Blog

A
A
Home | Blog | When Bubbles Pop

When Bubbles Pop

April 5, 2012
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.

Follow Mises Institute

Add Comment