The Science of Economic Crashes

[naf140230]

I recently read a section of Physics of the Future by Michio Kaku. It provides a scientific explanation for economic crashes. Bubbles and crashes might not be very unexpected after all. Science is not uniform either. It comes in waves that go like this. A seminal breakthrough occurs which leads to a cascade of secondary innovations. This, in turn, leads to vast amounts of wealth which is reflected in the economy. As a result, a bubble forms leading to a crash. The seminal invention's heyday ironically happens after the crash.

The earliest example in the book is the Crash of 1850. The first scientific wave started when James Watt invented the modern steam engine. This triggered the Industrial Revolution. This eventually led to the creation of the locomotive. A lot of excess wealth was created as a result. It had to go somewhere. It went into locomotive stocks in the London Stock Exchange. A bubble formed as a result. Because the locomotive was still in its infancy, the bubble burst which led to a stock market crash in 1850, followed by a series of minicrashes. The railroad industry ended up maturing in the 1880s and 1890s, when the railroad was in its heyday.

The next crash mentioned is the one the triggered the Great Depression in 1929. A second scientific wave began in 1879 when Thomas Edison in the lightbulb. Another seminal invention was the car. It wasn't until 1913 that Henry Ford invented the assembly line and brought forth the Model T. The electric and automotive revolutions of Edison and Ford proliferated throughout the world, creating excess wealth. Like before, this wealth had to go somewhere. It went into utility and automotive stocks on the US Stock Exchange. An unsustainable bubble formed which burst in 1929. This led to the Great Depression. After the economy recovered, the paving and electrification of America and Europe took place in the 1950s and 1960s.

The last crash mentioned in the book is the Crash of 2008. The current scientific wave began as a result of the Space Race. It is the high tech revolution that gave us the computer and the Internet. The wealth created as a result of the digital revolution went into real estate creating the housing bubble which burst in 2008. The wiring and networking of the world has not happened yet. The heyday of the information revolution has yet to come.

In addition, Michio Kaku predicts the possibility of a fourth scientific wave. He suspects it will involve artificial intelligence, nanotechnology, telecommunications, and biotechnology. This will create excess wealth which leads to a bubble that is likely to burst in 2087 before the heyday of the revolution comes.

This should be interesting to talk about. What do you think?

[naf140230]

(08-09-2016, 06:07 PM)X_4AD_84 Wrote:

(08-09-2016, 05:33 PM)naf140230 Wrote: I recently read a section of Physics of the Future by Michio Kaku. It provides a scientific explanation for economic crashes. Bubbles and crashes might not be very unexpected after all. Science is not uniform either. It comes in waves that go like this. A seminal breakthrough occurs which leads to a cascade of secondary innovations. This, in turn, leads to vast amounts of wealth which is reflected in the economy. As a result, a bubble forms leading to a crash. The seminal invention's heyday ironically happens after the crash.

The earliest example in the book is the Crash of 1850. The first scientific wave started when James Watt invented the modern steam engine. This triggered the Industrial Revolution. This eventually led to the creation of the locomotive. A lot of excess wealth was created as a result. It had to go somewhere. It went into locomotive stocks in the London Stock Exchange. A bubble formed as a result. Because the locomotive was still in its infancy, the bubble burst which led to a stock market crash in 1850, followed by a series of minicrashes. The railroad industry ended up maturing in the 1880s and 1890s, when the railroad was in its heyday.

The next crash mentioned is the one the triggered the Great Depression in 1929. A second scientific wave began in 1879 when Thomas Edison in the lightbulb. Another seminal invention was the car. It wasn't until 1913 that Henry Ford invented the assembly line and brought forth the Model T. The electric and automotive revolutions of Edison and Ford proliferated throughout the world, creating excess wealth. Like before, this wealth had to go somewhere. It went into utility and automotive stocks on the US Stock Exchange. An unsustainable bubble formed which burst in 1929. This led to the Great Depression. After the economy recovered, the paving and electrification of America and Europe took place in the 1950s and 1960s.

