When Bubbles Pop

In the Tulipmania crash the common Witte Croonen bulb, that rose in price twenty-six times in January 1637, fell to one-twentieth of its peak price a week later

From 1717 to 1720, shares of John Law’s Mississippi Company were bid up by frenzied Frenchmen from 500 livres to a high of 10,100 livres, before Law was run out of France and the shares crashed along with the value of Law’s banknotes.

In the late 1980’s, golf memberships in Japan were bid as high as $4 million apiece.  The Nihon Keizai daily even came up with a golf membership price index that was followed as closely as stock tables.  But by 2003, the Keizai golf index had dropped by 95% and many course owners were bankrupted.

Japan’s  Nikkei 225 hit its all-time high of 38,957.44 on December 29, 1989, after increasing sixfold during the decade. After the crash, it lost nearly all these gains, closing at 7,054.98 on March 10, 2009—81.9% below its peak twenty years earlier.

The NASDAQ composite index poked its head above 5,000 at the end of 1999 and feel to almost 1,000 two years later.

In 2001, with the Federal Reserve stepping on the monetary gas, the average price of an acre of land in Las Vegas was $158,000.   By the fourth quarter of 2007, the average land price (excluding resort properties) peaked at $900,000 per acre.

According to Applied Analysis, Q4 2011 land sales in Sin City averaged $102,491 per acre, meaning Las Vegas land prices have now fallen nearly 90% from their peak in 2007.  There’s talk of Vegas coming back, but home builders already have too much dirt and vacancies in retail, office and industrial space remain high.

Hubble Smith writes for the LVRJ,

It’s worth noting that only 54 percent of land deed transfers during the fourth quarter were regular “arm’s-length” transactions between private parties that did not involve a lender, he said. Trustee deeds represented 32.6 percent of activity.

So most of the action for land is lenders seizing their collateral.

However, the greatest bubble in financial history is currently stretching its seams and has been for years.  The bubble in U.S. Treasury securities rivals any mania the world has ever seen.

Lending the U.S. government money yields all of 5 basis points for a 1-month loan.  For six months, 14 basis points.  For a year, 18bp. Two years 33bp, 10 years 2.22% and lending the U.S. government money for 30 years denominated in a currency the Federal Reserve constantly and systematically depreciates yields an investor all of 3.35%.

How on earth could this be?  The creditor in this case owes at a minimum $15+ trillion.   This operation is currently running an annual deficit of $1.4 trillion.  The management of the entity has problems controlling its spending, so the fiscal problems will persist.  Yet, Uncle Sam can borrow money essentially for free.

The largest holder of U.S. Treasuries is America’s central bank. This is not money that’s been saved and looking for the best return, but money conjured up conveniently from the ether for the express purpose of buying Treasury debt, because no other buyers exist that will pay the same price.

When the U.S. Treasury bubble pops, it’ll be a doozie.


  1. Thank you, very good article.

    - When the U.S. Treasury bubble pops, it’ll be a doozie.

    At the moment the material ‘industry’ is loosing it’s dominance when it comes to – what/who does add value and how much is the value added. Anything else cannot work in a money system considering material value, which is still preferred.

    The moment people will have to decide, do we need something to eat or … This is the doozie. I am sure this time this decision will come and what you described will very likely be the ignition spark or one of them.

    Agreed. My original reply was 10 pages … there are consequences from ‘some’ problems the financial system tries to delay. We all together sit in a tremendous bubble – the real world economy went wrong bubble, this is the real one. A state of a real world economy that can only be financed, not solved I think.

    One point, in one sentence – Compensating the false allocation of talent when organizing economies along the concept of industry not serving people’s basic demands (current evolution over the years, good idea first) + no one can finance services, one-time / short period utility value value via debt in a market with decreasing material values used in economy or at lower prices or both, assuming the currency should be in the position to transfer real world values or store the value – in short you cannot eat Toki Tori.

    I am natural born Austrian (a real one), we learned that money is getting worth less over the time. The amount lost is the price we pay for unavoidable false allocation of talent, ok – no system is perfect. Anything beyond is debt. In order to improve the situation we invest our money… this period was not very exciting but things worked.

    In the end people will have to decide, ‘Do we want a currency allowing us to transfer real world value’. Anything else but money, serving the original purpose – product exchange, does not allow. This kind of money allows us to store the real world value on a long term.

