[OPE] Matter and Antimatter: How to Create a Crisis: AThanksgiving Rant

From: michael perelman <michael@ecst.csuchico.edu>
Date: Thu Nov 27 2008 - 16:04:03 EST

Skilled physicists do not know how to take nothing and turn it into
matter and antimatter, but finance behaves as if it had the capacity to
do something similar. Imagine a simple market economy about to create a
bubble. I want to tell the story of this bubble, only to put the
current, crazy stimulus package into perspective.
Somebody says to me they have a piece of paper worth $1 million. I can
buy for half the price. I borrow the money to cover most of the cost.
People are willing to lend me the money confident in the belief that my
paper will increase in value. Other people are engaging in the same
transaction, spreading confidence that these papers are now increasing
in value, say to $600,000.
The seller of the paper now has a half-million dollars, having given up
nothing but blank piece of paper. I have a capital gain of hundred
thousand dollars. My lenders have a credit with a half-million dollars.
We are all better off, even though nothing has been produced.
Feeling secure in the increasing value of our paper, I along with the
other "investors" now start consuming more, spreading prosperity for the
economy. Virtually everybody is enjoying the benefit of the bubble.
Within a short period of time, people throughout the economy making
decisions based on the increasing appearance of health and the economy.
At some point, people realize that this paper is nothing more than a
blank sheet of writing paper. The bubble may have stimulated some
investment that is capable of producing real economic benefits, but
mostly it has induced people to consume and commit themselves to pay
back debts.

Michael Perelman
Economics Department
California State University
Chico, CA
530 898 5321
fax 530 898 5901
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Received on Thu Nov 27 16:09:05 2008

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