The last crash mentioned in the book is the Crash of 2008. The current scientific wave began as a result of the Space Race. It is the high tech revolution that gave us the computer and the Internet. The wealth created as a result of the digital revolution went into real estate creating the housing bubble which burst in 2008. The wiring and networking of the world has not happened yet. The heyday of the information revolution has yet to come.

In addition, Michio Kaku predicts the possibility of a fourth scientific wave. He suspects it will involve artificial intelligence, nanotechnology, telecommunications, and biotechnology. This will create excess wealth which leads to a bubble that is likely to burst in 2087 before the heyday of the revolution comes.

This should be interesting to talk about. What do you think?

This seems to either ignore or trivialize the roles of things like monetary policy, trade policy and credit policy. Imagine the outcome in 2008 if there had not been 0% down mortgages, mortgages given to low paid workers, and the attendant real estate speculation in areas that don't normally experience much appreciation.

To make it more clear, the excess wealth produced by the tech boom was funneled into real estate which led to sub-prime mortgages. If you read that section of the book, you will find that Michio Kaku does not ignore or trivialize anything. Physics of the Future is not about monetary policy, trade policy, or credit policy. It is about the future of technology and its consequences for humanity. And it does mention speculation in all three examples. I suggest the chapter of the book called "The Future of Wealth". That is where you will find the section I have summarized.

[pbrower2a]

In a competitive economy, prices eventually fall to such levels that there is but a small return on capital for making and distributing the object. Think of compact disc players: the first ones sold for over $1000 and were for well-heeled audiophiles who were paying $10K for a pair of loudspeakers. Now one gets them in cheap boom boxes and clock radios. We already see much the same for reader devices (basically computers limited to service as web players) and cell phones. Do you want to see the cutting-edge technology of 30 years ago? Go to Goodwill or Salvation Army.

Some people make huge amounts of money early on the invention and get to live like sultans. But those who make the money end up buying prime real estate for which one finds a nearly-vertical supply curve. Working people get priced into places like Kansas City, where there are no views and the fire-and-ice climate suggests my idea of Hell. (a hint: my idea of Heaven has the climate of San Francisco or San Diego. My idea of a climatic Hell is an Iowa winter followed quickly by an Iowa summer with no real transition except for tornadoes).  


One of my contributions to Wikipedia (slightly modified):

Quote:Waterloo has a humid continental climate (Köppen climate classification Dfa) of extreme summer heat and extreme winter cold, but adequate rainfall and snowfall. Places Rated recognizes Waterloo as having one of the harshest local climates in the United States of America not in a hot desert, Alaska, or a high-mountain location due to seasonal extremes and severe storms. The record low and high temperatures for April (see link) alone allow one to get frostbite and heatstroke in the same month.

Source: http://www.intellicast.com/Local/History...n=USIA0894

But we get imbalances. The cheap places to live have no opportunities,  and the places with opportunities have no workers because the workers are priced away.

[Mikebert]

He misses an awful lot of crashes and financial crises.  Just off the top of my head there were the 18th century panics: The South Sea and Mississippi bubble crashes in 1720, the City of London Panic in 1772 that triggered the American revolution, the American crisis of 1792 which had little impact thanks to the deft hand on Alexander Hamilton.  Moving to the 19th century, we have had the Panic of 1819, the first politically-important financial crisis, the 1837 Cotton Crash, 1847 British railway panic, the Panic of 1857 (first international crisis), the Panic of 1873 (began the Long Crash), the Overender and Gurney crash in 1884, and the Panic of 1893.  In the 20th century you have the 1907 Rich Man’s panic (which led to the Federal Reserve) and the Great Crash of 1929-32 (began the Great Depression).  In the 1930’s Congress decided to ban panics and they stopped happening.  In the 1990’s they decided to bring them back, and so we started getting them in the 21stcentury: the subprime crash of 2008 and another crash in 2017 or 2018.


The cause of a big crash is a big bubble.  This is really a tautology, since the definition of a bubble is a period of high prices immediately preceding a sharp drop in prices.  But bubbles can usuallly be detected in advance.  Of course, as the adage goes, a bubble can (and usually will) last a long longer than you think it can.  Thus, it cannot be reliably "played" through use of options and even buy/hold/sell market timing is very difficult.

