economic globalisation

Doug Henwood dhenwood at panix.com
Fri Aug 18 08:12:48 MDT 1995


At 5:03 PM 8/17/95, Jim Jaszewski wrote:

>On Thu, 17 Aug 1995, Doug Henwood wrote:
>
>> Overvaluation is a necessary but not sufficient condition for a
>> bubble-breaking.
>
>        For us non-economists out here in vacuumland:  what would be other
>conditions?

Steve Keen covered much of this ground already, but lemme throw in my two
US cents (or 2.72 cents Canadian). Bubbles grow because whatever today's
price, people believe it will be higher tomorrow or the day after. By
definition, a bubble must be overvalued against some fundamental measure
(e.g. the Mexican stock market and peso vs. the underlying reality of the
Mexican economy), but it's the way of bubbles to get even more outlandishly
overvalued with time. There's even a theory of "rational bubbles," which
holds that people may know it's a bubble, but it makes sense to speculate
at time t if the bubble price will be greater at time t+1. (On Wall Street,
this is called the "greater fool" theory - you may buy something you know
to be inflated on the assumption that some idiot will be around to take it
off your hands at an even greater price.) Bubbles must be explained
rationally to those mainstream sorts who won't accept psychological
explanations like mass delusion. But whether you adhere to delusional or
rational explanations of bubbles, they burst when there's some shock to the
expectations that sustained them. The shock can be any intrusion from the
real world - a bank failure, say, or an increase in interest rates. When
reality intrudes, people start selling. The supply of greater fools dries
up. The bubble collapses.

Doug

--

Doug Henwood
[dhenwood at panix.com]
Left Business Observer
250 W 85 St
New York NY 10024-3217
USA
+1-212-874-4020 voice
+1-212-874-3137 fax




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