How bubbles inflate

Bubble - market error. Well, at least that's what they say. But is it really so? How do bubbles actually inflate? Who is to blame?

Bubble

The bubble is quite easy to create on the market - all you have to do is play with human motivation and prices. And lo and behold, the bubble is ready to burst.

Scrap fees

It usually starts quite innocently. Maybe someone will think that it is necessary to support the car industry. It will therefore be introduced scrapping fees - you will destroy your old car and get a premium to buy a new one! After all, how many future pollutants will be saved, how many jobs will be created!

So it is true that there are not many more jobs and it is also so dubious with those pollutants (for more see the older ones) An ode to destruction). But silence, that's not said.

Everyone is happy to buy cars. Grandmothers and grandfathers are getting rid of their Škoda 120, and to look worldly, they buy Dacia Logan cars instead. Yes, it's true - they don't contribute to the children's holiday, they probably won't just repair the roof in the barracks, and they also have nothing to repair the old fence. But it doesn't matter, they bought their Dacia Logan for all of us!

People in Romania are happy to enter new productions in the factories of the local Daciawhich belongs to the French Renault. All, of course, for Czech shredded money. As long as it is scrapped, the car industry seems to be doing well. Other Romanian factories of a French company are opening for the money of Czech taxpayers.

But the money of Czech taxpayers will run out in time, it will happen drop in demand after cars, the bubble bursts. Dacia closes its factories, fires Romanian workers, and Renault writes off a few bad ones investment.

Example? Sales of new passenger cars in Germany took place in August decreased by 27 percent year on year to 201.000 cars.

photovoltaics

Another example: the Czech government will create a guarantee of return investment to photovoltaic power plants by setting a mandatory minimum purchase price. Photovoltaics will thus become artificially more advantageous than they might otherwise be.

Suddenly, photovoltaic power plants are starting to appear everywhere. Entire fields covered with silica gold will begin to supply expensive energy to the grid. Guaranteed purchase prices they lead to higher electricity prices, costs to traders and households increase, but profits for power companies do not increase. Only the owner of photovoltaic power plants, often from India or China, earns.

But expensive electricity will stop being liked by people and companies who will start pushing the government. It succumbs to pressure and the guarantee cancels or decreases. In that moment the price of solar energy will fall to the current price and the vast majority of PV power plants thus become a beautiful representative of the group “bad investment“. Bankruptcy, sales, layoffs. Another bubble burst.

mortgages

Editing, another example: The US government wants to provide "housing for all." This will create companies Fannie mae (FD Roosevelt, 1938) a Fraddie Mac (1970), which are to buy mortgages from banks and turn them into other financial market instruments. Of course, both semi-state agencies enjoyed many benefits, for example they did not have to pay some taxes.

Banks began to hand out subprime mortgages on the treadmill - why not, when they were soon bought from them by one of those semi-state agencies (GSE, a hybrid between a private and a public company), which then transferred them to the financial markets, where they infected others ( not only) financial institutions.

Well, instead of the price of mortgages (ie their interest) rising naturally with high demand, it's because of central bank intervention (similar to a semi-state hybrid), on the other hand, interest rates fell. People built like on a treadmill. Employment in construction began to increase and so on.

But it was all artificial. One day the money just ran out, subprime payers did not have to repay subprime mortgages. And there were a lot of those who didn't have to pay. Fannie & Fraddie almost went bankrupt, similarly to AIG. Mortgage prices are going up, real estate prices are automatically going in the opposite direction. From securities containing mortgages slowly but surely, they became worthless lines. This is followed by a fall in construction, dismissal of construction workers, laying off many people working in the finance sector.

The fall in stock prices of infected companies will spread the mortgage crisis to the whole economy - a we have a global recession.

Boom - the next bubble is gone.

Bubble factory

In fact, it is not the market that systematically generates bubbles. As we were able to see, for example, in the bubbles in the currency markets of the 90s, it is, on the contrary, a state that is a 'bubble factory'. No one other than the state or its sanctified organizations has access to state monopoly on power, which allows them to arbitrarily interfere in market prices, thereby disrupting all processes that take place in the market.

Prices transmit information that is crucial for the entire market. They show how capital should be accumulated, shape its structure, through which profits are achieved that guide man. All the above examples, as well as other state regulations and interventions, have an impact mainly on prices. These then do not correspond to the real market situation, but arbitrariness of one who has access to that state monopoly of power.

Bubbles are thus a product of violence, while the market operates on a voluntary basis.

Any subsidies, whether for culture, sports or "tourism promotion" they are exactly the same intervention in market mechanisms. It creates bubbles (or bubbles) that lead to bad accumulation of capital, lead to bad ones investments, undermine the role of prices, which transmit bad information.

If we want to avoid bubbles, we must prevent interventions and regulations. They create them.

0 comments

  1. You are factually right, but for God's sake, learn the concordance of the conjecture with the subject… 🙁

  2. Yes, the free market itself is only a theoretical construction, the ruling bourgeoisie is, in fact, using its own state to get rich. It is therefore a state monopoly capitalism. When it comes to money, dogmas go aside.

Comments are off.