock markets in Western nations saw their equity value rise rapidly from growth in the more recent Internet sector and related fields
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Mises - for the how
http://www.thefreemanonline.org/featured/a-classic-hayekian-hangover/
After increasing at a rate of less than 2.5 percent during the first three years of the Clinton administration, MZM increased over the next three years (1996–1998) at an annualized rate of over 10 percent, rising during the last half of 1998 at a binge rate of almost 15 percent.
(MZM: Money with zero maturity. This measure equals M2 plus all money market funds, minus time deposits. It measures the supply of financial assets redeemable at par on demand.)
Sean Corrigan, a principal in Capital Insight, a UK-based financial consultancy, details the consequences of the further expansion that came in “autumn 1998, when the world economy, still racked by the problems of the Asian credit bust over the preceding year, then had to cope with the Russian default and the implosion of the mighty Long-Term Capital Management.”
Corrigan goes on: “Over the next eighteen months, the Fed added $55 billion to its portfolio of Treasuries and swelled repos held from $6.5 billion to $22 billion… [T]his translated into a combined money market mutual fund and commercial bank asset increase of $870 billion to the market peak, of $1.2 trillion to the industrial production peak, and of $1.8 trillion to date [August 14, 2001]—twice the level of real GDP added in the same interval” (http://mises.org/fullarticle.asp?control=754).
The party was in full swing. The Fed cut the fed funds rate 100 basis points between June 1998 and January 1999. The rate on 30-year Treasuries dropped from a high of over 7 percent to a low of 5 percent. Stock markets soared. The NASDAQ composite went from just over 1000 to over 5000, rising over 80 percent in 1999 alone. With abundant credit being freely served to Internet start-ups, hordes of corporate managers, who had seemed married to their stodgy blue-chip companies, suddenly were romancing some sexy dot-com that had just joined the party.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Tobbog:This is your private definition. Most people would explain bubbles as a large number of malinvestments that happen at the same time. And as long as people aren't perfectly rational godlike creatures, it is possible for bubbles to occur.
Appeal to Numbers?
The Austrian business cycle theory is an explanation of the phenomenon of business cycles held by the Austrian School of economics. The theory views business cycles (or, as some Austrians prefer, "credit cycles") as the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.[1]
The Wiki Article
And I actually have read up on it a bit in various books ect....
Tobbog:The Austrian School sees market participants in a constant struggle to estimate the future. If the majority or a large fraction of the market participants misestimate the future, a boom bust cycle can occur even without monetary intervention. Please tell me the reason why you think that is impossible.
With a stable monetary base how would market participants magically mis-estimate the future? Animal Spirits?
Tobbog:And as long as people aren't perfectly rational godlike creatures, it is possible for bubbles to occur.
The fact that your making a statement which passes judgement on what is a rational market participant would lead me to believe you are lacking major chunks of the Austrian School of thought, like Praxeology. Does man act less rational when the quantity of resources is lied about? Not necessarily.
filc:With a stable monetary base how would market participants magically mis-estimate the future? Animal Spirits?
There is nothing magical about misjudgements. No one knwos exactly what the future will look like. (If you do, I hope you are at least a trillionaire.) Because of that, everyone can just guess on how the future will be. And from time to time, the great majority of market participants have quite similar estimations of the future (because they read the same newspapers, and magazines, talk to each other, etc. ). And again, it is perfectly possible that this great majority will turn out to be wrong.
filc:And I actually have read up on it a bit in various books ect....
filc: The fact that your making a statement which passes judgement on what is a rational market participant would lead me to believe you are lacking major chunks of the Austrian School of thought, like Praxeology. Does man act less rational when the quantity of resources is lied about? Not necessarily.
If you think that I'm wrong, please disprove me. Which magic market mechanism will tell people ex ante that their investment decisions will turn out to be wrong??? There is none, unfortunately. And, becauses of that, if many people take a similar investment decision at the same time, which happens quite often, and that decision turns out to be wrong, there will be a good old boom-bust cycle.
Tobbog:You've got me there. I haven't read "Human Action" but the original "Nationalökonomie", that's why I've used the wrong terms here. What I wanted to say was that, ex post, we regret many actions that we have commited.
NP, they are fun reads though. :)
Tobbog:If you think that I'm wrong, please disprove me. Which magic market mechanism will tell people ex ante that their investment decisions will turn out to be wrong??? There is none, unfortunately. And, becauses of that, if many people take a similar investment decision at the same time, which happens quite often, and that decision turns out to be wrong, there will be a good old boom-bust cycle.
