Incomes have been either erased or diminished, and will not be recouped in entirety for several agrarian and industrial sectors around the world for at least 5 to 6 years. — Aryamoy Mitra

Yep, there still is this absurd idea of an economic rebound once the pandemic is over. It will be only a statistical one, not a real economic upturn. On a global level the service sector is such a huge provider of employment that the impact that pandemic has had is quite dramatic to overall aggregate demand. Same thing goes for tourism etc. The impact will be measured in years.

In the midst of all of this, having exploited the nature of sheer capitalistic brilliance, the world's billionaires have generated over half a trillion additional dollars to their name. — Aryamoy Mitra

Have they? Likely that is counted from their wealth and not from income and from the rebounce from the initial covid scare and stock market plunge until today seen from the graph below:



This rebound to similar highs as before is utterly confusing. Yet it happens because the monetary policy that causes asset inflation and the basically the idiotic index investing that is pushing stock prices to hilarious levels. You already have stocks with P/E ratios of 1000 meaning that in orders to get back your money in earnings, you would have to wait 1000 years. Yet if you take the largest five tech companies out of the indexes, the reality would be quite different.

But if nobody has bought a house in your neighborhood for a while, but then one is sold for twice the price as the last time, congratulations neighborhood home owner! Your house is suddenly worth twice of that in yesterday and you are so rich. And that's basically the asset bubble we have today...

I'll guess people will again then ask where did the trillions of dollars go when the market crashes.

If you've ever housed dormant misanthropic proclivities, now would be a fitting time for them to manifest. — Aryamoy Mitra

Unfortunately there are too many that feel this way.

I

I'm entirely in accord with the arguments you, and this forum, have previously put forth. A number of the distresses we've seen become pronounced are attributable to structural and maladaptive measures (such as the neoliberal market-oriented policies you've described) that were present prior to the pandemic.

I don't believe that the economic fallouts of the pandemic will be responsible for a greater number of deaths than the pandemic itself (I apologize it came across that way), but I believe they've exacerbated these distresses for many, and in the process, dispossessed developing classes of the most elementary economic freedoms.

For instance, in countries with high Gini coefficients and income asymmetries, families that weren't poor, but were incrementally advancing up the socioeconomic hierarchy, are likely to have suffered a setback that isn't easily recoverable from. Meaningful investments, such as Real Estate, have remained inaccessible to many of these families - a pattern that will almost certainly sustain itself for a considerable amount of time given their now absent, or diminished incomes.

There's a similar mechanism by which the neoliberal markets you've described have treated the business world. Small-scale entrepreneurs have borne the brunt of changes to consumerist mentalities in developing economies, whilst multinational conglomerates have been diversified enough industrially to reconstitute their business models. The conclusion of the matter has been an acceleration in the rate at which wealth gaps have been increasing, not an 'increase' per se (since I agree with you on the front that solutions to these predicaments must be devised independently of the pandemic).

Finally, the agrarian laborers, and several former white collar employees that have slipped down the socioeconomic ladder, are no longer economically liberal enough to be invulnerable to governmental stronghold and possibly tyranny. I may be mistaken in my judgment, but political motives are being indefensibly ascribed precedence over the truthful provision of state welfare around the world.

I remember reading a number of journalistic articles that cited astronomical increases to S&P 500 stocks, and consequently the net capital owned by the world's most active industrialists and businesspeople. I may be wrong, but I think this trend has been prominent for quite a while now.

'Yet it happens because the monetary policy that causes asset inflation and the basically the idiotic index investing that is pushing stock prices to hilarious levels. You already have stocks with P/E ratios of 1000 meaning that in orders to get back your money in earnings, you would have to wait 1000 years.'

Exactly. Such mismatches between equity and dividend value are precisely what in my estimation cause stock bubbles.

'But if nobody has bought a house in your neighborhood for a while, but then one is sold for twice the price as the last time, congratulations home owner! Your house has suddenly is twice worth than yesterday. And that's basically the asset bubble we have today... And I'll guess people will again then ask where did the trillions of dollars go when the market crashes.'

That's a really interesting analogy. It brings to light precisely how cyclical and sensitive today's economies really are with regards to demand and prices. Asset inflations result in commodities becoming unaffordable for those who don't possess them at the status quo, and subsequently detract demand from sellers - which ultimately results in stagnation. In order to combat this stagnation, central banks deploy expansionary monetary policies, which cause asset inflation and reinitiate the entire cycle all over again.

