Sunday, 5 August 2012
The bubble economy and the Olympics.
If you want to find out about asset bubbles, don't care for dry academic work and haven't read it yet, go and buy a copy of Tulipomania, by Mike Dash. GBP 5.99 for the Kindle version, apparently. I have already had one copy 'borrowed' and never returned.
The bad photo is of a great painting by Frans Hals, which you can find at the Alte Pinakothek in Munich. Perhaps his most famous picture, of a Laughing Cavalier, is at the Wallace Collection in London. Closer and free to see. The one in Munich is of a cloth merchant, as is obvious from the sword he's holding. Looking at it, I was struck that this is a painting of an asset bubble. The rich people who bought tulips at silly prices also paid the Dutch masters to paint their pictures so they could show off their new found wealth. This one was painted in 1629, just when the bubble was getting monstrous. Hals' later work is more sober, reflecting what happened after the bubble burst.
I don't know what it says about this era, that bubble-beneficiaries are more inclined to buy old masters than commission new work. Or they buy houses, super-yachts and football clubs.
The current asset bubble is different from is predecessors because it's truly global. That means it changes shape and moves around the world. It started as a credit bubble, that spawned housing bubbles. The first of those burst spectacularly. The second too, in many places. But as central banks shovel newly-minted money into bond markets, so the bubble turns up in different places. The near-zero levels of Treasury and Bund yields are obvious examples. The Swiss National Bank can only keep its currency in check by allowing a Swiss asset bubble to grow.
But if asset bubbles all have one thing in common, it is that they widen the divide between "have's" and "have not's". Money is almost free but brutally rationed. Germany can have as much is it wants, Spain can have none. Apple could borrow as much as it wanted except it has ludicrous amounts of cash sitting round, unused, already. Hals' cloth merchant was part of a small elite that wanted to show off its wealth. And even today, you can see a country in recession produce sell-out audiences to the Olympics day after day. Huddled over laptops, Londoners try to by more tickets, not put off for a second by the prices. In the last half hour, a few tickets have been out on for sale - GBP 450 for Tuesday's athletics, GBP 150 for a ticket to the women's hockey final? GBP 1500 for a ticket to the closing ceremony? Snapped up in an instant!
The Olympics are a huge success on many levels, and the amount of money spent by spectators will be one of the positives, even if it takes time to turn up in official data that struggle to capture something quite so esoteric. Oxford Street, after all, is much quieter than usual. I wish I could think of the equivalent incentive for the like of Apple and other cash-rich companies to spend more. For the most part though, in our 'bubble-economy' the assets which will do best continue to be ones the newly-minted central bank money gets to most easily. So don't be surprised to see stock markets out-perform economic growth (or profits), and don't be surprised if the yields on 'safer' government bonds remain far too low to finance a pension safely.