I think there is a methodological mis-communication or confusion in terminology between us here. Industry's grow and dwindle. The horse and buggy industry at one point in time consumed much in the way of global resources, it has since shrunk and died out. It cannot be said that it was a boom/bust cycle. Since no metric exists to measure whether someone is being rational or not it can only really be assumed that in a stable market industry's that boom do so because of consumer demand. If they boom because they are providing consumers with what they want there is nothing wrong with them. If they die because of new technology that is not an economic error but a natural progression of a dynamic economy. In such cases effects on the economy will be isolated and limited in scale. You can choose to call them booms and busts but doing so could be mis-leading.
Could it be argued that Tickle-me-Elmo was an isolated boom/bust example? I would say no as the process of an industry or company growing and shrinking is not what a business cycle is. Such isolated examples of a supposed boom may have been entirely necessary from a consumer standpoint, it could be part of the natural technological and economic progression humans need. It is hard for us to judge the subjective valuation of man.
Perhaps Mises said it best.
There is no room left in the field of economics for a scale of needs different from the scale of values as reflected in man's actual behavior. Economics deals with real man, weak and subject to error as he is, not with ideal beings, omniscient and perfect as only goods could be.
OR
Ethical doctrines are intent upon establishing scales of value according to which man should act but does not necessarily always act. They claim for themselves the vocation of telling right from wrong and of advising man concerning what he should aim at as the supreme good. They are normative and disciplines aiming at the cognition of what ought to be. They are not neutral with regard to facts; they judge them from the point of view of freely adopted standards.
This is not the attitude of praxeology and economics. They are fully aware of the fact that the ultimate ends of human action are not open to examination from any absolute standard. Ultimate ends are ultimately given, they are purely subjective, they differ with various people and with the same people at various moments in their lives.
-Human Action
The point is by your folks's definition. When a supposed Boom/Bust happens you have no way of discerning whether it's some kind of error or simply a change in consumer demand. Making judgments as to whether or not an industry boomed in error is passing judgement against individual human action. In other words, we are making judgments against people's subjective valuation right?
That would not be the viewpoint of AE to my understanding. Economics is not an omniscience created at predicting the future of business activities successes and failures. Nor is it's purpose suppose to identify the best way of doing business. Austrian Economics says that consumers will make such a decision. It simply studies the action of man after it has happened and points out the economic effects which can occur or may have already occured due to political or economic policies imposed by society.
Falling into the trap that we can pass judgement on individual decisions and find man to be irrational is akin to the planners and socialists. They arbitrarily perceive things in their own way and wish to project their point of view on the masses, calling human action an error. Or by accusing man of being irrational.
I hope some other Austrian Economists will defend my viewpoint, I don't think I am missing the boat by any means. Thanks Tobbog.
Tobbog:which happens quite often, and that decision turns out to be wrong, there will be a good old boom-bust cycle.
To Tobbog and filc. You are both right. Tobbog's description of a boom can and does happen.... but too-low interest rates can/will make the bubble much bigger because the process of borrowing to invest inflates the money supply. Its perfectly possible to have more than one reason for any phenomina.
What Went Wrong with Economics
mickanomics:but too-low interest rates can/will make the bubble much bigger because the process of borrowing to invest inflates the money supply.
This is incorrect. Interest rates only get lower through monetary inflation, they do not cause inflation themselves. When the FED targets a rate, it hits that rate by manipulating the money supply. The rate is only a price, and is subject to supply and demand.
liberty student:This is incorrect. Interest rates only get lower through monetary inflation, they do not cause inflation themselves. When the FED targets a rate, it hits that rate by manipulating the money supply. The rate is only a price, and is subject to supply and demand.
Agreed. But the gist of my previous posing is still correct. I shall modify it slightly-
To Tobbog and filc. You are both right. Tobbog's description of a boom can and does happen.... but the FED's targeting of too-low interest rates can/will make the bubble much bigger because the process of borrowing to invest (which has now been made cheaper) inflates the money supply*. Its perfectly possible to have more than one reason for any phenomina.
* The "money supply" that counts is the total money that has been lent out. If the FED creates new money by decree, its effects on prices are not felt until the money gets lent out in to the real world. I.e. the fed could create 100 trillion dollars tomorrow, but if it just sat there not doing anything then there would be no effect on inflation.
Is that better?
mickanomics:To Tobbog and filc. You are both right.
Lets be clear Mick that this is your viewpoint and not a viewpoint shared with Austrian Economists. Austrian's don't consider standard fluctuations in the market as being bubbles.