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?
Bubbles do occur in an unhampered market. At the risk of sounding condenscending I would suggest to anyone thinking differently to spend some time on a betting exchange and observe unhampered markets in action. The difference is in the longevity with the lifespan of bubbles measured in minutes.
Marko:Bubbles do occur in an unhampered market. At the risk of sounding condenscending I would suggest to anyone thinking differently to spend some time on a betting exchange and observe unhampered markets in action. The difference is in the longevity with the lifespan of bubbles measured in minutes.
If the money supply is stable prices should reflect across the entire economy. As manufacturing of goods bid for the same resources as others, if one industry exhumes a larger supply of resources others will exhume less. So prices will fluctuate. Some industries will go up with prices while others go down. Consumer demand steers the direction of investment.
THe concept of a bubble as we know it cannot exist. The idea that an altered money supply will financially support perpetual investment in all industry's and giving the appearance to investors that savings and capital exists for all sorts of industry rather then one. This disconnects investment from the stearing handle of the consumer as they get the false impression that consumers have a large pool of savings.
From this standpoint any investor in any industry may get the appearance that consumer demand is high, consumer demand may grow in all sectors relevtively speaking rather then rise in one and fall in others.
Statism is a religion.
krazy kaju: "Bubbles" would not occur. However, it is possible that financial assets could be mispriced, since some information was not revealed through the price structure. When the new information is revealed, then there would have to be a repricing of the mispriced financial assets.
"Bubbles" would not occur. However, it is possible that financial assets could be mispriced, since some information was not revealed through the price structure. When the new information is revealed, then there would have to be a repricing of the mispriced financial assets.
If many investors overestimate a particular sector of the economy, e.g. the high-tech sector, a bubble can occur. What you are describing, the mispricing of financial assets and its repricing is nothing different from a boom and bust cycle.
Do tell how it isn't.
To darkness I condemn you...
Tobbog: krazy kaju:"Bubbles" would not occur. However, it is possible that financial assets could be mispriced, since some information was not revealed through the price structure. When the new information is revealed, then there would have to be a repricing of the mispriced financial assets. If many investors overestimate a particular sector of the economy, e.g. the high-tech sector, a bubble can occur. What you are describing, the mispricing of financial assets and its repricing is nothing different from a boom and bust cycle.
krazy kaju:"Bubbles" would not occur. However, it is possible that financial assets could be mispriced, since some information was not revealed through the price structure. When the new information is revealed, then there would have to be a repricing of the mispriced financial assets.
Not at all. By your definition, bubbles occur continuously. If Q3 profits for GE were lower than expected and the stocks fell as a result, then there was a bubble in GE that just turned into a bust according to you. Obviously, that is not what most people would call a bubble.
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krazy kaju: Not at all. By your definition, bubbles occur continuously. If Q3 profits for GE were lower than expected and the stocks fell as a result, then there was a bubble in GE that just turned into a bust according to you. Obviously, that is not what most people would call a bubble.
I wouldn't call that a bubble either. But imagine there's a new technology like the internet in the 90's. Many people believe that there's a "new era" and everything will be different now. Thousands of start-ups emerge, millions of investor pump billions of dollars into companies that haven't earned one cent yet but are believed to become multi-billion dollar corporations in 5-10 years. After a few years, investors find out that they were too optimistic and panicky try to sell their assets (sometimes even below real intrinsic value).
That scenario is absolutely possible in an unhampered free market economy, since investors didn't have any experience with the "New Economy". I agree that monetary policy can and does exacerbate this problem, but since people cannot see into the future and are often lead by herd instinct etc. boom and bust cycles will naturally occur in a free market economy as well.
Tobbog:ometimes even below real intrinsic value
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
A bubble is defined by the snowball effect. When you have ever more people buying something just to get a piece of the action on no better basis than that it is seeimingly appreciating without looking at the fundamentals at all. Which in turns triggers even more buying making the snowball self-fueling.
nirgrahamUK: Tobbog:ometimes even below real intrinsic valuewont someone stop the madness!
He meant below the price the fundamentals would normally suggest.
Marko:A bubble is defined by the snowball effect. When you have ever more people buying something just to get a piece of the action on no better basis than that it is seeimingly appreciating without looking at the fundamentals at all. Which in turns triggers even more buying making the snowball self-fueling.
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.
Marko:He meant below the price the fundamentals would normally suggest.
nirgrahamUK: Tobbog:ometimes even below real intrinsic value wont someone stop the madness!
wont someone stop the madness!
Do you agree that there are some things that people but party for their own sake and partly as an investment? Like housing or antiques.
So when people decide how much they are willing to pay for this type of item they have to consider two factors. 1. How much pleasure they will derive from the item for whatever period that they are likely to own it and 2. How much money they estimate they will get for the item when they sell it. If for some reason they were barred from ever selling the item or if there as a 100% tax on profits made then only factor 1 need be considered. What word or phrase should we use to describe the price people are willing to pay given factor 1 alone?
buying something as an investement is not for the sake of the investor?
nirgrahamUK: buying something as an investement is not for the sake of the investor?
I'm not sure I understand what you're getting at.
Things can be bought partly as an investment and partly for their own sake.
Actually buying something "as an investment" is perhaps overly restrictive. Maybe I should re-phrase my scenario in terms of "with an eye to the potential resale value". I idid this myself just recently. I was considering how much to bid on ebay for a "concept II" rowing machine. They're pretty expensive things, and we all know that people often get bored with exersize machines. I thought to myself, "if I keep up my motivation and use it for years and years to come then my cost per workout will end up being very small, and so its not really that expensive after all". I also thought to myself "If I get bored with it after a few weeks then I can always sell it, and as I know they are very well made and are in gyms all over the world, I should be able so sell it for just about as much as I bought it for."
So this is an example of a predicted future selling price influencing what I am willing to pay for the item.
Lets put it another way, lets say I was just about to put my bid in on ebay (for amount X) but just before I pressed the [Bid now] button I heard the voice of God saying "Mick, you are not allowed to ever sell this item. If/when you have finished with it, you must give it away for free" then (after I have got over the shock of hearing the voice of God) I would lower my bid to amount Y (which would have been substantially less). What word or expression would an Austrian give this lower price Y?
its just your reserve price given your subjective valuation of the good
nirgrahamUK:its just your reserve price given your subjective valuation of the good
maybe
maybe not
http://en.wikipedia.org/wiki/Intrinsic_theory_of_value
http://en.wikipedia.org/wiki/Subjective_theory_of_value
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