The Shaky Art of Economic Bubbles

SUMMARY: This essay represents the audience copy

of a talk read at an inner-city church attempting to
introduce the world of macro-economics to local
community members. What is salient for a lay audience
is the potential for bank failures and runaway inflation,
and so the title. As preposterous as it might sound, this
talk explains how block-chains have changed the
perception of the marketplace for the financial world,
comparing the new realities to how social media has
changed the world for us.
What may be of academic interest is as an
experiment in adult education. First I have attempted a
chain of metaphors developed pp.2-6 leading up to the
caricature of block-chains (pp.7-10), this is followed by
two very short examples of alternative “models” to add
to our mix of economies (pp.11-12) complete the talk.
For the few young couples that attended, and one jaded
adult (my wife), the experiment was a success.
Everyone came away thanking me for explaining what’s
going on.
Chautauqua Challenge
Talk # 8
Given on Nov.19, 2023 at Saint Michael’s Episcopal Church
140 N.Warren Street
Trenton, NJ

1
 The Shaky Art of Economic Bubbles

This is part of a series of the so-called

“Chautauqua Talks” that I’ve begun experimenting
with here at St. Michael’s. Their premise might be
taken from the cover of your program… that
questions that always receive the same answers, such
as “Why did the chicken cross the road?” might HAVE
different, if not rather good answers. In this
particular case, the chicken crossed the road because
she was trying to walk a straight path, only the road
was crooked.
I advertised this talk under a different title, but I
changed it to “The Shaky Art of Economic Bubbles”
because last Sunday I woke up to find out that my
bank had just been taken over by the FDIC. Luckily it
turned out NOT to be MY bank, but one of the same
2
name in Iowa. However, it was the 7th such bank to go
under in about as many weeks… So I figure mine or
yours might be next, and we need to talk about it.
I’ll try talking in a straight line, but like the
drawing on the cover I’ll be describing the side of the
road. The simple side is the world you and I tend to
live in, and the complicated side is like studying
economics and finance. The spike in the middle is
where something drastic must have happened. Like a
bubble bursting, when money loses its value and
anyone without millions goes broke. HOW money
loses its value is as complicated as the bottom half, so
we won’t go there. What I will describe are banks, and
economic models of value, and how the information
revolution is overtaking us. And I shall make a plea
for prudence, with two ways to support our consumer
culture while we go about changing the paradigm.
Returning to bubbles, I’m not sure if one even
speaks of bubbles slowly ‘deflating,’ but we are lucky
there is an FDIC, or Federal Deposit Insurance
Corporation. The idea of an FDIC is to take over a bank
that has suddenly found out it can’t meet its
obligations. Everyone in the financial world, e.g. the
marketplace, is in it together. One broken promise can
easily turn into five, twenty and on-up-the-chain of
promises that hold our economy together. So the FDIC
pays off the debt….and if there are a couple banks in
the same situation, everyone takes a good look at their
own investments and credit card bills, and slowly
changes strategies… to let the bubble deflate before
the whole economy bursts.