[Mikebert]

Did Michio Kaku metnion Schumpeter, or Gerhard Mench in his book? What you describe sounds a lot like the innovation school of economic long cycles (K-waves).

[naf140230]

(08-16-2016, 06:33 AM)Mikebert Wrote: He misses an awful lot of crashes and financial crises.  Just off the top of my head there were the 18th century panics: The South Sea and Mississippi bubble crashes in 1720, the City of London Panic in 1772 that triggered the American revolution, the American crisis of 1792 which had little impact thanks to the deft hand on Alexander Hamilton.  Moving to the 19th century, we have had the Panic of 1819, the first politically-important financial crisis, the 1837 Cotton Crash, 1847 British railway panic, the Panic of 1857 (first international crisis), the Panic of 1873 (began the Long Crash), the Overender and Gurney crash in 1884, and the Panic of 1893.  In the 20th century you have the 1907 Rich Man’s panic (which led to the Federal Reserve) and the Great Crash of 1929-32 (began the Great Depression).  In the 1930’s Congress decided to ban panics and they stopped happening.  In the 1990’s they decided to bring them back, and so we started getting them in the 21stcentury: the subprime crash of 2008 and another crash in 2017 or 2018.


The cause of a big crash is a big bubble.  This is really a tautology, since the definition of a bubble is a period of high prices immediately preceding a sharp drop in prices.  But bubbles can usuallly be detected in advance.  Of course, as the adage goes, a bubble can (and usually will) last a long longer than you think it can.  Thus, it cannot be reliably "played" through use of options and even buy/hold/sell market timing is very difficult.

Most of those crashes are not important when dealing with the subject Michio Kaku talks about. He also mentions smaller crashes when talking about the first one.

[pbrower2a]

Here is one of the hazards of going outside one's field of expertise and using techniques from such an area as physics or mathematics to study somethint else. Brilliant as Michio Kaku is, he may miss some of the big story.

The extinction of extraordinary profits from technological innovation may be one contributor, but I have seen other patterns.

1. Exhaustion of opportunities. Just before the Crash of 2008, energy prices soared because speculation on petroleum prices was one of the last few remaining possibilities (energy prices spiked only to crash; I saw gasoline at $5.49 a gallon in rural Michigan in the summer of 2008) for investment. That's after people had huge profits from speculative gains and no obvious chance of making any more gain from the subprime scam in real estate lending.

In 1929 people were betting on crazy investments because sane investments had below-average returns on investment.

2. Completion of big projects that devour bulk commodities and hire huge numbers of construction workers. The economic downturn of 1937 follows the end of such bridge products as the Golden Gate and Trans-Bay bridges in the San Francisco Bay Area and the George Washington bridge across the Hudson, and the completion of the Hoover Dam, all intended to create huge numbers of jobs while meeting basic needs in transportation or control of water. Construction is the largest variable use of steel, concrete, and glass; a big project such as the Big Dig of Boston ended just before the Crash of 2008. When the project is over the steel mills, concrete plants, and glass manufacturers lose a steady and lucrative stream of revenue. Smaller crashes followed the completion of the Mackinac Bridge and the Verazzano Bridge. Economic booms often coincide with big construction projects, and economic busts follow their ends. Construction workers are laid off, mills scale back production, and steel workers lose jobs.

3. The bubbles themselves. Friedrich Hayek points this one out: bubbles do not so much create wealth as they devour it. The bubble itself is the calamity because it can do little good while ensuring that investment capital that could go into more mundane (but useful) activities goes into the bubble. While Americans were over-investing in real estate in the Double-Zero decade they were under-investing in plant and equipment. Hayek (with whom I disagree on many other issues) recognizes that the Crash is only the recognition that the investments in the bubble are pure waste.

4. Economic scandals.  Enron Corporation is a prime example.

[Mikebert]

(08-17-2016, 04:24 PM)naf140230 Wrote: Most of those crashes are not important when dealing with the subject Michio Kaku talks about. He also mentions smaller crashes when talking about the first one.

 
Well the title of your post was the science of crashes.  Wouldn't that apply to all crashes, not just the few he mentions? 
 
