The History of Economic Booms and Busts – Learn Liberty

The History of Economic Booms and Busts – Learn Liberty


Why is it that so many people all make the
same investment mistake? The obvious explanation is that there’s a failure in the signaling
mechanism of the market economy, which in this case particularly means the monetary
system. The United States and other countries have
had a succession of financial crises over the last 300 years, similar to the one that
we have just experienced. So in the United States, for example, there was a major crisis
in 1929 to 1932, before then in 1920–21, before then in 1906, before then in 1892–93,
before then in 1870–71. The common feature of all of them is an unsustainable
boom, in which some kinds of assets—tulips, railroad shares, stocks and bonds, or in the
most recent case, real estate—become the subject of a speculative bubble, in which
people buy the product in question, not because they expect to get income from it or to use
it, but because they expect simply to be selling it onto another person at a higher price than
the one they paid for it. In the most recent case, what you had was
an enormous real estate bubble in the United States and other parts of the world, which
has now very painfully burst, with U.S. real estate prices down over 50 percent from their
peak in 2007. Why is it that so many people all make the
same investment mistake? The obvious explanation is that there’s a failure in the signaling
mechanism of the market economy, which in this case particularly, means the monetary
system. The underlying common factor in all of the crises and panics I’ve mentioned
is some disorder in the monetary system, brought about by action by governments, whether these
are rulers or, more recently, central banks. What these agents do is, essentially, to lower
the price of money below its true market level. In other words, they keep the rates of interest
below what it ought to be. What this means is that all kinds of investment opportunities
appear to be profitable when in fact they are not. Eventually, however, it becomes apparent
that the investments are not going to yield the kind of profits that the people making
them expect. And at that point, suddenly everyone tries to get out; they try to liquidate their
investment before it’s too late. And at that point, there’s a crash, and the assets
collapse in value.

42 Comments on "The History of Economic Booms and Busts – Learn Liberty"


  1. Can you explain why the central banks keep interest rates artificially low? I thought inflation targeting central banks would tend to raise interest rates in a boom…

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  2. Great explanation!!!! Check this out! I tried to tell this to some people around 2002 and they told me I was crazy!

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  3. @collinliau In my opinion, it is because central banks are trying to spur the economy, to boost consumerism!

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  4. There is truth to this, but it is not the whole truth. More realistically everyone knows they are riding an unsustainable boom, but still think they can get away with it before the rug falls out. This is particularly true with the tulip example. Government exacerbates, but does not cause the recession (well, not true with the housing bubble, but usually true).

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  5. @natritious1 It wont because gold and silver are of stationary value, its price only goes up because everything else is losing value.

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  6. @natritious1
    Actually gold and silver have been holding a steady value over the last 800 years, that's why gold and silver can never be a "bubble". People the world over understand the buying power of gold, so it's value doesn't change (much) but rather currencies are inflated against gold and silver.

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  7. @natritious1 nope this will not happen to gold not to this level. only if we fix our monitary policy will it go down. gold and silver are just reflections of inflation for the most part. u will never see silver at 5 an oz. or gold at 300 an oz. rp2012

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  8. How about this; the crash happens and we are in a state of war. Afterwards, we end the war, bring back troops and let them loose after they have beenbeen conditioned to obey order, and not just love their country, but possibly die for it, that they become the hardened workforce that picks up the slack of an entitlement state.

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  9. @natritious1 You'll see it happen with US treasuries soon enough. Depends how long the federal reserve can keep the illusion going.

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  10. @TWSceptic Yeah, but I think it depends. Gold and silver aren't the only things worth having. I think a lot of people would want to have farmland access to food if it was a real crisis. Even moreso than gold and silver. Other tangible assets like oil and coal will probably also be worth a lot.

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  11. … to 1932? REALLY! .. That's a lie! … Try 1947, when FDR's policies were ended and reversed. Sheesh!!!

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  12. @mallardhead See this guy's 3 myths about the Great Depression, where he pretty much agrees with what you just said.