Exactly. Such mismatches between equity and dividend value are precisely what in my estimation cause stock bubbles. — Aryamoy Mitra

It's more of a symptom than a cause, even if with index investing there is this mechanism to put more investment in the stock that have risen the most and are the largest. Yet I think the reason is and in history has been the financial sector, which has with excessive financing promoted speculation and in the end created the bubble. Once the sound business enterprises are invested, then there's left the unsound ones and then pure speculation about the future values, usually of real estate. Since the Tulip Mania or the South Sea Bubble of 1720, all bubbles have behind them a very lax financial sector lending people to speculate.

That's a really interesting analogy. It brings to light precisely how cyclical and sensitive today's economies really are with regards to demand and prices. — Aryamoy Mitra

It's a simple fact when you think of it. And it explains simply why prices of real estate etc. can vary on a wide range yet real estate while rents do not go up and down in a similar way. Every rent is priced monthly while the vast majority of real estate are not bought and sold annually. This is multiplied in the stock market where it is genuinely a bunch of casino players are selling and buying a small proportion of the stock all the time. Hence we have gotten such absurdities as negative oil prices: a reaction when the casino players faced the actual possibility of ending up with the physical stuff they trade with.

Asset inflations result in commodities becoming unaffordable for those who don't possess them at the status quo, and subsequently detract demand from sellers — Aryamoy Mitra

Not perhaps commodities. Prices hikes of commodities have happened and have resulted in poor countries in food riots, but far more typical issue would be real estate and the price of homes. This is where even ordinary people are touched by asset inflation. They have took a loan for a home in a economically booming area, once they have paid that loan they have made usually a quite a profit (if they move then somewhere cheaper).

Here California is the best example I can think of. The lack of affordable housing programs has lead to sky high prices in homes and Third World style inequality with the most richest people living there with people on tents, and especially during this pandemic an outflow of people from the state or into less expensive areas. The pandemic has not only shut many small business down, but also put people to work from home. If people can work from home sometimes even their employer urging them to do that, why pay a huge price for a crappy small place in Silicon Valley, if you could have that estate in Colorado?

I think this pandemic is an engine to a far longer economic downturn than we anticipate.

Yet I think the reason is and in history has been the financial sector, which has with excessive financing promoted speculation and in the end created the bubble. — ssu

This is fundamentally flawed because speculation goes both ways. Speculation doesn't cause bubbles across all financial instruments.

Asset inflation is caused by the pursuit of price stability and other monetary policies. Low interest rates means financial institutions hunt for yield at the same time central banks are dumping free money in the system with no end in sight. It's not as if they don't realise stocks are overvalued. They're just passing along the hot potato simply due to large demand in the financial markets because everybody is investing free money, the source of which is basically unlimited. And with MMT, which is the direction we're going in, tof will only get worse. In the end, the stock price isn't relevant but at what volumes it can be traded, its liquidity and volatility. Hence, asset inflation while the fundamentals crumble.

:up:

This is fundamentally flawed because speculation goes both ways. Speculation doesn't cause bubbles across all financial instruments. — Benkei

? ? ?

How is it fundamentally flawed?

You think that speculative bubbles happen in times when interest rates are high and banks don't lend or what? Tell me an example of a speculative bubble happening in that kind of environment.

And tell me of a speculative bubble that didn't have speculation??

Asset inflation is caused by the pursuit of price stability and other monetary policies. — Benkei

Pursuit of price stability? I don't understand where this is coming from. Please explain.

I think everyone should agree that loose lending practices encourage speculative bubbles, and that was certainly one of the causes behind the 2008 crash - but I think we've seen bubbles in all types of US markets even in eras with high interest rates (1980s). I'm inclined to see financial speculation as just a natural human activity, and unless the government takes serious, serious steps to squash it I think it's going to happen in a number of different financial environments. I could be wrong though. I just think the 1980s here were a time for rampant speculation despite high interest rates and not being in an era of "endless QE."I think you're certainly right in a general sense that high interest rates discourage speculation.

