Bitcoin and other bubbles
Bitcoin has been the poster child of bubbles in recent times. This is undeserved. What we saw in the 2017 price run up is more akin to tech optimism getting ahead of adoption curves and the building out of the necessary infrastructure. AKA a totally normal garner hype cycle in action. A temporary phenomenon that doesn’t like hundreds of other obituary that Bitcoin has already had spell its demise but a necessary part of the tech adoption and further confirmation of its larger potential to change the basic structure of modern society.
However the fact that it happened in 2017 immediately following the election of Trump and following the spike in upwards in the stock market, concentrated heavily the FAANG stocks, comprising of the tech behemoths of our time, Facebook, Amazon, Apple, Netflix and Google is something worth considering. It had to happen now because as the S and P shows we’ve reached peaks in valuations and there is a speculative mania that is unfolding left and right.
With Cryptocurrency and pot stocks being the most obvious examples.
Given this I’d like to expand on the less obvious examples and more importantly the underlying phenomenon that has led to conditions that are conducive to speculation.
The real cause in the economy is the Fed and even more so a structural failing of democracy. This is both more interesting and more concerning than price inflation and people buying just to sell to someone else.
Back in 2000 when the dot com bubble burst Greenspan, then chair of the Fed had to deal with a minor recession. Letting the recession hit and taking a slowdown in the economy and allowing a number of bad investments be exposed to the light of day would have the usual route. However Greenspan was quickly met with a lot of vitriol for not having more stimulative measures in the economy to offset the slowdown. The 2000–2001 recession was caused by two factors, speculation in dot com stocks and also some in the housing market. When the dot com bubble burst Greenspan then decided to cut the fed funds rate to 1%.
This act was then expanded upon by both Republican and Democratic parties that gave major tax cut incentives to new homebuyers. As both political parties wanted to be responsible for “putting a chicken in every pot” as it meant more popularity and it also meant escaping being blamed for a recession and all the bad that would come with that being their legacy. In turn what this created was a place for capital to want to flow because the low fed rates meant putting money in savings wouldn’t be a good source for capital, because inflation would largely reduce the money someone had in savings over time so the best way to make capital work for you would be to now seek out new investments.
This led to adjustable rate mortgages, very easy credit for homebuying and down the road people buying and speculating on home prices as their main source of income as the bubble went into full swing. This turn created a situation where instead of creating real value via actual goods and services a lot of money was created in the form of bad and totally unrepayble debt and packaged together in the derivatives market as another form of investment.
Because so many investments where now reliant on something that related with bad debt bundled into good debt (non sub prime mortgages) when the housing market bubble burst a ton of wealth simply vanished and that caused a major downturn in stocks (which by the way was up because people were using their home as an atm and took money out of their mortgage to engage in further speculative activity) as well as the general economy as tons of good paying jobs left and a lot of people were laid off and/or had their retirement go up in a puff of smoke.
By the time the recession was really going into action Obama was now in office and just like the president before him didn’t want to get blamed for economic hardship. He bailed out the banks that had their money caught up in predatory lending and other derivatives schemes and the Fed in turn rolled out a 0% interest rate and massive rounds of quantitative easing to help the economy out of its rout.
Notice a pattern?
In effect what Obama and the Fed did was exactly the same thing as what Bush did.
In response to an economic downturn instead of biting the bullet and allow assets to fall and firms to close down what Obama did was enact socialism and money printing. Bush did it for everybody and Obama decided to do it for the rich.
And it fails every time. For a country thats so in love with the capitalist bootstraps spirit it seems to flirt with government interference in the markets really often.
So what do we get when we have this new form of easy money? Well money gets printed its value doesn’t come from nowhere, it comes from everyone’s collective savings and their combined networth. That would be the key driver of the feeling of this last decade following Obama’s reign. It led to an impoverishing of the middle class to the benefit of the banks and the Venture (read VULTURE) capitalists. Who have taken advantage of all this easy money to prop up new bubbles using all the cheap credit that’s floating around.
Which brings me to the point of this article. Instead of focusing on hating and admonishing Bitcoin lets take a look at every real bubble.
Under Obama America’s oil production has almost doubled. This is thanks to its production of shale through hydrofracking. The worst environmental problem we’ve had in a century. And it happened under Obama. Because not only does it cause massive degradation and fire hazards it also could wipe out massive reservoirs of drinking water if the fracking solution leaks into them. That aside, there’s another thing that no one talks about when it comes to massive shale oil boom and all the supposed riches it’s bringing to the American economy, none of them are profitable. They all barely make enough to keep operating at current oil prices. Which are historically very high and overpriced. And the more they produce the more the price of oil goes down because the world market was basically at demand (even though production costs in Saudi Arabia are 1/10 that of the shale in the US) and now there is a surplus a crash in oil prices is inevitable. And all these shale companies have produced any at all because all their facilities are built through loans and producing enough to keep the lights on means producing at historically low interest rates and historically high oil prices. If either one goes, they all basically default on that debt and btw as I’ve stated the shale oil companies now produce almost half of all US oil production.