3
 Let us turn to banks. Banks exist to help money
move, and they make their money by moving it many
times over—so that the very same dollars can be used
in three or four or twelve or twenty-two transactions
“at once,” which is not actually simultaneously, but in
the same accounting period when the bank can show
all its transactions are balanced.
Remember Jimmy Stewart in the movie “A
Wonderful Life” when his uncle misplaced the Savings
& Loan’s deposit? Everyone ran on the bank and he
explained to them that in fact, they were all sharing
each other’s money? That’s essentially how the
society operates. It did back in Roman days, and
Greek days before that. In fact, people have been
lending money to small farmers and business folks for
millennia… with IOUs. The bank operates on the
credit of time…of harvests and sailing ships at sea
between ports, delivering the grain for an entire city,
in which case it could return an incredible profit. It
has been that way, on a smaller scale since at least the
Agricultural Revolution, which was some time before
the Tower of Babel.
The bank gives you credit to spend money and
pay it back later, because it knows your business, and
knows you’ll do enough business by the time the bill is
due to pay them back. Most banks make money by
charging you monthly interest for the time, like they
were renting you the use of money instead of lending
it. Some people even charged family members
interest, because they didn’t trust a son to hold onto
his profits. But since the rent was coming in, a little
bank could borrow from a bigger bank, who gave it
4
credit.. on up the chain, trading IOUs. And many of the
IOUs were in fact from the king (the reigning
government in charge) who was waiting for his
plunder or merely taxes to come in. So interest, to pay
back for the risk, goes back to the beginnings of
markets. It’s called FINANCING. You might call it
‘greasing the wheels,’ or as it’s often compared to the
heart pumping blood; which explains the metaphor of
how bubbles get blown up.
So let’s turn to bubbles next. Different bubbles
form and burst different ways. Foam is made of
bubbles. It appears at the tip of ocean waves, at the
bottom of a waterfall, or on a head of beer. It’s the
most natural type of bubble. Think of the foam in your
washing machine… you just add soap.
There are quite beautiful bubbles that are
hardly blown at all, but a matter of surface
tension…which is what the soap does. Surface
tension also applies snowflakes and crystals. And
while these aren’t bubbles, we might keep them in
mind regarding different kinds of GROWTH. Bubble
growth and crystal growth might have something in
common. But all that depends on your economic
models.
And this brings us to MODELS. Economics is
called a “Modelling Science,” or a science of models.
We need models in trying to understand society and
how to keep it strong, just like contractors need
drawings for big building projects. Most importantly
in this case, the different models tend to describe
different structures of growth… and different models
help you grow different things well. If you use Legos
5
to build your models they look different than if you
use Tinkertoys, or Lincoln Logs, cardboard, or clay.
And your models will be able to do certain things and
not other things depending of course on the
components you build it with.
The components in this case are designed
around different sources of VALUE. Let’s consider
what’s called “the bottom-line.” We assume it refers
to the profits that can be taken from a business at any
given time. But the actual value is not in the cash
number we associate with that bottom line, but rather
the balances that have been used to get there—the
trade-offs and triage that led to the bottom line. If
profit for the stock-holders or the CEO is the prime
driver of the business, the bottom line might be
different than if providing the best products and
services is the prime driver. Value is where incentives
come from. This is why I say that the differences in
the components used for a model can be extrapolated
from the way “value” is derived…and the most
important take-away from this is, that different folks
have different incentives over the short and long
term.
Kings fought over LAND. Taking and defending
their hunting territory like lions and eagles. Quesnay
and Henry George based taxes and social structures
around land’s relation to economic growth.
Marx and Engels said LABOR was the basis of all
value. Society should belong to those whose sweat
created things, and the Communists got busy
distributing everyone else’s wealth with as little sweat
as possible.
6
 Then our entrepreneurial capitalist world
insisted that value is all about THINGS, Useful things.
Machines and material and money have purpose and
meaning, and the more useful purposes you can
squeeze into your life the more value and meaning
there shall be in the world. This is the basis of a
consumer model of society.
LAND-LABOR-CAPITAL. That’s what we learned
in Economics 101 when I went to school before
computers took over. But now there is INFORMATION
—and how this has taken over the mantra of
economics and finance….and politics…. is very very
important if we are to understand today. For even in
the last decade, something entirely new has arrived
that will be overturning all our economic models and
assumptions: BLOCK-CHAINS.
Let me say before we move on, that if you have
something else to look at on your smartphone for the
next two pages, please feel free…. I’ll let you catch up
with me in a page or two, because in the meantime I’m
going to try to explain block-chains briefly. It is a
caricature that I think is necessary to
grasp—especially if more banks are facing insolvency.
The reason is NOT block-chains, but the difficulty that
everyone shall have betting on them. They are here to
stay, but betting on them could prove very expensive.
They represent a newly-discovered type of
usefulness and value. Social media platforms were a
‘discovery’ that there was incredible value in helping
people discover themselves through other people,
holding up a mirror as they try to express things. This
is a new reality in the world, here to stay….
7
 Block-chains are a very special type of puzzle,
rather like a crossword or a Sudoku built with
different classes of mathematical ‘pieces’ in place of
the letters—and the pieces represent different types
of math developed for decades in the computer
industry to handle incredibly massive problems of
bit-compression and transmission which are way
beyond me. But once you find a structured puzzle that
‘works,’ and is ‘closed’ like a crossword or Sudoku that
“reads the same in all directions,” it can be used like a
key, a perfect random number that can never be
regenerated—and function as a password that cannot
be hacked by brute force. Remember, there are an
infinite number of Sudoku puzzles…that’s why they
can’t be hacked….Try to make one up yourself and
you’ll see how clever they actually are…and I’ll let you
think through what it would take a hacker to hack one.
Once a block is discovered, you can sell access,
or ‘links’ to this very private, territory creating a chain
in which everyone is now a participant in the same
‘block’ puzzle. This makes the ‘block-chain’ operate
somewhat like a bank, and somewhat like a miniature
marketplace.
The way you probably heard of block-chains
was with the buzz over cyber-currencies, and then
about NFTs, which are artifacts of block-chains, being
the way you buy into participating in the block.
Cyber-currencies seem to be here to stay, but the
block-chain has become a much more useful tool and
technology in its own right. So I’d guess that some of
the perturbations and bank failures have to do with

