*Devil Take the Hindmost: A History of Financial Speculation* Edward Chancellor Chancellor posits that speculation must be understood within a social context. Mass psychology has enormous effect, with ==confidence== among the primary emotions. Speculative bubbles have occurred when there were shifts in global power (Thucydides's Trap). "Speculative euphoria is often a symptom of hubris. For this reason, we find great speculative manias at times when the economic balance of power is shifting from one nation to another." - 17th century — Dutch — tulips - 18th century — Dutch to English — South Sea, East India Company - 19th century, 1920s — English to American — railroads - 1980s — supposed shift from American to Japanese that did not fully materialize — Japanese bubble economy - 2020s — American to Chinese? Speculative bubbles occur around new financial innovation, information technology, communications technology, and transportation technology: - Stock market, shares, dividends, government bonds, insurance, paper currency, central banking — 16th century to late 17th century, the latter of which is considered the "Financial Revolution" when a stock market emerged in London - Railroads — 19th century - Radio, automobile, aircraft, motion picture — 1920s - Derivatives — 20th century - Internet — 2000s - Bitcoin — 2020s Usually, when a new technology or innovation emerges, speculation dives in head first. After the bubble bursts, the debris is cleared away, paving the way for real investment. ^ab4e7b The 1929 crash was primarily due to overleveraging and the use of debt. ### Crowd psychology, mass psychology - "According to Freud and Le Bon, the defining characteristics of a crowd are invincibility, irresponsibility, impetuosity, contagion, changeability, suggestibility, collective hallucination, and intellectual inferiority. The crowd and stock market have other features in common. They both thrive on uncertainty and rumour. [...] the crowd is inherently unstable; it has no stasis, no point of equilibrium, and is driven by a dynamic either to grow or to shrink." ^c5c72d - intellectual inferiority "is a sign that people are filtering and manipulating new information to make it accord with their existing beliefs" — cognitive dissonance - collective fantasy, collective faith, carnivalistic trance ^f709a3 - "According to Festinger, a group will maintain a state of cognitive dissonance until the pain exceeds the rewards. In stock market terms, this might be seen as the moment when the fear of loss outweighs the greed for gain." - [[202011181624 Description of market mania in a bubble]] from [[Lords of Finance]] ### Japan - When the bubble burst, the central bank stepped in (as the Fed did in 2008) and bought up assets of "too big to fail" companies, guaranteed losses, and provided liquidity to banks. This intervention in effect prevented the market from finding a natural floor in which buyers could step in to balance out the sellers. Although it prevented further loss, this artificial floor that the authorities created "frustrated the market's ability to clear away its own excesses." And "Instead of alleviating the problems, the authorities' mismanagement succeeded only in drawing out the painful aftermath of the bubble." ### Quotes - "The spirit of speculation is anarchic, irreverent, and anti-hierarchic. It loves freedom, detests cant, and abhors restrictions." - "The essence of speculation remains a Utopian yearning for freedom and equality which counterbalances the drab rationalistic materialism of the modern economic system with its inevitable inequalities of wealth." - ==[[202011201433 Speculation never changes because human nature remains the same.]] ^abdeb5== - "fear of loss, emulation of one's neighbour, the credulity of the crowd, and the psychology of gambling" - [[202011121841 It's all just the same thing over and over. We can't help ourselves.]] - "The most striking similarity between the 1920s and 1990s bull markets is the notion that traditional measures of stock valuation had become obsolete." - It's a cry of "New Paradigm!" - "[...] the new paradigm ideology is simply a product of the bull market. As long as investors maintain their faith in a new era and ignore dissonant information, then stocks will continue to rise. In the short run, a rising market serves to cover up weaknesses in the economy. [...] In this way the new era analysis becomes something of a self-fulfilling prophecy." Optimism drives optimism a la Soros's reflexivity. ^f43c3d ### Quotes by others - "When Statesmen turn jobbers, the state may be jobb'd." - Daniel Defoe of the South Sea bubble - The implication is that at heightened stages of speculation, politicians can be easily corrupted and thus the government and state. Shares of companies are given to politicians. - "First we find it in a state of quiescence, next improvement, growing confidence, prosperity, excitement, overtrading, convulsions, pressure, stagnation, distress, ending again in quiescence." - S.J. Loyd, Lord Overstone, describing a speculation cycle - "All people are most credulous when they are most happy." - William Bagehot on people believing their prosperity will last forever - "In June 1997, the New Republic reported, under the headline 'Bust Busting: The End of Economic History,' that 'top officials at the Treasury Department believe that, with the proper mix of policies and the absence of external shocks, the United States can prolong the current expansion indefinitely.'" - "pure, irrational desire, and nothing is more manipulable than desire" - Robert Hughes commenting on the art bubble caused by Japanese investors in the 1980s --- [[markets]] #book #clipping