January 27, 2009--Bubblenomics
Just as I was allowing myself to feel good about things again, what with Obama and his seemingly competent people in charge in the White House, thinking maybe they will be able to turn the economy around, someone I was having breakfast with couldn’t stop talking about how everything’s a ponzi scheme.
“Now take Social Security,” he said, gulping down his fourth cup of coffee, “that too’s a ponzi scheme.”
This got my attention since I have come to like seeing my SS checks direct-deposited in my bank account every month. “How do you figure that?”
“Like with that Madoff fellow whose scam required a continuous infusion for new money in order to keep paying people who he lured in early on, the same is true for Social Security. For folks like us to keep getting our money people currently with jobs have to keep paying into the system. There’s no Social Security fund or anything like that to draw down. People have to keep paying their FICA tax.”
“You sure about this? I thought the money they withheld when we were working went into some sort of account.”
“That’s want they want us to believe. But trust me, it’s the new money coming in that gets paid out to us. And you know what has me worried?”
Though I wanted to ignore him and enjoy my bowl of Great Grains I couldn’t help myself from asking, “What?”
“That with all the layoffs and unemployment heading toward double digits, there won’t be enough new money being paid in to keep the checks coming to us.”
This was not what I wanted to be thinking about with the day looking like it would turn out to be gorgeous and a long beach walk looming; and so I muttered something intentionally unintelligible back at him, lowered my head closer to my cereal, and tried to change the subject, asking what the betting line currently was for Sunday’s Superbowl. He disdainfully waved me off, got up from his stool, and stomped over to the cash register.
But of course I knew he was right—lots of things are like ponzi schemes. The real estate crisis, for example, which many feel is at the heart of our problems. For many folks to pay the rising cost of their mortgages and have money to spend they needed to see the value of their houses keep rising so they could refinance and use the money they took out of that equity to stay above water and finance their life styles. And when home prices began to deflate and they could no longer take cash out of their previously-appreciating homes, the bubble collapsed. Just like Bernie Madoff could no longer pay off his so-called investors.
The more I thought about this I began to see bubbles everywhere—with hedge funds, stock market margin accounts, and even, yes, with tea. Particularly one of my favorite kinds of tea, Pu’er, which I have come to depend on having with my Chinese food. Especially with dim sum lunches.
The New York Times reports that in China the Pu’er tea bubble has collapsed. (Article linked below.)
For poor rural folks in Yunnan Province, isolated from China’s economically booming coastal cities, growing and trading compacted bricks of Pu’er became their version of playing the market. The tea itself has a noble lineage, having been “invented” back in the eighth-century by horseback traders who were the first to compress the leaves into easily transported cakes. But it was much more recently, when tea speculators showed up in places such as Menghai County, that Pu’er, with its alleged medicinal qualities, became an object of market manipulation.
For no apparent reason other than a crafty out-of-town few taking control of the supply chain before pulling the plug and reaping profits for themselves, Pu’er rose ten fold in value in a decade, topping out, before the market bubble collapsed, at $150 a pound. Now it goes for less than during pre-boom times and thus many in the region are wiped out.
As with other Western bubbles, those cashing in along the way used the artificially inflated value of Pu’er to subsidize their spending habits. A local farmer says that “Everyone was wearing designer labels [probably stuff made in China!] and a lot of people bought cars, but now we can’t afford gas and so we just park them.”
Oh yes, happy Year of the Ox.
“Now take Social Security,” he said, gulping down his fourth cup of coffee, “that too’s a ponzi scheme.”
This got my attention since I have come to like seeing my SS checks direct-deposited in my bank account every month. “How do you figure that?”
“Like with that Madoff fellow whose scam required a continuous infusion for new money in order to keep paying people who he lured in early on, the same is true for Social Security. For folks like us to keep getting our money people currently with jobs have to keep paying into the system. There’s no Social Security fund or anything like that to draw down. People have to keep paying their FICA tax.”
“You sure about this? I thought the money they withheld when we were working went into some sort of account.”
“That’s want they want us to believe. But trust me, it’s the new money coming in that gets paid out to us. And you know what has me worried?”
Though I wanted to ignore him and enjoy my bowl of Great Grains I couldn’t help myself from asking, “What?”
“That with all the layoffs and unemployment heading toward double digits, there won’t be enough new money being paid in to keep the checks coming to us.”
This was not what I wanted to be thinking about with the day looking like it would turn out to be gorgeous and a long beach walk looming; and so I muttered something intentionally unintelligible back at him, lowered my head closer to my cereal, and tried to change the subject, asking what the betting line currently was for Sunday’s Superbowl. He disdainfully waved me off, got up from his stool, and stomped over to the cash register.
But of course I knew he was right—lots of things are like ponzi schemes. The real estate crisis, for example, which many feel is at the heart of our problems. For many folks to pay the rising cost of their mortgages and have money to spend they needed to see the value of their houses keep rising so they could refinance and use the money they took out of that equity to stay above water and finance their life styles. And when home prices began to deflate and they could no longer take cash out of their previously-appreciating homes, the bubble collapsed. Just like Bernie Madoff could no longer pay off his so-called investors.
The more I thought about this I began to see bubbles everywhere—with hedge funds, stock market margin accounts, and even, yes, with tea. Particularly one of my favorite kinds of tea, Pu’er, which I have come to depend on having with my Chinese food. Especially with dim sum lunches.
The New York Times reports that in China the Pu’er tea bubble has collapsed. (Article linked below.)
For poor rural folks in Yunnan Province, isolated from China’s economically booming coastal cities, growing and trading compacted bricks of Pu’er became their version of playing the market. The tea itself has a noble lineage, having been “invented” back in the eighth-century by horseback traders who were the first to compress the leaves into easily transported cakes. But it was much more recently, when tea speculators showed up in places such as Menghai County, that Pu’er, with its alleged medicinal qualities, became an object of market manipulation.
For no apparent reason other than a crafty out-of-town few taking control of the supply chain before pulling the plug and reaping profits for themselves, Pu’er rose ten fold in value in a decade, topping out, before the market bubble collapsed, at $150 a pound. Now it goes for less than during pre-boom times and thus many in the region are wiped out.
As with other Western bubbles, those cashing in along the way used the artificially inflated value of Pu’er to subsidize their spending habits. A local farmer says that “Everyone was wearing designer labels [probably stuff made in China!] and a lot of people bought cars, but now we can’t afford gas and so we just park them.”
Oh yes, happy Year of the Ox.
posted by Steven Zwerling at
6:15 AM
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