The Bubble That Must Burst

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The Bubble That Must Burst

by Michael S. Rozeff


The bubble that must burst is a very, very large bubble. It is worldwide. It is co-existent with most nations of the world.

Like
all bubbles, for a time it appears rational. It even seems to work. The
bubble seems to bring all gains and no losses, and all at very low
cost. The returns seem very high and never-ending. They attract the
resources and allegiance of many because the yield seems so high.

But
like all bubbles it cannot go on forever, because it is based on greed
and gain extracted from other persons against their wills. It is a
bubble based on extrapolative expectations that eventually cannot be
sustained by reality.

What is this bubble? It is the bubble of
constitutional and representative democracies that lack the consent of
all of those being governed. It is the bubble of states that promise
more and more social gains and cannot deliver upon these promises. It
is a bubble of governments that are chain letters and Ponzi schemes. It
is a bubble built upon robbing some to pay others.

All of these
bubbles must, by the dynamic of their intrinsic nature, come to an end.
They all must, by the necessity of facing reality, be deflated. And, in
the process, the peoples of the earth will have to come face to face
with themselves and will have to fashion new social and political
relations.

The constitutional and representative democracies
cannot be saved by changing the leadership, because they are based on
rules of force that must come to grief. They cannot be changed by
voting. No stable economy can be reflated by a central bank, and no
stable nation can be reflated by voting in new leaders.
Counter-intuitively, the government bubble will burst when more and
more people do not vote and withdraw their support from a government
based on unworkable and unjust rules of force.

Democracy, as
people are now exercising it through majority force throughout the
world, is rotten to the core. It is common within these government
systems for people to rush to take advantage of anyone else they can,
in their greed. Democracy has become one big speculative bubble, as
many people have placed bets on an ever-expanding gain for themselves
at the expense of others. This cannot go on indefinitely, so it is a
bubble that has to burst.

Chain letters must come to an end.
Ponzi schemes must unravel. The music must stop and there will not be
enough chairs for all to sit on. Speculative bubbles must burst.
Governments built upon ever-expanding circles of greed and gain must
fail. Trees do not grow to the sky.

Deep down, we know this. We
only hope that we will not be the one left standing when the music
stops. We only hope the system will last another 10 or 20 or 30 years
or whatever life we have left. We wish our children and grandchildren
well, but we are secretly glad that we do not have to confront the
problems we hope will be deferred to them and not fall upon us.

Why must bubbles burst? Basically because they cannot pay off according to our expectations.

Take
the housing bubble as an example, but a bubble in growth stocks works
in the same way. Changes in expectations cause price changes. If we
think houses will rise in price, we are more inclined to buy them. This
makes the price rise. It reinforces our expectations and draws in new
buyers. Many causes of changes in expectations are possible. In the
U.S., we had lower interest rates and the authorities encouraged
re-financing at lower rates. In some places, new house building was
restricted as in California. House prices started to rise. This started
a speculative move in which people started bidding house prices higher.
This was concentrated in a handful of states. Some areas grew because
they had a real business boom. The idea got around, from several
sources, that prices were rising. People had extrapolative
expectations. They thought that what was past was prologue. These
expectations self-reinforced for a while, even years.

Eventually,
the reality sets in, which is that the asset cannot rise too fast in
price indefinitely. It sets in for a number of reasons. Builders build
houses at much lower replacement costs, drawing demand away from the
high-priced houses. They also build more of the high-priced houses than
there are buyers. Rentals begin to look relatively less expensive. The
market runs out of new buyers, because prices are high compared to
wages and salaries. Other investments begin to look relatively more
attractive. Interest rates rise. Speculators begin to sell out what
they had bought earlier in order to take profits. The bubble bursts, as
it has to.

People are expecting a big profit, or a high yield
from the house purchase. That is why they buy at high prices. They
think they are going higher. When people count into their calculation
of a high yield the expected future price gains, as in buying
high-priced growth stocks or high-priced houses, they are pouring money
into these assets thinking they have higher yields, and they are
bidding the prices up so as to get those yields. In the process, the
yields are falling. The whole price process is driven by what is in
their minds because it's all what they expect will happen in the future.

Greed
for gain comes to grief. Many people and institutions borrowed heavily
to take advantage of the housing bubble. It was like the stock margin
buying in the 1920s. All of those that used so much financial leverage
should fail. We who did not should not be made to pay them for their
greed and mistakes. All the ones that took out asset insurance from
counterparties that had no assets – they erred in their evaluations
too, and they also should bear their own losses or fail. Innocent
people shouldn't be paying for the mistakes of others. All the ones
that can't pay for their houses now and are under water should face the
consequences themselves. They too blundered. No one should be made to
bail out someone else.