Secondly, student loans. Since the 2008 financial collapse the US government took over the student loan business which was historically handled through JP Morgan or other financial centers. The cost of tuition has tripled since 1988. Even though degrees don’t give you nearly the same roi that they used to. Furthermore because the government is now the issuer of credit and because there has been a shrinking of good jobs as well as economic pain in the general in the economy lots of unemployed people have simply stopped looking and went back to school to gain new skills, thus we the numbers we have for unemployment are exaggerated. Furthermore because higher ed is far more accessible in previous generations, especially given the governments intervention as creditor what you end up with is another paradigmatic shift like seen in 2008 when houses which historically always went up in price took a downturn, in that same vein the effect of a glut of supply and lack of demand would mean a cheapening of the value of education altogether. Which many can attest to as having a degree in a highly sought after field like Computer Science, Accounting and Electrical Engineering which have historically led to gainful employment now do nothing but produce high levels of debt and meager wages if jobs are found. Since the glut of well educated and well trained employees in a largely weak economy held up by what is essentially speculation and price inflation means it’s hard for young people to get good paying jobs and are frequently met with barriers that require experience they can’t attain. The sum total of all this student debt btw is now at 15 trillion and at a 11% default rate. And this is now, when the economy is supposedly good.
Third, Silicon Valley and the unicorn problem. Right now Silicon Valley and its VC’s have produced a total of over 100 companies that are startups with no idea of how to turn a profit, that are valued at a billion dollars or more. Others like Theranos have come and gone with its fake promise of revolutionizing genetics and medicine. But I’d rather focus on the supposed sucesses, forget about Uber competitors valued at a billion or over like Grabtaxi or Dropbox acquiring a doesnothing now defunct nice UI for your email mailbox for 100 million, lets talk about the supposed winners like Uber. This is a company that is hemorrhaging billions of dollars every year paying their workers to stay with them and when they do make far less than minimum wage. Under what premise? That every taxi company in the world can be run out of business and in turn Uber can then run up their prices enough that they can actually become profitable? Or Tesla for that matter whose accounting practices scream fudging the numbers and total overextension of resources and ambition for a market that’s decades from the infrastructure necessary to sustain its business model. Or Amazon. A TRILLION dollar company that still does not post a profit many years because its following the future profits business model that it adopted in the mid 90’s when it sold just books. Still.
Fourth, stock buybacks. The key cause of the 1929 crash that brought the great depression. A practice that was illegalized but thanks to the most corrupt establishment in Washington in living memory and deregulation has become common practice in the time of the Trump tax cuts. With major corporations like GE engaging the practice with their tax cut buying their stock to massively boost up their companies value in the short term, only to be revealed as a total fraud a mere year later as their stock comes crashing back down. With all the traditional bellwethers in the S and P posting their lowest prices in years and again this is now while the stock market is close to its highest valuation ever. And not to mention Warren Buffet’s favorite indicator of a recession, the sum total stock market valuation to GDP is at a similar point that it was prior to the 1929 and dot com crashes.
Lastly, the US dollar. When the 08 crash hit the US had long since stopped being the producer in the world and switched to being the consumer. With Asia both producing most of America’s products and America paying them back with IOU’s and using that credit to finance the service sector economy. And the government gauging economic growth not in terms of investment and infrastructure and production but instead with consumption. Well the chickens eventually come home to roost with that sort of backwards forward thinking. Now China which was once producing jeans that America no longer would is now the home of supercomputers and high tech research labs and are leading the way in solar energy production and investment in paradigm shifting tech, stealing the historical role of Silicon Valley. And not to mention the Petrodollar the keystone to the American hegemonic power in the world with the unveiling of the petroyuan.
All this taken together means two things, an economic crash is inevitable. It will be catastrophic. And two, the Fed and the government can do NOTHING about it this time because it was government intervention (inflation of bubbles) that had caused this. The Fed can’t slash the rate to 0% to combat economic downturn because it was already at 0 for so long. And Quantative easing won’t work because all that did was make the problem from 08 but really 2000 that much bigger and more painful. And because the last two recessions took the stock market from 1500 to 750, basically half and the stock market is inflated to much higher degree and there is no quick cheap fix to make 750 the bottom this time, likely the next contraction will be 3/4ths or even more having the US push on the territory of a depression with no way for the government to intervene. But they’ll try anyway, leading to inflation a pushing up of prices for goods and 50–80% decline in housing prices or more, met with in addition falling wages and fast disappearing jobs in all sectors of the economy.
And this will likely happen soon, during Trumps first term. Which means all the main evils of our times, frackers, Bezos, Silicon Valley, corrupt Washington will all take the hit. But it will hit the rest of us much much harder. And in turn, hopefully, get ultra left wing socialists in the halls of power. Stay classy friends and stay safe.
Further reading :http://www.thebubblebubble.com/
The Real Crash by Peter Schiff