Lockdowns are spreading across Europe as the virus surges today. Infection in Czechoslovakia is very high at the moment, with similar levels to Wisconsin in the US, which is probably the hottest spot in the world at the moment. I heard on the news tonight that 1 in 4 are infected there.

The UK is going to try to weather the storm without a national lockdown, somehow I doubt it. I expect a sudden U turn in a week or two which is the modus operandi of our government these days.

I'm inclined to see financial speculation as just a natural human activity, and unless the government takes serious, serious steps to squash it I think it's going to happen in a number of different financial environments. — BitconnectCarlos

Gambling is a natural human activity also, but a speculative bubble is separate from your ordinary market actions or the "Animal Spirits" Keynes talked about. Hyman Minsky explains quite well how speculative bubbles are endogenous to financial markets. Even the Tulip Mania did involve the banking sector, so the access to debt is intrinsic to a speculative bubble to form.

Thoughts on this?

Even the Tulip Mania did involve the banking sector, so the access to debt is intrinsic to a speculative bubble to form. — ssu

By "access to debt" do you mean, primarily, traders and investors using leverage? So borrowing funds to invest or speculate. Certainly that can magnify things. We can do that on a much greater scale now with the internet but I'd imagine that practice has been around for quite some time.

In the end, the stock price isn't relevant but at what volumes it can be traded, its liquidity and volatility. — Benkei

Yes, and that liquidity isn't just institutional; everyone's fleeing the dollar, and with Robinhood and other retail "friendly" (i.e. exploitative) brokers becoming ubiquitous, the gap between real (economic) value and asset price is likely to widen. At some point though stocks will feel the pinch and inflation hedges like gold and bitcoin will be the major winners.

(This is actually worth a new thread).

gold and bitcoin will be the major winners — Baden

Don't forget that masked bandits are the biggest winners...they are completely unrecognizable.

By "access to debt" do you mean, primarily, traders and investors using leverage? — BitconnectCarlos

Yes. Without the access to debt, there are only very few that can invest. Debt leverage is quite essential.

Thanks Baden!

The real estate bubble in the UK is due to a systemic failure of government, Although it was the privelidged classes who benefited from it, I don't think it was this which provided the driving force behind it. It was ideological, the Tory government continually dismantling state institutions and support, and inviting in capitalist organisations to fill the gap. The Tory wet dream of free market capitalism. During the same period there were incentives brought in to increase home ownership allowing council tenants to buy the property they were living in. This fuelled the trend further. The council properties were not replaced with provision of new social housing. The property developers continually focussed on building the highest value properties in the most desirable locations with little affordable housing.

I could go on, but that is enough detail to spell out that the UK is in a dangerous place, trying to hold this bubble in place. If it blows all that wealth built up over 40 years will evaporate, with mass evictions, repossessions and millions of people with massive debts that they can't pay. No wonder the Tory's are running scarred and lurching to the right in a vein attempt to double down on their rip roaring capitalism. They have filled Downing Street with headless chickens running around the cabinet table, lashing out at Europe, immigrants and the poor. Roll on Brexit Britain.

Thoughts on this?

The north is being used as a Petri dish.
The surge a month ago was fuelled by schools and universities going back, so now the increases will be reducing due to partial lockdowns. The trouble is that the infection rate is so high that test and trace has become ineffective as the numbers are unmanageable.

? ? ?

How is it fundamentally flawed?

You think that speculative bubbles happen in times when interest rates are high and banks don't lend or what? Tell me an example of a speculative bubble happening in that kind of environment.

And tell me of a speculative bubble that didn't have speculation?? — ssu

Because I think we need to distinguish between speculation and investing. If investors en masse invest because of cheap credit, this has nothing to do with speculation. I think the distinction between an economic bubble and a speculative bubble is useful; a speculative bubble can exist in a specific asset class but speculators as distinct from investors are a much smaller group that don't have the influence to cause economic bubbles.

Simply because prices don't reflect underlying value, this doesn't mean it is caused by speculation but there's a tendency to call it a speculative bubble regardless of cause. The stupidity of the name even resulted in idiotic measures like banning short selling. This resulted in an even bigger downward trend in the markets, because it wasn't speculators causing it but investors who now had to outright sell their positions to manage their risks.