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  13. At 1:32, socialists have a different answer to the question "Why is it that so many people make the same investment mistake?"

    Because capitalism is inherently corrupt and evil, that's why!

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  14. absent a fiat currency, the value of gold has withstood nearly 2,000 years as a valuable commodity. that being said, even the common man will accept gold, come whatever crash there be. if the Amero becomes a reality, unlikely seeing that the Euro is about to cease to exist, people would still value gold, without question.

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  15. GregoryTheGr8ster (below) thinks capitalism is "corrupt and evil." Hmmmm I wonder what process allowed the very computer he used, to make the comment, come into existence. Hhmmmmm…..

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  16. I don't understand why this guy concludes that speculation wouldn't happen without downward pressure on interest rates. I'm not convinced that a 1% change in the price of money is going to be a large effect on an entrepreneur's decisions, who is going to back an enterprise if and only if expected ROI is good enough, risks low enough, etc. Yes, interest rates will shift these decisions at the margin. But isn't expected future price increases by far the stronger driving force for bubbles?

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  17. What is common among all the busts is money diverted into land value speculation. This is not investing because you cannot create more land. This is gambling on land values. The problem is all the cash diverted into this gambling is drawn out of the economy where actual productivity takes place. This is the origination of the boom and bust scenario. What the governments do in reaction, as in FED intervention just treats the symptoms. The only solution is recapturing the rental value of land.

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  18. Wow. I never thought of it that way.
    Giving one central authority a complete monopoly over the creation and enforcement of laws is such a sophisticated way of looking at this issue.
    Competition works so well everywhere else in life, but it obviously is foolish to believe competition can be applied to law.
    -_-

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  19. I don't understand you're point in this comment, but I'll answer it anyway from my own point of view.
    I am against mob rule. That is why I am for free-market capitalism.
    Also I like your insult, "brainwave", I'll have to remember to use that.

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  20. There are still booms and busts under markets, but not like the horrors that central banks produce.
    The Federal Government before 1913 was still EXTREMELY involved in the economy. This government involvement served to destroy market signals and cause booms and busts.
    Also the economy was mostly based on agriculture for much of the time before 1913. Agriculture is susceptible to poor weather conditions that can affect large amounts of landmass, hence affecting the economy at large.

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  21. Except in free-markets, people's votes are based on their productive capacity. THAT is competition. In any sort of government system, productive capacity is not important or relevant.

    And as for Anarchism being childish and stupid… You're right there. When I think angsty teenagers, the first to come to mind are Robert P. Murphy, Stefan Molyneaux, Stephan Kinsella, Jeffrey Tucker, Hans Herman-Hoppe and Murray Rothbard. Immature children they are.

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  22. I wish you guys had more videos on this because this is a topic i truly have little understanding of.

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  23. Not trying to be a rude but i was hoping to get some rebuttal to understand the argument better. Wouldn't Gold and silver increase in value because of government printing money? The more printing, the more dollars it takes to buy a product. And precious metals like gold and silver hold there value very well so inflation will make there value in terms of U.S. dollars much greater?

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  24. The U.S. government can't inflate gold and gold's inherent properties mean that the last people who hold it will not be left with nothing if somehow the value of gold goes down. So, if there is such a thing as a "gold bubble," I doubt it's the thing described here.

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  25. Can someone explain the part about "lower-than-normal interest rates lead to profits that are not sustainable"? And what does "normal" mean here?

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  26. "normal" means the rate that would exist if it was being determined like every other price is determined, by supply and demand

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  27. Greed generates more greed so who is there to regulate it? Obviously nobody, bubbles and bust have to happen and those who were too greedy have to fail so those were smarter can go further. Instead of that we have corrupted governments helping those who were greedy to get back on their feet by bailing out their mistakes. Market is indeed to much influenced and regulated and those who r rich and powerful r doing everything to stay like that even they fail and loose. No balance at all!

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  28. So you're saying it's been a succession of pyramid schemes around a "thing" like railroad stock, or bananas.

    Reply

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