8
traditional investments in that industry’s growth, and
the bets on its speed of growth.
For the world of block-chain management has
real costs in terms of the massive energy costs of
running dozens of super-computers to keep the
block-chain systems of contracts, obligations,
transactions, information security, and accounting in
those mini-marketplaces up and running. A company
managing a block-chain system, holding up several
discrete industries — oil markets, potato markets,
beef markets, healthcare insurance markets – can
chew up more electricity in a week than a suburban
township does in a month. This is REAL cost balanced
against a PRACTICAL value. Block-chains represent a
new banking and marketing industry that will grow in
importance.
After all, security has always been a key to
stability, and information security in real markets cuts
down major risks. The boys in the back room—the
Bezos’ and Soros’, the multi-national corporations,
governments, even oligarchs—value stability above all
else, as long as it allows them to bet on their world
markets in a familiar way. Betting on the block-chain
industry’s growth is where we can see dangers of a
bubble. For some of these folks may not care a whit
about peace or hunger or suffering, but the stability of
their systems of the world is extremely important.
The temptation to explore all the future usages
of block-chains before we can afford them shall be a
VeRY curvaceous road that shall tempt the economy
over the guardrail and a cliff –which is to say a busted
bubble –if we don’t understand what we are actually
9
looking at or looking for. The real concern is whether
we can keep our economic cultures inflated, and
running fast enough to let all of us in on the
transactions at once. The world of block-chains is
transparent to most of us, and investing on
cyber-currencies won’t change our way of life much.
Can government-backed takeovers work like the
“donut” that lets us keep driving until we get around
to buying a new tire? I don’t think so. Should we
focus our bets on the infinite wealth of this utility
when it takes so much energy to get us up there and
keep us going? I suggest not, if our lives and homes
are competing for the same megawatts.
What I shall do next is propose some new
options. We can “mine” infinite sources of value and
growth without requiring extra energy, while allowing
us to keep the current economic culture and its
transaction machines running.
The first is based on developing new sources of
INNER GROWTH. Inner growth means learning to
value new things, discovering new pleasures that are
worth saving for and paying for…like our new
appreciation of cuisine, and all the cooking channels
on TV. Think of it. The very same energy costs of raw
materials, sunlight converted to grain and beef,
shipping and cooking, is used up for your $300
meal-for-two at the Pierre as for the $30 meal-for-two
at Taco Bell. The skill and the desire to pay for a good
chef is simply a property of our economic
culture—and that is the “transaction machine” that
allows wealth to develop. Epicurus argued that the
poorest person could find pleasure in the subtlest
10
things by training their senses to discriminate; and
while he lived as a poor mendicant, Epicurus pointed
us to our modern Epicurean way of life!
There is a lot of economic energy that can be
driven from inner growth, developing new habits and
hobbies. This means advertising investment in
different types of education, driving motivations for
new sensory pleasures ---which are new types of
“goods” without inventing new products –simply new
channels for marketing. Facebook is the kind of
channel I’m talking about. Etsy was another. I’m sure
there are dozens ways to spread the excitement of
education for pleasure—higher RECREATIONAL
education that creates altogether new economic
incentives. The idea is to blow bubbles of foam, giving
people new purpose, an appetite to grow and shop in
new markets, instead of pushing the status value of
the latest cars and sneakers that eat up the same raw
materials at a pace they can’t be replenished.
In another paper I’ve floated the suggestion of
how to set up a new type of World Bank—to have the
United Nations settle the disputes over Arctic
territory and resources by establishing the Bank of
Gaia, who will then sell those resources while buying
back empty lands from countries around the
earth—distributing massive new funds…and just like
a bank financing the futuristic “mars-colonists” to
build and live on those lands, generating massive new
investments in the new manufacturing technologies
necessary to settle them. This is regular old
bubble-blowing, but it is based on the earth’s owning
its own resources, and controlling their sale.
11
 We cannot bet on a single growth economy.
When bubbles burst, angers and chaos and fear rule
the day, and the people keeping the pump running will
simply manipulate us as part of their game.
So I shall suggest the following metaphor. That
the economy is not played like a game, but rather a
play or produced like a film that our children shall
enjoy. We must use many different kinds of models to
design the sets—for action takes place in quite
different conceptual spaces with different types of
growth and value in each marketplace. That play is
not an “economy” but rather a metaphor for society
itself, human society, that is like a human being who
needs to keep spirit and hope and faith alive in order
to walk straight – with prudence through a crooked
path. There are certainly enough crooked people
trying to lead the way.

12