Obviously, my comment about interest rates and monetary policy concerns the current asset inflation. The previous one was driven by inflated real estate prices, combined with bad loan origination and complex derivatives. No speculation involved, again. Just stupidity in the loan origination part with bad incentives all over the place and moronic optimism about always upward moving "markets".

Pursuit of price stability? I don't understand where this is coming from. Please explain. — ssu

Central Banks have a limited range of measures at their disposal because they're constrained by their purpose of maintaining price stability. Which is a quaint left over from the days when they thought price stability would avoid the boom and bust cycle and unreasonable fear of deflation. So they can basically only regulate the money supply and interest rate. And here we are.

There's of course a lot else going on. Like the fact people will save regardless of interest rates because they have saving goals. So all these theories can't deal with the complexity of human action and there's always unintended consequences and effects. It's time we stop basing policy on necessarily flawed theory.

. I think the distinction between an economic bubble and a speculative bubble is useful; a speculative bubble can exist in a specific asset class but speculators as distinct from investors are a much smaller group that don't have the influence to cause economic bubbles. — Benkei

OK, I'll just answer one part here as otherwise the answer would be too long.

Yet economic bubbles are also speculative bubbles. Here's why.

Let's think about this with two examples, because the divide is simply about contagion and the effect of the bubble to the real economy. Bubbles can also move into other asset classes.

Bubble 1: Speculative bubble that doesn't affect the economy

Some hip new innovation that has genuine promise sends people investing in something be it cryptocurrencies, rare earth minerals or whatever is the new fad. That there is hype driving the bubble can be seen perhaps from uh, a philosophy forum we all know starting to talk about the new innovation and some there investing in it. These kinds of things won't have large economic consequences as a) few will invest more than a tiny amount of their wealth and b) there's not much impact on jobs, or consumer consumption in the real economy. The burst of the bubble won't have huge consequences. If some people lose money, they'll likely curse to death the whole stock market and finance sector as bunch of swindlers and con men. And continue with their lives with just hating capitalism. But the vast majority of people who didn't notice the fad will not be affected.

Bubble 2: Speculative bubble that does affect the economy

A real estate bubble. As houses cannot be built by robots in China, real estate bubbles have a huge impact on employment and in the domestic economy. Second, people don't choose to speculate: families need a roof over their head and people looking for a home have to participate in the market however crazy it is. And people who own real estate will notice the wealth effect of their homes increasing in value, hence it's not just the few who invest or those who willingly take risks. For the majority of people buying an own home is the largest investment they will ever do. Hence it's not only the rent seekers and speculators that are players in this bubble. That building houses is labor intensive means that the bubble truly lifts up the economy. And for the financial sector? Mortrages and financing construction is the most ordinary thing they do.

And when this kind of speculative bubble collapses, there went the wealth of many, which has causes on their consumption. At the worst case people find having more debt than then is the price of the property. Once you cannot service that debt, then you are in real trouble. Also, the slowing down of the construction business will have an effect on the economic cycle. And most importantly, when the financial sector is hit, it will close it's lending an sit on it's money like Scrooge McDuck and this will have an effect on other unrelated sectors of the economy. Hence a real estate market bursting will cause a severe recession.

Or a pandemic which shuts down the economy which already has speculative bubbles inside it...

So you said:

Asset inflation is caused by the pursuit of price stability and other monetary policies. — Benkei

This I find still find confusing.

Central Banks have a limited range of measures at their disposal because they're constrained by their purpose of maintaining price stability. — Benkei

Yet they look at inflation as it is now measured. That price stability is about consumer prices, prices of tomatoes, not the price of a Netflix share!

Central banks fight inflation, but they don't fight asset inflation.

(or with zero real interest rates as today, they would hope to see mild inflation)

A real estate bubble. As houses cannot be built by robots in China, real estate bubbles have a huge impact on employment and in the domestic economy. Second, people don't choose to speculate: families need a roof over their head and people looking for a home have to participate in the market however crazy it is. And people who own real estate will notice the wealth effect of their homes increasing in value, hence it's not just the few who invest or those who willingly take risks. For the majority of people buying an own home is the largest investment they will ever do. Hence it's not only the rent seekers and speculators that are players in this bubble. That building houses is labor intensive means that the bubble truly lifts up the economy. And for the financial sector? Mortrages and financing construction is the most ordinary thing they do. — ssu

