Greenspan is wrong: Economies are liquids
If you look at the surface of a liquid, it is smooth and level. A bubble only forms if there is a discontinuity in the consistency of the underlying liquid due an insoluble substance. Depending on the viscosity of the liquid, it may take some time before the bubble rises to the surface (or sinks, depending on relative buoyancy), but make no mistake, the placidity of the surface is disrupted when the bubble breaks.
Economies are like liquids in many ways.
1. A liquid is a fixed volume - you have to add to it to increase its volume and pull from it to reduce its volume.
2. It evenly distributes itself to seek highest efficiency, flowing to fill low spots (opportunities) until saturation (an even level).
3. The formation of bubbles is caused by a non-homogeneous substance (like government regulations) being introduced into the liquid. Though they may be introduced in seeds which cause crystallization (of certain industries) or distributed throughout the liquid itself, they are not native to the liquid and force the liquid to accommodate as best it can around them.
I think the best liquid example for an economy could be magma. Compare the viscosity and violence of eruption of bubbles in Hawaiian volcanoes with those of the Cascade ranges. I think our current economy has been suffering viscosity increases and pressure increases due to government interference for long enough that it is going to blow sooner rather than later. The recent "downturn" was just the preliminary tremors before Mt. Economy blows its lid completely.
Economies are like liquids in many ways.
1. A liquid is a fixed volume - you have to add to it to increase its volume and pull from it to reduce its volume.
2. It evenly distributes itself to seek highest efficiency, flowing to fill low spots (opportunities) until saturation (an even level).
3. The formation of bubbles is caused by a non-homogeneous substance (like government regulations) being introduced into the liquid. Though they may be introduced in seeds which cause crystallization (of certain industries) or distributed throughout the liquid itself, they are not native to the liquid and force the liquid to accommodate as best it can around them.
I think the best liquid example for an economy could be magma. Compare the viscosity and violence of eruption of bubbles in Hawaiian volcanoes with those of the Cascade ranges. I think our current economy has been suffering viscosity increases and pressure increases due to government interference for long enough that it is going to blow sooner rather than later. The recent "downturn" was just the preliminary tremors before Mt. Economy blows its lid completely.
The article's economic analysis is "spot-on". Those of us who know Econ 101 see it.
Several economics studies (forgot the links to them...) have concluded that the average time for inflation to show up in the economy after a central bank starts serious money printing is about 2 years, and perhaps a little longer for larger economies like ours. The main round of QE money printing (QE 2) started in 2011. I believe the inflation we are starting to see is the roughly 2.5 to 3 year delayed response to QE 2. The even bigger inflation of QE 3 (which started in mid-2012 and is still being added) will start to arrive next year.
Get ready for high inflation, high interest rates, falling asset prices (stocks, bonds, annuities, real estate, etc...) and severe economic disruptions. These are the predictable results of the Fed printing another $3.2 trillion (5X growth in money supply) to devalue our currency (after the 2-3 year delay period)...
He is especially right when he says: " I do believe that central banks that believe they can quell bubbles are living in a state of unrealism.”
Exactly. It is just not possible to measure and quantify these bubbles etc. and to take action to deflate each. Bubbles come and go to be replaced by new bubbles. The attempt to control cannot help but it can magnify some problem. however clever the central bank reporting and mechanisms, the market responds in some new way and finds ways round them.
Central banks should not intervene, the real question is, Is there any point in having central banks?
Extreme left governments control these bubbles with rigid systems. Rigid systems in economics are the same as in engineering, they move slowly, impervious to local pressures and bubbles, respond to central directive (sometimes), and they still fail, they must fail, and when they fail it is complete.
Now don't bother me, got to complete my variable rate loan and buy more hot social media stocks before they get even higher! :O