    What is created currently is money without value (almost worthless underlying) and money eating up its underlying material value via interests. This is not the best idea. The current money system does allow exporting preexisting digital content to aliens accepting our debts as the money for the pay back assuming the universe is expanding. Sounds strange, but this would work:).

    The functions of money have to be combined consistently in a system.

    In my home country there was a silver hype/bubble at the time described in the article in specific area in Tirol (Schwaz). From the early days on (late mid-age) prosperity grew and the region’s economic structure evolved and did change – imo a Bubble grew from this. This bubble popped when silver had been found in another place and imports from mines in South America started to dominate in Europe (article Tulip hype – same time). Schwaz’s de facto monopoly in Europe was gone. This is a just normal evolution, except of the short period of exaggeration. It’s about people that stay, too. Look at Silicon Valley – products invented in a garage is very much the same as digging for truffles – very much the same as digging for gold. San Francisco. Nothing bad, just a concept that worked.

    I am sure people will decide correctly. When there is nothing to loose ratio will come back, but before it’s better to go on holidays.

  2. To what extent is the American citizen personally liable for the debt incurred by the Federal Government (leaving aside any debts incurred by state and municipal governments)?

    I have seen it written by respected comentators that every child born today arrives with a beginning debt of about $50,000, thanks to the Federal Government. I believe that calculated number, but I have never seen any blog or article that demonstrates the legal obligation to the citizen for this debt.

    If true, I imagine the average citizen thinks it’s “the govmint” that owes the money, not him. How about making it a requirement that, in order to vote in the next election, each citizen must sign a promissory note agreeing to pay his share of the national debt, maybe even with some payment terms.

    How many people do you think would be willing to vote?

      • An old saying is someting to the effect of: Nothing is as certain as death and taxes. I’m guessing that most people accept their obligation to pay Federal income tax, even if they don’t like it. But I think also that most people do not believe they have any personal liability for the so-called national debt. Wildberry (see his comment) thinks we are required only to pay the tax; no liability for the debt. I’d like to see each citizen confronted with the debt liability, if there is one (except me, of course). Then maybe the pols would really be scared.

    • GB,

      I don’t think an individual has any liability for the debt, which leads to a bit of a moral hazard.

      The individual obligation is to pay taxes based on individual earings. That was done with the 16th Amendment, passed as part of the package of the Federal Reserve Act, and the 17th, prividing for the direct election of Senators, formerly appointed by the states, and who must ratify new tax codes.

      One of the darkest years in American Constitutional history.

      • Wildbery, Yes, I’m awarae of those Amendmants. But if the citizens do not have liability for the debt, I’d like to know by what legal interpretation that is so. I’ve seen too many other comments about, for example, a family of four saddled with $200,000 of the national debt.

        Either way…a hefty tax hike or a direct amortization schedule…the citizens should be confronted with their obligation. Maybe that would change their attitudes toward the welfare-warfare state.

      • Yes, the 14th amendment states, “The validity of the public debt…shall not be questioned”. By your reasoning then, since we have no standing to question the public debt, we cannot be held individually liable. That gets even the pols off the hook, doesn’t it. No wonder it’s so easy for them to rais the debt limit.
        Thanks for your insights

  3. The Treasury bubble seems real enough, but it can’t pop in the same way that the Tulip bubble popped, i.e. the price of Treasuries in U.S. dollars can’t simply fall. Treasury debt is refinanced continually, so a collapsing Treasury price is equivalent to a massive increase in the cost of the Treasury’s debt service, and this increase requires some combination of decreased Federal spending, increased Federal taxes, dollar inflation and outright default.

    The first two options, decreased Federal spending and increased taxation, are most attractive to bondholders, but these measures don’t address the problem for precisely this reason. Without default or very low (negative), real interest rates, a massive glut of increasingly risk averse creditors, facing slim prospects for extending so much credit fruitfully, will buy Treasuries. Higher interest rates make these nominally “riskless” securities all the more attractive.

    I very much want much lower Federal spending, but I don’t want my children taxed out that a** while what little benefit they derive from state spending disappears, so that Treasury holders can receive promised principal at higher interest rates. For my children’s sake, I prefer outright default, and if outright default is not in the cards, I prefer inflationary default, and I want lower Federal spending at the same time.

    The effect of inflation on price signals is perilous, but how much better is a massive tax increase? The inflation is costly to Treasury holders, as it should be. Paying promised principal and interest on Treasury securities, even a very low, real interest rate amounts to a massive bailout of creditors. Maintaining positive Treasury yields without a rising price level also distorts price signals.

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