Moving on, there is a fourth wave he didn't catch, as well as waves before that: 
 

 
What he appears to be talking about from your description is the innovation school of the economic long cycle or Kondratieff wave.  Joseph Schumpeter (1939) first proposed the idea that clusters of innovations were responsble for business cycles.  A new innovation is developed, it builds into an invesment bubble which pops, leading to a recession.  He envisioned a nested series of ever-larger cycles, ordinary business cycles, longer Juglar cycles, longer-still Kuznets cycles (linked to the 19th century panics) and finally fifty-year Kondratieffs, which relfect the development of whole new economic sectors (this might be what Kaku is focusing on ). 

Gerhard Mensch (1979) formalized the Schumpeterian long cycle as arisng from specific clusters of fundamantal innovations spaced about 50 years apart.  Harry Dent (early 1990's) developed some of these ideas in his innovation wave (the article of mine I linked to talks about this).  Dent did not mention Mensch, but his work was not academic (he's an investment adviser). George Modelski (1980's) developed a Mench-type idea further to include pre-industrial waves. The figure above I constructed using Modelski's concept of periodic leading sectors.  He and William Thompson (1980's I think) married these ideas to fluctuations in relative military strength amongst the great powers and came up with their Global Leadership cycle (google that you'll find out more).  Jordan Goodspeed, who used to post a lot on T4T is a Modelski and Thompson fan.

So Kaku follows in a long tradition.  I asked if he mentioned any of these folks in his book.  Is he aware of the work that came before?

[naf140230]

(08-18-2016, 06:18 AM)Mikebert Wrote:

(08-17-2016, 04:24 PM)naf140230 Wrote: Most of those crashes are not important when dealing with the subject Michio Kaku talks about. He also mentions smaller crashes when talking about the first one.

 
Well the title of your post was the science of crashes.  Wouldn't that apply to all crashes, not just the few he mentions? 
 
Moving on, there is a fourth wave he didn't catch, as well as waves before that: 
 

 
What he appears to be talking about from your description is the innovation school of the economic long cycle or Kondratieff wave.  Joseph Schumpeter (1939) first proposed the idea that clusters of innovations were responsble for business cycles.  A new innovation is developed, it builds into an invesment bubble which pops, leading to a recession.  He envisioned a nested series of ever-larger cycles, ordinary business cycles, longer Juglar cycles, longer-still Kuznets cycles (linked to the 19th century panics) and finally fifty-year Kondratieffs, which relfect the development of whole new economic sectors (this might be what Kaku is focusing on ). 

Gerhard Mensch (1979) formalized the Schumpeterian long cycle as arisng from specific clusters of fundamantal innovations spaced about 50 years apart.  Harry Dent (early 1990's) developed some of these ideas in his innovation wave (the article of mine I linked to talks about this).  Dent did not mention Mensch, but his work was not academic (he's an investment adviser). George Modelski (1980's) developed a Mench-type idea further to include pre-industrial waves. The figure above I constructed using Modelski's concept of periodic leading sectors.  He and William Thompson (1980's I think) married these ideas to fluctuations in relative military strength amongst the great powers and came up with their Global Leadership cycle (google that you'll find out more).  Jordan Goodspeed, who used to post a lot on T4T is a Modelski and Thompson fan.

So Kaku follows in a long tradition.  I asked if he mentioned any of these folks in his book.  Is he aware of the work that came before?

You may be right, but I suggest you read the book.

[Mikebert]

I was able to get the book online and read the relevant material.  The book is about the technological future.  The bit about crashes is a side issue, which explains why he mentions a Crash of 1850. There was no crash of 1850.  His point is big crashes occur as a result of technologically advancement, but they have never derailed progress.  He is right on his main point.  It's not an economics book at all. So there would be no reason to go into details.  If you are interested in this topic Harry Dent's stuff is a good place to start.  It's written for the general audience, easy to follow, and quite illuminating.  It's what originally turned me on to S&H and other cycles.

I'll also mention that he and I are on the same page as expecting a deflationary market crash.