What I'm trying to get at, is that this isn't a form of speculation. Maybe you just think that's a semantic discussion but there's a reason supervisors enacted stupid decisions like banning short selling - they confuse investing, buying to use and speculation. What you describe isn't a speculative bubble in my view of how the word "speculation" should be used. A speculator buys or sells assets or derivatives only because of a future expectation of value which could either be higher or lower than the current market price. A speculator is in that sense agnostic about the general direction of the market, although he is obviously concerned about his specific positions held at a certain time. An investor invests to obtain a return on its capital mostly by lending its money for a variable return in capital or stock markets. They can also He wants the industry or market he's invested in to grow and isn't agnostic. Then there are also buyers who buy to use, a specialty chemical company buys furfuryl alcohol to blend it for its own products - not to invest or to speculate.

Most people buy houses to use them, not to speculate or to invest. The real estate bubble was caused due to systemic risks. NINJA-loans, incentives for brokers to originate loans that were terrible, CDOs that were opaque and too much money in the system.

Some junior officer on a ship in the South China Sea hits the wrong button sending a torpedo in to somebody else's ship, leading to full scale escalating chaos in minutes.

Stock market = Insanity

Stock markets are excellent systems to bring lenders and borrowers together. Its insanity is caused by other things.

Stock markets are excellent systems to bring lenders and borrowers together. Its insanity is caused by other things. — Benkei

Market collapse of 1929 caused by hyper-speculation, leading to Great Depression, leading to re-emergence of Hitler, leading to WWII, leading to mass death camps, and nuclear weapons.

Market collapse of 2008 leading to untold suffering for millions, and a near miss global catastrophe.

Just arguing for tight control of a very dangerous mechanism.

Or, we can keep debating until the next crash where you lose your home and Net connection, and then I'll be able to go "Nana nana na na!" and you won't be able to counter. :-)

I never said it should be unregulated. I take issue with pretending stock markets are inherently insane. They're very useful.

never said it should be unregulated. — Benkei

Never said you did. I hear you, a meeting place for mechanical transactions. In theory, neutral. Trouble is, in the real world, such places can routinely lead to chaos on a large scale.

What you describe isn't a speculative bubble in my view of how the word "speculation" should be used. — Benkei

Sorry, but in economics this term is used.

It's erroneous to assume that speculative bubbles happen because of some market participants just somehow start acting irrationally and start speculating / gambling. Perhaps better would be to talk about debt bubbles, but that then takes focus away from the market behavior happening with a bubble in some new industry. Simply put it, the phenomenon is complex.

The real estate bubble was caused due to systemic risks. NINJA-loans, incentives for brokers to originate loans that were terrible, CDOs that were opaque and too much money in the system. — Benkei

OK. NINJA-loans (no-income, no job / assets) is actually a perfect example of speculation, if you just think about it.

The speculator is just the lender. The banker assumes that the real estate prices will go up. If he is sure of that, NINJA-loans are totally logical. If the NINJA-loan taker cannot pay his monthly interest, no problem, the bank just takes the home and either the value has stayed the same or perhaps even risen. So "no" risks! And a huge amount of new potential customers. You see, the systematic risk you are talking about is actually the speculative bubble bursting. Then, what has not been seen in any statistics (which just have shown low risk and minimal amount of credit losses) suddenly change to something totally else. And similar thing with CDOs: just take your share and sell the risks to someone else, so no reason to think if the people can pay or cannot. After all, real estate prices go up! Have done that forever.

Why it looked like a non-risky thing. Assume extrapolating the percentage of mortgage delinquencies from loans from the stats from 1979 to Q4 of 2006. Think your extrapolation would predict correctly the future 2007-2008?


Then there's the way the banking sector operates. You see, If you sell cars, there's a multitude of things you can do with your product to make it different from other cars and hence make a niche of people to love your cars (and others hate them). With a bank loan there's nothing like that. You can basically choose a) what's the interest rate and b) to whom you give loans to. Nothing else, basically. And the more debt you issue, the more profit you make. And if you are a smaller bank or a failing bank, one option is to be more "aggressive", meaning you start giving debt to people that other banks don't give money, or face losing the game.

All this shows how intrinsic role the financial sector has in creating speculative bubbles. These bubbles can also happen when a heavily controlled financial sector is suddenly opened to free competition and banks start to in earnest compete about market shares.