This is not the way of most governments,
however. Bailouts are the way. The attempt is to find chairs for those
left standing. The chairs have to be stolen from those who were prudent
enough to sit down earlier before the music stopped and the game of
musical chairs ended. Governments today routinely violate basic human
rights to life, liberty, and property.

Government bailouts are
the government’s absorption of the housing bubble into its own social
security bubble. This hastens the bursting of the government bubble.

Generations
before us started the government bubbles that now rule us. They bet on
government. They saw gains coming down the pike as they collected their
Social Security and built their subsidized houses and drove on their
subsidized highways and grew their subsidized crops, all through
subsidized loans. They saw gains from favoring labor and executives and
public schools. The bubble grew because shifting coalitions bid up the
power of government and collected the gains. Voters psychologically buy
into the government bubble. They have extrapolative expectations. They
think that they will secure the gains that the earlier generation
managed to extract. But those gains are in their minds. They are unpaid
promises made by their officials. Who will pay for those gains? Who
will pay for the bailouts, the health care promises, the retirement
promises, and all the other trillions upon trillions of guarantees
being liberally handed out? The bubble has to burst. There’s only so
much gold in them thar hills before the price of extraction rises
beyond its worth.

One can do no wrong by buying a house that is
going up in price, or so it appears. And one can do no wrong by
endorsing a government that provides a rising stream of benefits, or so
it seems. Why not buy a second home or a third? Why not borrow to buy
them? And why not expand the government and get more benefits? Why not
have the government borrow to provide them?

Government in its
current form is an overpriced growth stock. It is paying dividends out
of contributions forced out of newcomers to the game and extracted in
countless ways from the dividend recipients and obtained from
borrowing. It is promising a rising stream of future dividends, while
itself producing nothing of value.

When the value of the
obligatory debts exceeds the value of the assets, the enterprise is
insolvent. The owners walk away from the assets. When government debts
exceed the value of the social benefits, people will walk away from the
government. Many already have, in a variety of ways. Why pay more than
what something is worth? Why invest any emotional capital in an
institution one regards as unfit, unjust, inefficient, intrusive,
irrational, unworkable, and ineffective?

Government is now an
insolvent enterprise. Government is a Ponzi scheme. Government is a
fraud. Government is a bubble that must burst.

That being the
case and while there is still time to think without the pressure of
rapidly changing events, we can only benefit by exploring and
considering a wide range of social and political options that are in
accord with basic and sound principles of peace, liberty, justice, and
rights. A period of revolutionary reconstruction lies ahead of us. We
should not be reflating the government bubble that will burst; we
should not be reflating the forces of domination and greed exercised
through and by coercive government.

We should be shaking off the
myths, fallacies, errors, and wrong turns of the past. We should be
stating, and reinstating, and advancing those principles that can shape
societies along sound lines. There are sound ideas that came along with
constitutional governments, but they have been shunted aside and
diluted. Consent of the governed, all of the governed, is one of those
principles. This implies a second principle: Government without claim
over territory, or an end to the idea that a sovereign has a right to
claim rule over a territory and every person and thing within it. No
person can rightfully be made a citizen of a government without his
consent and by virtue of the place where he happens to live.

The
internet can be a model of what is to come with respect to getting to a
much-reduced arbitrary and non-consensual governance and a situation
where social interactions are freed from unnecessary coercive
restrictions. People can freely join whatever societies of persons they
wish throughout the globe in a way that surpasses the force-ridden idea
of territorial domains. The internet has no such territorial borders,
and such borders only reinforce coercion as well as being the product
of coercion. The internet is breaking down those borders as it opens up
communications.

The bubble governments of the present have
vastly intruded upon social matters. They have made the social into the
political in areas where they have not obtained the consent of all.
There is a large enough and difficult enough realm of governance
without government absorbing society. There are all sorts of disputes,
conflicts, and crimes that require governance and justice procedures.
Libertarians have thought long and hard about how to preserve and
improve these governance systems, even as the non-consensual features
of the present bubble governments fall by the wayside when these
bubbles eventually burst. Libertarians have thought long and hard about
rights, rule of law, due process, and property rights. This thinking
needs to be continued, questioned, tested, ramped up, restated,
refined, integrated, and understood even better. The government bubble
is going to burst, and we will need this and more thinking in order to
cope with the coming opportunities to remake social and political
relations.

March 26, 2009

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.