Mr. Sensitive

March 1, 2010


Filed under: Comic Books,Stuff I Just Wanted To Say — lbej @ 19:07
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Americans have experienced two tremendous asset bubbles in recent years (information technology 1996-2000 and residential housing 2004-2007), after having not experienced anything so bubblicious for generations prior.  I am very interested in both the tech and housing bubbles, but far more learned folks than I have written volumes about both and I don’t know that I have much to add.  I will note that the common link is the Alan Greenspan Fed, and one of my great hopes for popular sentiment is that this link not be forgotten when Greenspan croaks.  Fat chance, right?  Unfortunately, I can’t blame Sir Alan for the bubble I really care about: the great comic book bubble of the early 1990s.

What happened is what always happens in asset bubbles: utility-based demand for an asset is overpowered by speculator demand.  Speculators are not bad people.  They are trying to enjoy life just like the rest of us.  But if you are trying to run a business about which you are genuinely passionate, you should want speculators to stay the hell away from you and everyone you know.

Business is ideally about getting people the things they need and want, although not necessarily in that order.  If you can provide others with goods and services they value, the theory goes, they will provide you with valuable goods and services in return.  Money is the device we use so that we don’t have to barter directly.  And we use it to compare the value of goods and services that aren’t really comparable, like chickens and cars.  It’s not a precise system because there’s no empirical equivalency between chickens and cars (how many feathers equals one floormat?).  So the values of chickens and the prices of cars, both measured using money, will fluctuate absolutely and in relation to each other.  But the price of each is supposed to be based on the underlying assumption that people want/need chickens and people want/need cars.  If they didn’t want/need the goods and services, they wouldn’t want/need money.  Money is valuable because goods and services are valuable.  Value is utility.  So the price of your chicken should be directly related to the value of your chicken.  In fact, we use price and value as synonyms.  But they aren’t, and speculators know it.  Price is nothing more than a measurement, a way of comparing one thing to another, the same as weight or height or volume.  Price happens to measure a good or service in units of currency.

Now I have demonstrated that I am not an economist.  Of course, Greenspan is an economist, so I win vs. them.

So to bring this around, if you are a chicken-lover (um…), you would buy a chicken because you want/need the good itself.  If you are a speculator, you buy it because you think the price is going up.  Period.  You don’t want the chicken.  Maybe you’re scared of chickens; I know I am.  But you think you can sell that chicken in a couple weeks for fifty percent more than you are paying for it now.  So you buy it.

Now both the speculators and the chicken-lovers want the same chicken.  And the market doesn’t know the difference.  It registers demand, and in the absence of compensating supply, the price rises.  And this attracts more speculators, and it spooks yet excites the chicken-lovers, and demand increases again, and prices rise further.  And on and on, forever and ever.  Except no.

No, because something happens.  Something happens because it always does.  Maybe it’s SARS.  Maybe the chickens threaten to unionize.  There’s some event, or possibility of an event, or outlandish rumor about an event, and the speculators bolt.  This is what they do, every time.  Of course they do, because they never wanted the goddamn chicken in the first place, and if the price isn’t going up, they’re not going to be the one left holding the bag.  Or the chicken, in this instance.  They never wanted all that fiber-optic cable, or that third house in Las Vegas, or a tenth copy of Turok: Dinosaur Hunter #1.  And if they think for even a second that the next price on the ticker isn’t going to be higher than the last one, it’s time to sell.  It’s past time.

So why is this bad?  So some speculators drove up prices.  Some of the speculators make money, some lose money.  No big, they knew the deal.

This is the big assumption that I see underpinning the public discourse about bubbles: if you let the air out of a bubble, it deflates back to some natural level, and only the speculators get.  But it doesn’t deflate.  It’s not a balloon, it’s a bubble.  It bursts, and it leaves nothing but soap scum.

Chicken prices don’t fall back to where they would have been if not for the creation of the bubble.  They fall lower, probably much lower.  The reason for this is the other side of the natural price equation: supply.  During a bubble, demand far outpaces supply, but supply doesn’t sit there twiddling its thumbs.  It increases, first a little, then a lot, and usually with a significant time lag.  After all, it takes awhile to hatch more chickens.  A short-term spike in demand doesn’t trigger the same kind of structural increase in capacity.  Short-term demand fluctuations can be addressed with the natural ebb and flow of inventory buildup and draw-down.  But if the industry thinks the increase in demand is permanent, capacity will be increased.  And the poor chicken farmers always think the demand is real.  Why wouldn’t they?  They love chickens, and now the rest of the world is seeing what they knew all along.  Chickens are awesome.

Psyche!  It was speculators, not chicken-lovers.   Chickens suck.  You suck.  Play the Rollins Band song “Liar.”  It’s like that.

You see the problem now.  The chicken farmers have added enormous capacity, capacity they can’t remove quickly.  Unless you want them to just kill a bunch of chickens, and what are you, a jerk?  So it’s going to take some time to work through that supply at normal demand levels.  Good thing demand isn’t just going to fall off a cliff or something.

Play “Liar” again.

Speculators bolt.  Demand is gone.  And what the hell are we going to do with all these chickens?

Okay, so we’ve got extra chickens.  That’s okay, right?  Except that you forgot about prices.  If we have many more chickens than the plain, ordinary chicken-loving demand we are left with, prices will fall.  Hard.  Prices will not fall back to where they would have been absent the bubble.  They will be much lower than they should have been, because there is much greater supply than there should have been.  I could draw you a picture, but I won’t.

And now the real tragedy unfolds.

The speculators have moved on to whatever is next.  But there is no next for the chicken farmers.  There’s only chickens.  Chicken farming is their vocation.  Now they are selling the same number of chickens (hopefully) they were selling before the bubble but at far lower prices per chicken.  And the price of everything they want/need hasn’t gone down.  Revenue way down, mortgage/car payments, food, clothing, not so much.  You can do the rest of the depressing math yourself.

Speculators kill businesses and ruin lives (including their own).  Maybe they are bad after all.  The really sad thing about it is that they rarely pretend to be anything other than what they are.  Speculating isn’t fraudulent—fraud is fraudulent.  If speculators do pretend, they do a lousy job of it.  It’s the people in the industries targeted by speculators and their natural desire to believe the world finally loves chickens just as much as they do, that leads to the truly great harm.  After all, what if all the people around you, all the people who never believed in you, suddenly tell you “you’re right, and you’ve been right all along?”  What would you do?  You’d like to thing you’d be wary, but you know you wouldn’t.  You would have a house full of chickens is what would happen.

So that is why bubbles are bad.  And the greatest, most important bubble in all of time is the one in the comic book industry.  More on that to come, unless I don’t get around to it.

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