[naf140230]

(08-19-2016, 01:10 PM)Mikebert Wrote: I was able to get the book online and read the relevant material.  The book is about the technological future.  The bit about crashes is a side issue, which explains why he mentions a Crash of 1850. There was no crash of 1850.  His point is big crashes occur as a result of technologically advancement, but they have never derailed progress.  He is right on his main point.  It's not an economics book at all. So there would be no reason to go into details.  If you are interested in this topic Harry Dent's stuff is a good place to start.  It's written for the general audience, easy to follow, and quite illuminating.  It's what originally turned me on to S&H and other cycles.

I'll also mention that he and I are on the same page as expecting a deflationary market crash.

I am well aware that the book is not about economics. I just felt that I had to mention it. Also, I suggest looking at this: https://dentresearch.s3.amazonaws.com/BN...Report.pdf

Mr. Dent has more to say in this article.

[Ragnarök_62]

The Federal Reserve Bank fuels trickle down economics:  http://charleshughsmith.blogspot.com/201...h-and.html


1. The Federal Reserve is the engine of asset bubbles.

So... Here's another reason to ditch the Big Banking cabal, AKA, the Federal Reserve.  Abolish the Fed and just let the treasury department issue currency.  The Federal Reserve is just plain evil.

2. Broker dealers: https://www.newyorkfed.org/markets/primarydealers.html

NY FED Wrote:Primary Dealers
Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
Societe Generale, New York Branch
TD Securities (USA) LLC
UBS Securities LLC.
Wells Fargo Securities, LLC

So, you see, here are the beneficiaries of the Federal Reserve's open market operations. So yeah, it's time to abolish the Fed for having all of these parasites.

[Ragnarök_62]

Peak Rent. Traces of relief for renters. Landlords scramble. But in cheaper cities, rents soar.
In April, asking rents for two-bedroom apartments declined from their respective peaks in all of the 12 most expensive rental markets in the US, ranging from a tentative 1.3% down-tick in Los Angeles to an 18.9% plunge in Chicago.
For one-bedroom apartments, asking rents declined in nine of the 12 most expensive markets from the respective peaks, with Chicago’s median rent down 18%.
It seems the 12 most expensive rental markets in the US have had a date with reality, and that can be tough. But in some “mid-tier” markets (in terms of how expensive rents are), rents are soaring by the double digits.
The gap between plunging and soaring rents gets neatly averaged away in the national numbers to create a rental la-la land where the median asking rent for a one-bedroom apartment rose 3% year-over-year to $1,169, and for a two-bedroom 2.9% to $1,390. No sign of the drama playing out in local markets.
Zumper’s National Rent Report, on whose data this is based, tracks asking rents in multifamily apartment buildings. Single-family houses for rent are not included though they’re ultimately impacted by multifamily dynamics.
In ludicrously expensive San Francisco, the median asking rent for a one-bedroom apartment dropped 5.3% from a year ago to $3,370 and is down 8.2% from the peak in October 2015. For a two-bedroom, it dropped 5.9% to $4,500 and is down 10% from the peak.
This doesn’t happen often: The last episode of year-over-year rent declines in San Francisco ended in April 2010.
These asking rents do not include incentives, such as “1 month free” or “2 months free.” Incentives were rare during the years of breath-taking rent surges in San Francisco. Now, with new apartments and condos flooding the market due to a historic construction boom that coincides with a slowdown in job creation, incentives have become common. And they have a big impact. For example, with “2 months free,” the first-year median rent of a two-bedroom would be down 25% from its peak. That’s $15,000 a year!
Incentives are a way of lowering the rent without showing the declines to the public, on the fear that lower rents beget lower rents and encourage renters to negotiate. By hiding the actual declines, the industry hopes that next year, rents might rise again.




