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The world’s most valuable retailer, Alibaba, carries no stock. The world’s largest taxi company, Uber, owns no cars. The world’s most popular media conglomerate, Facebook, creates no content. The world’s largest accommodation provider, Airbnb, owns no property. Something's up.  The creation of intangible value through internet assets has been a popular trend in modern history. In the past this has led to disastrous vicious-cycles, (similar to positive-feedback-loops), that can cause an economic system to descend into chaos.
Speculation on the value of internet assets was what caused the .com bubble of 2000 to inflate - burst. The bubble that popped in 2000 was an asset price bubble that resulted from the explosive stock market growth as the internet emerged. Another period of rapid tech development is almost upon us; in the future it will be referred to as the Machine Learning, AI, and/or Quantum Computing revolution. Having said that there's the possibility of enormous technological growth in the near future, I'm not saying it will happen tomorrow. The United States could very well end up in another recession if the economy doesn't react well to the unprecedented treatment it's received from the Federal Reserve, ZIRP, etc. Irrespective of the domestic/global economic landscape, technological progress is inevitable. As time passes the electronics humans use worldwide will only get smarter, faster, and more advanced. Technological progress sees no regression. (unless you work at Apple... Iphone 6s > Iphone 7)
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The Financial Instability Hypothesis is one of the crowning achievements of Hyman Minsky. It blames debt accumulation for financial crises, emphasizing the macroeconomic impact of three classes of borrowers.
1. Hedge Borrowers - Hedge borrowers are the safest type of debt, as they have the ability to pay back principal and interest regardless of whether or not they are offered additional credit. 2. Speculative Borrowers - Speculative borrowers take out debt less responsibly, they are capable of paying back principle, but must borrow again to make interest payments. 3. Ponzi Borrowers - Ponzi borrowers are incapable of making principal/interest loan payments without additional sources of credit. Ponzi borrowers only remain solvent if they're investing in consistently/indefinitely appreciating assets. The issue with ponzi borrowers is that no investment appreciates indefinitely. If you could invest for guaranteed return, then it wouldn't have been an investment in the first place. A combination of asset prices declining and too many ponzi borrowers existing causes macroeconomic issues. Specifically: ponzi borrowers start defaulting across the board, asset prices decline more sharply, causing speculative borrowers to start to default on their loans too. If the lending situation is bad enough, ponzi defaults can even cause some of the hedge borrowers to start to fail. When the people find that they can vote themselves money, that will herald the end of the republic.10/5/2016 "When the people find that they can vote themselves money, that will herald the end of the republic".
- Ben Franklin The United States is in an asset price bubble. Asset Price Bubble Checklist 1. Rapid Acceleration of Asset Prices 2. Overheated Economic Activity 3. An Uncontrolled Money Supply 4. Uncontrolled Credit Expansion The United States meets all the criteria, being flagrant offenders of 3 and 4. The economic situation in the US mirrors the Japanese Asset Price Bubble (wiki link) to an alarming extent. Years before the economic decline started, the Japanese government implemented aggressive fiscal policy (increased public investment) and expansionary monetary policy (dropped their interest rate). The US has the same fiscal/monetary policy stances. From 1989 to 1994 the NIKKEI 225 Index grew from $10000 to $38916 (231%). Economic deflation started draining the economy in 1991 and lead Japan into economic struggles for nearly 20 years (1991-2010). The first ten are commonly known as the lost decade, the full time period known as the lost score. The S&P 500 keeps setting new all-time records, the price is the highest it has ever been in history. All Time High - $2175 - 7/22/2016 Why are interest rates still close to 0%? Below - S&P U.S. High Yield Bond Indices track the performance of "junk bonds" in the United States. They have increased nearly 20% in 2016.  How did the FED made this happen? The FED's monetary policy has resulted in interest rates that are close to 0. A Normal-Interest-Rate Economy High-Yield Bonds - High Risk/High Return High-Credit-Rating Bonds - Low Risk/Low Return A Low-Interest-Rate Economy High-Yield Bonds - High Risk/High Return High-Credit-Rating Bonds - Low Risk/Lower Return Investors typically seek the most return with a level of risk they can tolerate. When "safe" bonds offer little to no return, investment in alternatives increases. Low interest rates create more junk bond investment. Why is this Bad?
1. Lenders face a higher risk of default. 2. Companies that shouldn't be invested in receive more money. |
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