Sorry, but in economics this term is used. — ssu

That's simply not true. There's a distinction between speculation and investment in economic theory as well. Depends on what you read, really. But it's fine. I don't think we disagree in essence on what caused the bubble with respect to 2008 or the asset inflation we're looking at right now.

The speculator is just the lender. The banker assumes that the real estate prices will go up. If he is sure of that, NINJA-loans are totally logical. If the NINJA-loan taker cannot pay his monthly interest, no problem, the bank just takes the home and either the value has stayed the same or perhaps even risen. So "no" risks! And a huge amount of new potential customers. You see, the systematic risk you are talking about is actually the speculative bubble bursting. Then, what has not been seen in any statistics (which just have shown low risk and minimal amount of credit losses) suddenly change to something totally else. And similar thing with CDOs: just take your share and sell the risks to someone else, so no reason to think if the people can pay or cannot. After all, real estate prices go up! Have done that forever. — ssu

Again. If you look at it from my perspective, this is not a speculator because he's not agnostic about future values; he's invested in prices always going up. Combine that with shitty risk management and voila.

If you look at it from my perspective, this is not a speculator because he's not agnostic about future values; he's invested in prices always going up. — Benkei

What does agnosticism have to do with this?

If someone thinks that prices are ALWAYS going up, meaning real prices (not that the currency is losing value), that simply is by any means quite a risky, speculative approach to investing.

Ok, now we really have to look at the definition to speculation to get this point:

assumption of unusual business risk in hopes of obtaining commensurate gain

Merriam-Webster

In the world of finance, speculation, or speculative trading, refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value. With speculation, the risk of loss is more than offset by the possibility of a substantial gain or other recompense.

Investopedia

Speculation is an investment approach in which the investor aims to buy or sell stocks, currencies or other assets solely to make a quick profit. In such cases, the investor is known as a speculator.

Market Business News

Anyway, Then call it a debt bubble or simply an asset bubble. It's the same important phenomenon that earlier was even dismissed to ever happen in the modern financial markets (and still there are those who don't believe in bubbles anyway). I myself have seen enough crashes and market hype in my own lifetime to believe that this phenomenon does truly exist. And a crash can happen ...and then people start bitching about risk management being wrong.

What does agnosticism have to do with this? — ssu

You can be agnostic about opinions as well. So I don't commit to saying God exists or not but I can also be agnostic about markets going up or down. Maybe that's a very Dutch way of use the term agnostic for "unimportant" things but Merriam Webster recognises that type of use as well.

From your definitions, Market Business News is the definition of speculation I'd use if I'd have to chose; it's not investing based on yield but (short term) price differentials.

Anyway, Then call it a debt bubble or simply an asset bubble. It's the same important phenomenon that earlier was even dismissed to ever happen in the modern financial markets (and still there are those who don't believe in bubbles anyway). I myself have seen enough crashes and market hype in my own lifetime to believe that this phenomenon does truly exist. And a crash can happen ...and then people start bitching about risk management being wrong. — ssu

I think bubbles are real but if you see speculators as a sub-set (or even separate) from investors, calling them speculative bubbles becomes a bit weird.

And I get that you see the position "market prices will always go up" is speculation but where it differs from a speculative transacation is that such assumptions underpin long-term investment. The lender enters into a 30 year mortgage, for it's long term yield. Or they buy stock not with the plan of selling it in a week time because they think next week will be the most opportune time to sell but because regardless of market volatility if they sit on it long enough they will make a return on their investment.

and then people start bitching about risk management being wrong. — ssu

I think this was true of the last bubble. With wrong incentives and no skin in the game for a lot of people.

Now it's mostly driven by governmen/central bank policy. I think that's worse because there's no threat of bankruptcy dampening risk taking. The next bust is going to be horrible - much worse than 2008. Everybody in finance knows it and they will dump all their shit and buy commodities before average Joe realises what's going on.

What we need, in my view, is smaller financial institutions that aren't too big to fail and quicker and more robust bankruptcy and resolution mechanism when they do fail. These risks will always return and be underestimated because today's black swan wasn't the one of 10 years ago. We shouldn't aim at avoiding black swans but aim at dealing with them quickly and decisively, cut out the cancer and move on with as little disruption to society as possible.