And signs of desperation are cropping up – desperation both, among investors that sit on new but vacant luxury condos with very high carrying costs; and among folks looking for an “affordable” nice place to stay, even if space and privacy are a bit compromised.
So a startup has sprung up to bring these two desperate parties together. The SFGate:

Quote:These arrangements, which come complete with subdivided bedrooms featuring upholstered partitions between roommates’ beds, come courtesy of HomeShare, a startup that carves up rooms inside of unoccupied luxury apartments and then vets and links up strangers to occupy them.
Each of HomeShare’s hundreds of tenants gets about 55 square feet along with half a closet, half a bathroom, and a compact common area shared with a roommate and usually two other flatmates, slumbering in the unit’s other divided bedroom. Each micro-bedroom fits a queen-size bed and little else. Some of the walls don’t quite reach the ceiling. It’s a fit for the kind of person who needs to scrounge cash and will tolerate roommates, but craves panoramic views and glistening new plumbing fixtures.

In New York City, the second most expensive rental market in the US, the median asking rent for a one-bedroom dropped 5.5% from a year ago, and has now plunged 12.9% from the peak in March 2016. Rents for two-bedroom apartments fell 1.1% year-over-year and 10.4% from the peak. And there too, many landlords are luring buyers with large incentives.
This table of median asking rents and their year-over-year changes in the most expensive large rental markets in the US is awash in red ink where for the past half-dozen years there used to be thicket of lush green:

Rents in the Bay Area cities of San Francisco, San Jose, and Oakland are all in the red. Note the free-fall of rents in Oakland, down 15% year-over-year.
In terms of the longest plunge from the peak, Chicago is it: from peak rent in September and October 2015, median asking rents have plunged 18% and 19%!
Even in Seattle, where annual rent growth was in the high-single digits through the fall of 2016, red is making an appearance. While the median rent for a one-bedroom eked out another record, the median rent for a two-bedroom has dropped 7.5% from a year ago.
But huge rent increases, some well into the double digits, are migrating to mid-tier markets, with two-bedroom apartments experiencing often the largest increases, for example: Nashville, TN (+14.6%); Irving, TX, (+15.3%); Sacramento, CA (+15.0%), Raleigh, NC (+15.4%), or Richmond, VA (+14.0%).
For renters living in any of those markets, their cost of living surged far beyond what the national averages of the Consumer Price Index might suggest. And few of them received a corresponding double-digit pay increase. This might be part of the problem with the overall economy. It depends on consumers taking on debt to buy things they cannot afford, but these consumers, perhaps strung out by rising rents, are now cracking. Read… Are American Debt Slaves Getting in Trouble Again?




Below are the top 100 rental markets in April, in order of the amount of rent for one-bedroom apartments (tables by Zumper, click to enlarge):





Sorry, Eric.  Red state rents are in line with the new economics of debt serfdom and go nowhere wages. The only solution if to kill off globalism, man.   May the Walmart shelves empty from denial of goods from China.  I won't miss Walmart.  Live by globalism/wage destruction , die by globalism/ wage destruction.   I want our local Walmart to become a homeless shelter or somesuch. Lots of room to be re-purposed.  JC Penny's will be gone soon, so that's the start of new area for folks to live. Next up, I wish I may, I wish I might, for Sears to pass into the night. Fuck retail joints, long live flea markets.

[pbrower2a]

It could be that people are moving out of high-cost metro areas to places far less expensive. San Francisco may be a paradise, but it is so fiendishly expensive that moving to a dump like St. Louis (to be sure, it has a high crime rate, a brutal climate, and much poverty) might allow one to live materially better. One might not take the income with one. OK, is Indianapolis that bad? The scenery is non-existent and the climate is brutal (about like Arkansas in the summer and almost like Wisconsin in the winter)... The difference in rent between San Francisco and Indianapolis is $2720 a month for a one-bedroom apartment and $3800 a month for a two-bedroom apartment. You can buy a giant-screen TV for that price and some very impressive nature videos with the difference in one month.

The chain restaurants and shopping are about what you would expect in Fremont or Walnut Creek. Cultural life? You can go to St. Louis (which is otherwise a dump) or Chicago as day trips.

I noticed that Bakersfield is relatively cheap. It's also poor. Paying California taxes in a low-income area looks like a raw deal.

[pbrower2a]

Update, anyone?

Could it be that the 'coastal elite" area are the sorts of places where productivity (especially in the creation of intellectual property) comes with fiendish rent while the rest of America goes Third World in living conditions?