Bubble world

Have recently been reading this it is an excellent book written by Garet Garret in 1932 entitled 'Bubble World'  it offers a great insight into the nature of market bubbles, looking at the psychology and rational of this economic phenomenon. Offers some great insight into the pre WWII period, and is extremely relevant today. I have included a few pages below.

COSMOLOGY OF THE BUBBLE

The Lord giveth increase, but man devised credit.

Mass delusions are not rare. They salt the human story. The hallucinatory types are well known; so also is the sudden variation called mania, generally localized, like the tulip mania in Holland many years ago or the com- mon-stock mania of a recent time in Wall Street. But a delusion affecting the mentality of the entire world at one time was hitherto unknown. All our experience with it is original.

This is a delusion about credit. And whereas from the nature of credit it is to be expected that a certain line will divide the view between creditor and debtor, the irra- tional fact in this case is that for more than ten years debtors and creditors together have pursued the same de- ceptions. In many ways, as will appear, the folly of the lender has exceeded the extravagance of the borrower.

The general shape of this universal delusion may be indicated by three of its familiar features.

First, the idea that the panacea for debt is credit.

Debt in the present order of magnitude began with the World War. Without credit, the war could not have con- tinued above four months; with benefit of credit it went more than four years. Victory followed the credit. The price was appalling debt. In Europe the war debt was both internal and external. The American war debt was internal only. This was the one country that borrowed nothing; not only did it borrow nothing, but parallel to its own war exertions it loaned to its European associates more than ten billions of dollars. This the European gov-4 ABUBBLETHATBROKETHEWORLD

ernments owed to the United States Treasury, besides what they owed to one another and to their own people. Europe's attack upon her debt, both internal and external, was a resort to credit. She called upon this country for immense sums of private credit—sums which before the war had been unimaginable—saying that unless American credit provided her with the ways and means to begin moving her burden of debt she would be unable to move it at all.

Result: The burden of Europe's private debt to this country now is greater than the burden of her war debt; and the war debt, with arrears of interest, is greater than it was the day the peace was signed. And it is not Europe alone. Debt was the economic terror of the world when the war ended. How to pay it was the colossal problem. Yet you will find hardly a nation, hardly any subdivision of a nation, state, city, town or region that has not multiplied its debt since the war. The aggregate of this increase is prodigious, and a very high proportion of it represents recourse to credit to avoid payment of debt.

Second, a social and political doctrine, now widely ac- cepted, beginning with the premise that people are en- titled to certain betterments of life. If they cannot imme- diately afford them, that is, if out of their own resources these betterments cannot be provided, nevertheless people are entitled to them, and credit must provide them. And lest it should sound unreasonable, the conclusion is an- nexed that if the standard of living be raised by credit, as of course it may be for a while, then people will be better creditors, better customers, better to live with and able at last to pay their debts willingly.

Result: Probably one half of all government, national and civic, in the area of western civilization is either bankrupt or in acute distress from having over-borrowed according to this doctrine. It has ruined the credit of countries that had no war debts to begin with, countries that were enormously enriched by the war trade, and

COSMOLOGY OF THE BUBBLE S

countries that were created new out of the war. Now as credit fails and the standards of living tend to fall from the planes on which credit for a while sustained them, there is political dismay. You will hear that government itself is in jeopardy. How shall government avert social chaos, how shall it survive, without benefit of credit? How shall people live as they have learned to live, and as they are entitled to live, without benefit of credit? Shall they be told to go back? They will not go back. They will rise first. Thus rhetoric, indicating the emo- tional position. It does not say that what people are threatening to rise against is the payment of debt for credit devoured. When they have been living on credit beyond their means the debt overtakes them. If they tax themselves to pay it, that means going back a little. If they repudiate their debt, that is the end of their credit. In this dilemma the ideal solution, so recom- mended even to the creditor, is more credit, more debt.

Third, the argument that prosperity is a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the in- crease and exchange of wealth, and credit was its product.

This inverted way of thinking was fundamental. It rationalized the delusion as a whole. Its most astonishing imaginary success was in the field of international finance, where it became unorthodox to doubt that by use of credit in progressive magnitudes to inflate international trade the problem of international debt was solved. All debtor na- tions were going to meet their foreign obligations from a favorable balance of trade.

A nation's favorable balance in foreign trade is from selling more than it buys. Was it possible for nations to sell to one another more than they bought from one another, so that every one should have a favorable trade balance? Certainly. But how? By selling on credit. By lending one another the credit to buy one another's goods. All nations would not be able to lend equally, of course.

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Each should lend according to its means. In that case this country would be the principal lender. And it was.

As American credit was loaned to European nations in amounts rising to more than a billion a year, in the general name of expanding our foreign trade, the question was sometimes asked: "Where is the profit in trade for the sake of which you must lend your customers the money to buy your goods ?"