Why economic bubbles can be a good thing

The LinkedIn's IPO has the tech and investor world going bananas due to it's wild stock value.  LinkedIn was priced to open at $45 a share and is already up to $85. (10 AM ET)  Pundits are taking this exuberance as an opportunity to shout from the mountain top that we are about to enter a second technology bubble like we had in the late 1990's

The story being sold is that bubbles are a bad thing, that you should watch out for your money.  That is true. You shouldn't throw money around in an effort to get rich quick. But I think the press do us a disservice to label economic bubbles as completely negative.  In the short term, yes, they can have negative effects, but in the long term they have can create tons of hidden value.

Let's look at the positives that can come out of bubbles from a historical perspective:

Infrastructure
– the two biggest infrastructure advances in world history came because of economic bubbles.  The first, the laying of rail road rails across the US throughout the 1860-70's ending in The Panic of 1973  This overbuilding of rails laid the ground work for the US growth in the 20th century.(There was a second railroad led panic in 1893) The rails speed communication, the movement of resources and expansion of commerce. 
The second, the laying of fiber optic cable in the build up for the first internet explosion.  Just as we did with rail roads, we over built and created a vast network of connected data systems.  Google and others took advantage and created the speedy information networks and cloud computing we use today.

Talent creation
– bubbles have a way of getting people into the work force who may not quite be ready and releasing those folks into the unemployment line when the bubble bursts.  The 2001 internet taught lots of investors and venture capital folks what doesn't work.  Many of them got burned, learned and knew what to look for going forward.  Crashes also throw tons of people out of work.  Those out of work become the new creators, new business makers. Desperation can be the mother of invention. I don't have the exact numbers, but I have heard somewhere that in the 1930's more businesses where started than at any time before?  We're seeing that again today with the economic crash of 2008,  there seem to be more people trying to make new businesses.  Where in the years prior, the brightest and best would try and work at a hedge fund or go into banking we're now seeing young people starting businesses.

With the United States economy being relatively dynamic. It is flexible and money usually finds good ideas.  Those good ideas will become the new business.  We're less dynamic than we used to be,  but we're still the most open society in the world.  Bubbles can lay the ground work for growth, either through new infrastructure,  new talent or simply talent with idle hands.  There is a lot of pain when a bubble bursts, but there seems to be seeds that are sown during the darkest days.Originally appeared https://laurent-courtines.com/why-economic-bubbles-can-be-a-good-thing from http://laurent-courtines.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s