Customer Reviews

Pop!: Why Bubbles Are Great For The Economy

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There's nothing really new in this book. The idea that bubbles are "naturally" recurring phenomena is a standard concept of economics known as the business cycle. The idea that bubbles lay down the expensive infrastructure investments that make the next boom/biz-cycle-upswing possible is also not new. An example of this is: Google's current success would not have been possible if tech companies had not built out our broadband infrastructure in the first dot-com bubble.

What's useful about this book is that it conveniently lays out several bubbles and how the overinvestment in each bubble contribute to economic rebirth. History may repeat in the chronicles of business cycles, but it's amazing and interesting each time. My recommendation is that you read this book if you find this angle interesting, but if you only want the main point, save your money as I've already given it away above.

I found the prose very distracting. I couldn't get more than a page before the author felt the need to write another glib metaphor comparing something to something else totally unrelated. It's as he feels a constant need to show you how clever he is. Read this book if you want to find out how annoying metaphors can be.

Taking the long view, bubbles - manic bursts of investment by entrepreneurs and investors - have had a positive impact on our economy. This is the simple idea that supports POP! a quick history of American hyper-growth. The infusion of capital, uncritical enthusiasm, and grand expectations - all to excess - leave in their abrupt aftermath an infrastructure - physical, legislative, or psychological - that those who follow ("consolidators") can use to ultimately realize the goals of the early dreamers. It is another of author Daniel Gross' contentions that the uniquely American aspect of the bubble experience has to do with the role of government. Government tax credits and grants stimulate American investment without an outright attempt to control the end results and thus diminish its longer term benefits to society.

Daniel Gross looks at the development of the telegraph, the build-out of railways, the internet boom-bust, the recent real estate boom, and the now bubbling, alternative energy phenomenon. In each earllier instance a collapse resulted in havoc and pain for the initial investors that left behind infrastructure (viz. national rail system, telecommunication network, new construction) that successors used for their profit. The 1929 stock market collapse is a classic bubble representing the pursuit of easy money (viz. credit and its wily twin, leverage). The infrastructure that resulted was not physical but legislative. Laws and regulations put in place after the Crash created an investment environment that would position the U.S. financial markets as preeminent. There is not a lot that is new in POP!, and its main idea that bubbles have had a positive effect on the economy is perhaps too fragile a foundation to support a book, but the commentary is presented selectively and with journalistic wit.

Common thinking tells us that excessive investment in fixed assets is bad for investors, employees of the bubble companies, and the economy. Gross contends that the stuff built during infrastructure bubbles doesn't get plowed under when its owners go bankrupt - it gets reused by those with new business plans, lower cost bases, and better capital structures. In addition, he also contends that many major bubbles greatly benefited from government action (or inaction) - eg. telegraph, railroad, housing, and telecommunications.

Gross does not contend that all bubbles are useful - eg. investors buying Cisco at $70, only to see it fall to $16 have not helped the American economy - it is only when commercial infrastructure is left behind that others can use. Further, Gross concedes that government cannot be relied on or expected to pick those bubbles to support.

However, Gross does not consider the fact that overbuilding assets inevitably results in relative scarcities, higher than necessary costs, and misapplication of resources - certainly not beneficial. Further, qualifying his conclusions to "only when commercial infrastructure is left behind that others can use" severely limits the generalizeability and value of his thinking. Incredible amounts of valuable capital have been wasted in the Holland tulip craze, Motorola's satellite phones, agricultural subsidies, modernizing American industry (only to see the work move to China and India), providing college educations for jobs that don't require them (one expert estimates this at 50%), doubling inflation-adjusted per-pupil expenditures (including fixed assets) to no avail, and ballooning the costs of American health care (including fixed assets) to more than twice the costs of other developed nations.

Bubbles are anything BUT naturally occurring in and of themselves. They are a natural result of unnatural tampering and manipulation by the Federal Reserve, printing obscene amounts of money to keep interest rates low, which in terms spurs an unmanageable amount of bad investment, which leads to bubbles. If you had a price to borrowing money, people would be FAR smarter about it, as the risk counters the blind greed aspect of human nature, and would not result in housing bubbles as millions of people take on mortgages they can't afford, or the NASDAQ bubble where people are investing billions into something they know nothing about or without a tangible value. Bubbles ALWAYS pop and the only people who make money on them are the golden parachute club CEOs that get out with their shirts. Everyone else loses theirs AND is left holding the bag. It all starts with the Federal Reserve, a private banking cartel that has subjugated American currency and answers to no-one. They print unknown amounts of money, thus devaluing and destabilizing US currency, resulting in instability and lack of faith in foreign markets. This leads to inflation, which devalues hard assests here at home, depletes private savings, wipes out investment and leads to higher prices of imported goods.

The premise quoting Gross: "...the tales of short-term woe experienced by bubble-burned investors, who constitute a minority of the population, frequently overlook the substantial long-term benefits that accrue to everyone, and the economy at large, in the years after. And if you take the long view - in this case, a pretty long view - it's possible to detect a pattern that emerges in bubbles and their aftermaths." Quoting elsewhere, "And this is not to say that all bubbles are good for the economy. ... To repeat, they're useful only when they leave behind a commercial infrastructure that others can use." Indeed, infrastructure remains along with burned investors.

Gross then goes through many examples: telegraph, railroads, financial new deal, internet, real estate, and alternative energy. In his conclusion, prices of commodities and raw materials are generally leading indicators of a coming bubble and pop (his first of six rules). Note this review is written in the aftermath of the housing bust and ensuing credit crunch at a time when commodity prices have risen.

What's the next bubble and pop? One can only tell after it's happened. During boom times, there's no end in sight. During busts, there's no end in sight. Why is this?

Two other books may help answer that by looking at how we behave:
Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich by Jason Zweig.
Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely.

Global demand is intertwined with human behavior.

There are a few annoyances mentioned by other reviewers - however, the message is more important than the delivery; a message often forgotten - until next time. A message many in business have studied through business cycles - and forgotten - until next time. We as humans do this to ourselves - greed - both on the part of the investor piling in capital, and the company/industry romancing the capital to build their promises. Both get burned in the pop, and blame someone else.

However, in the long run, society benefits. Then we do it again somewhere else "where it's going to be different this time."

Wealth Odyssey: The Essential Road Map For Your Financial Journey Where Is It You Are Really Trying To Go With Money?

Whilst "Pop!" was an enjoyable read, one must realise that its analysis is very superficial. Arguably, this is the book's weakest point. We are taken on a high level romp through the past century's various bubbles. A deep analysis is not provided.

In the 1950s, Joseph Schumpeter coined the phrase "creative destruction" and applied it to modern capitalism. That is, no economy grows in a straight line. Boom follows bust which follows boom. The process pushes the weak parts of an economy to one side and allows the strong to grow. The end result is greater wealth. The antithesis would be North Korea today. No booms, no busts; just a total mess. A people enslaved and famine continually threatening.

In retrospect, I know my expectations were too high. I had come to believe that "Pop!" would be a serious book of economics. How naïve was I? I should have realised better with the title of the book.

So, for the general reader wanting an overview of economic booms, this book is fine. For the reader wanting something more, go elsewhere.

Not that I'd expect anything written by Daniel Gross to be worthy of reading, I was initially intrigued by the claims made by this book. My recommendation is that this book be delegated to the "humor" section of book-stores everywhere.

Utter trash. Little more needs to be said.