May 25, 2007

BUBBLICIOUS (via Jim Yates):

How economic bubbles built America (NEIL REYNOLDS, 5/23/07, Globe and Mail)

In 1820, as calculated by the English economist Angus Maddison in The World Economy: Historical Statistics, the United States produced 1.8 per cent of the world's gross domestic product. China and India together produced 50 per cent.

In 1920, the U.S. produced 15 per cent of world GDP, the same percentage as China and India. With 4 per cent of world population, the U.S. now produces 25 per cent of world GDP, twice the combined share of China and India. With a $13-trillion (U.S.) economy, the country now routinely increases GDP by hundreds of billions a year -- or more than the entire GDP of such dynamic economies as South Korea. What explains this explosive American growth -- uniquely sustained for two centuries?

Normally, by way of explanation, people cite democratic institutions, the rule of law and free-market capitalism. But these essential attributes of most prosperous countries don't explain the profound differences between rowdy, expansive American growth and (for example) discreet, orderly European growth. [...]

In his new book Pop! Why Bubbles are Great for the Economy, [Daniel Gross, a columnist for Slate] argues that excessive enthusiasms - "outbursts of entrepreneurial id" - are indeed a defining aspect of the American Way. These outbursts invariably produce bubbles, he says, the long-term consequences of which are invariably good. All by themselves, bubbles have given the United States a huge competitive advantage and constitute one reason why the country was able to build itself "from almost nothing to become, for all its faults and failings, the most prosperous nation in the history of mankind."


Nice qualifier. Of course, one of the main faults in the eyes of folks like Mr. Gross, is that we likewise pursue enthusiasms for Reforming places like Europe, Asia, the Middle East... It's all of a piece.

Posted by Orrin Judd at May 25, 2007 9:27 AM
Comments

And I'll bet I know what the end positive result of the Housing Bubble bursting is: A vibrant Subprime-mortgage lending industry that both knows its limits (no "Liar Loans") and can profit from those limits (extensive use of fees vs interest, much like Credit Cards).

And it will be just in time for those 100 million immigrants who need a house to buy, right OJ?

Posted by: Brad S at May 25, 2007 10:15 AM

Just thought I'd mention this, too: Even though George Gilder caused a lot of people in my business (Telecom) a LOT of money, all predictions he made about broadband availability/usage have come true. To mention one obvious example, Comcast now sells more Hi-Speed Internet modems than basic cable subscriptions.

Posted by: Brad S at May 25, 2007 10:19 AM

The genius of capitalism is the ability to allow risk-taking, which is enabled by a ruthless willingness to strip failed enterprises for parts, rather than letting them limp along on life-support indefinately.

Posted by: Mike Earl at May 25, 2007 11:28 AM

The genius of capitalism is the ability to allow risk-taking, which is enabled by a ruthless willingness to strip failed enterprises for parts, rather than letting them limp along on life-support indefinately.

Posted by: Mike Earl at May 25, 2007 11:29 AM

The housing bubble is in its early stages. We're just seeing the results of artificially high interest rates.

Posted by: oj at May 25, 2007 11:46 AM

Artificailly high rates? Headline inflation is running at 6%. Fed discount rate 5.25% Trade deficit/demand for treasuries is keeping rates low, not a lack of inflation. Artificially low rates caused the housing imbalance. Bubbles are caused by artificial demand and betting on the cum, greed, in other words. The houses, railroads, internet/information highway get built however and they get built fast. Pigs, as they say, get slaughtered.

Posted by: hugh at May 25, 2007 3:45 PM

Real inflation is at 0% or less. So 5.25% is usurious by historical standards.

Posted by: oj at May 25, 2007 6:04 PM

Real inflation? Please, define your terms. Had rates been 'usurious', as you say, no housing imbalances would exist. Rates were, and are, anything but usurious. Housing is deflating due to tougher lending standards, not rates. If 'real' inflation exempts all prices which are rising then there is no inflation. Governemnt statistics are issued by the same folks who issue substantial portions of income to over half the population. COLA increases are based on reported inflation. Can you say 'conflict of interest'? Core CPI reports inflation ex inflation to a large extent.

Posted by: hugh at May 25, 2007 6:30 PM

Exactly, the fact that a few prices rise does not signal inflation.

Posted by: oj at May 25, 2007 8:58 PM
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