De Coster Explains the Cupcake Bubble

220px-Chocolate_Cupcakes_with_Raspberry_ButtercreamThere’s the Skyscraper Index, and then there’s the Luxury Cupcakes and Breakfast Cereal Index.  That is, a six-dollar bowl of cereal may be an indicator that easy money is a little too easy to come by. Karen De Coster spots the latest warning signs for high-end cupcakes:

I called the cupcake bubble back in 2009. Post-economic bust, what started rising from the economy’s ashes was a series of economic “successes” whose popularity made no sense in an economy that was awash with bubble-bust carnage. Cupcakes were the most obvious an imminent mishap.

Later on, as cupcake pandemonia took firm hold and media stories gloated about the glory and popularity of those pricey-but-oh-so-special cupcakes, I was writing about the cupcake bubble and what was really driving the bubble madness that created endless malinvestments [ see definition ] in the cupcake business.

Yesterday, it was announced that Crumbs, the New York-based “cupcake empire” was going out of business. Forty-eight stores in ten states went kaput. The day that Crumbs mania hit its high and it was announced that the company was going public, I called it out as a favorable stock short.

I didn’t attack cupcakes because I hate cupcakes – I like an occasional cupcake every now and then. I merely latched onto an absurd fixation that was being fueled by something other than demand and productivity. From 2008 onward, the advent of government stimulus policies along with the Federal Reserve’s fight to keep credit cheap and money plentiful created market distortions that were making even the ridiculous seem profitable and real. Americans developed a strange obsession with enormous, sugar-laden, pricey mounds of sweets all dressed up in toppings and flavors suitable for the most discriminating 5-year-olds, and thus business malinvestments in the cupcake world ensued.

However, I was attacked by cupcake lovers and libertarians alike, the latter who were incensed that I would bring into question any free market activity. As a market anarchist, I am all for the free market investing in and opening up toe-jam restaurants if that is the desire and/or apparent trend. Nonetheless, my criticism would be based in the feasibility of the idea and the ability for the economy to sustain such a market without government monetary policy and interventionism mucking up markets. At the core of Austrian economics is the trade cycle theory that explains why recurring booms and busts occur in an economy. Unsustainable credit expansion and inflation, along with the “have-pulse-will-loan” mentality, served to lure entrepreneurs into seemingly profitable business ventures that were not sustainable on their own merit.

I argued that the bubble period produced many casualties in the form of absurd fixations produced by the boom years that continues to titillate perpetually adolescent adults of all ages who are still experiencing their own sense of made-up prosperity even as America’s boom became a flat-out bust wherein even multiple government stimulus policies have not managed to stimulate anything in a tangible sense. When government inflation and interventionist monetary policies prop up the economy and “stimulate” it through artificial means, peoples’ perceptions of economic life are transformed into that which was intended by the central planners: the economic crush is over; our government cured all the problems; things are great again; go back to your old ways. Rinse and repeat.

Thus the credit boom had given rise to a fictitious prosperity grounded in debt. The accumulation of stuff via the buildup of debt distorted people’s perception of reality and gave them a false sense of wealth, and so they took full advantage of their newfound “prosperity.” It has not been authentic affluence because much of the economic growth in the U.S. has been built upon a foundation of debt and consumption, not one of increasing production and real wealth.

As household debt-to-income ratios rose to an all-time high, personal savings rates plummeted to new lows. People demanded more and more materialism in the form of “things,” and producers responded by supplying the goods and services that were in demand. The easy-credit, economic boom allowed them to produce increasingly more extravagant products and services that lured consumers who were not restricted by cash on hand or real wealth. Consumers could spend as they pleased through the careless use of debt.

Debt-based consumerism can generate numerous social problems, including leaving behind a number of spiritual casualties. In essence, the boom-bubble period made people go bonkers. Entrepreneurs, business owners, individuals, and consumers became unhinged, going well beyond sustainable business models and reasonable spending patterns. The excess of credit along with the low cost of obtaining it allowed business ventures to be funded that otherwise would not have been able to raise capital. Business capital was therefore wasted on projects that were doomed to failure in the long run.

Along with that, I have argued that government monetary policy is the major contributor to the institutionalization of perpetual adolescence. Inflation and credit bubbles distort time preferences [ definition here ] to the point where individuals are attracted to inanity and reduced to puerile behavior. The distortion of time preferences serves to infantilize adults whose instant gratification has usurped emotional intelligence and common sense. Among the most tragic consequences are the behavioral enigmas left behind by the spiritual debasement caused by years of excesses, with two of the most disturbing problems being the professional child consumer and the perpetual adolescent adult.

I first recognized this phenomenon in all its ugliness in 2008 after I observed that Cold Stone Creamery was yet another credit-bubble business whose business model wouldn’t last five minutes outside of the hyper-boom environment in which the business was born and initially thrived. I wrote about Cold Stone in 2008 when I sensed that this business was a most preposterous venture, perhaps the worst I’d ever seen from a major chain. I was attacked on multiple fronts for daring to call out the failure of this chain that happened exactly as I said it would happen.

Hat tip to Lauren Snyder Grosz and the many others who messaged and/or tweeted this newsflash my way.

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