Excerpts from Bubblenomics: A Crash Course in Common Cents by Lawrence Rowe

Economic bubbles have been engineered throughout history. The housing bubble of the Roaring 2000s which preceded the current Depression has the same cause as the stock-market bubble of the Roaring 20s which preceded the Great Depression. Each bubble is not new and unique, but rather a repetition of the same old pattern. Thus the term bubblenomics:

bub•ble•nom•ics, noun, the study of the general principles of inflating and deflating economic bubbles.

Please don’t let the term bubblenomics scare you. This is a crash course in common cents, in monetary principles which are depressingly simple when expressed in plain language. The ultra-rich mystify economic bubbles to increase their profit and power, and perpetuate debt serfdom.

I have labored to demystify the truth, and distill it down to a simple form so that you obtain maximum wisdom with minimum effort.

* * *

If you or I printed money, we would be convicted of counterfeiting. But it is legal for the Fed to create money because the government has given them this power and denied it to everyone else.

This power to print money can be confusing. Someone has to print money for it to exist and circulate, and a society with circulating money is more prosperous than one without it. But abuse of the money printing power is an evil like the counterfeiting you or I would go to prison for. Deciding how money will be created, and what form it will take, is one of the most important choices a nation makes, and much of history is a struggle for control of this all-important power.

* * *

In 1931 a one-pound loaf of white bread cost 7.7¢. Today that loaf costs at least 100¢. A dollar. We are talking plain-Jane white bread, not $4.00-a-loaf organic 49-grain variety. Technology allows a farmer today to produce more wheat than a farmer in 1931. Computers, robotics, pesticides, tractors, irrigation. All sorts of productivity improvements have become commonplace, and should have made bread cheaper, yet here it sits at a buck a loaf.

* * *

No physical money is printed. It is done virtually, on computers. We need another new word. Computer exists as a noun, we’ll be using it as a verb:

com•put•er, verb, to create money out of thin air on a computer ledger. Also: computered, computering.

Physical money is roughly 10% of America’s money supply, 90% is computered. 9 virtual dollars per paper dollar.

* * *

A house in your neighborhood was valued at $100,000 ten years ago, $285,000 last year, and sold for $305,000 this year. Never mind interest, mortgages, debt. Buy as many houses as you can. Wait twenty years and sell them for ten times what you paid. Or wait ten weeks and turn a quick 10% profit. It’s as sure as the sunrise. Easy money. Only a sucker wouldn’t take a ride on this gravy train. Choo choo, all aboard!

This becomes the basic view of the average person.

In hindsight, everyone admits it was absurd. Economists that championed credit while the bubble inflated bemoan the unraveling. Even intelligent, conservative people are duped. They didn’t buy extra houses, but took “equity” out of the home they “owned” and bought plasma TVs, hot tubs, THX jetski speakers. Or they used the “equity” for home improvements, expanding kitchens, redoing bathrooms, certain that every $1 spent on improvement would lead to $5 of resale value.

* * *

Credit Default Swaps (CDSs) are insurance taken out on financial instruments. In banker-ese, “credit default” means screwed. Someone who was issued credit (a loan) has defaulted (stopped making payments on the loan). The buyer of a CDS makes payments to a seller, who pays him if there is a default on the insured credit instrument. “Credit default swap” is just a fancy term that means insurance for investments. Mortgage insurance is a credit default swap. If you can’t pay your mortgage, the insurer does. You purchase this protection.

You only insure assets you own, but a credit default swap can be purchased for assets someone else owns. If you had a $1 million life insurance policy, you might worry about your spouse killing you. Imagine if your neighbor could take out a $10 million life insurance policy on you.

A credit default swap can be issued for anything. A company, a loan, a credit card, a bond, an interest rate, a person, a sick goldfish. All you need is one party willing to make regular payments to insure themselves against event A, and another willing to agree to a payout if event A happens.

Your neighbor takes out a life insurance policy on your spouse and children. Then a fire insurance policy on your house. You notice gas cans near his garage...

* * *

Imagine thieves at AIG, the largest insurance company on Earth, sitting around scheming a way to earn more premiums. Everybody who needs car and home and life insurance has pretty much bought it. But what if AIG could start selling insurance on every stock, bond, mutual fund and loan on Earth? Such CDS agreements were structured just like normal insurance policies, except the payout was in the event of a bond default, stock decline, or mortgage foreclosure.

Normal insurance companies don’t have enough money to back all policies, why should CDS insurers? Every house in America doesn’t catch fire at once. Hurricane Katrina doesn’t hit all of America at once. Half of Americans don’t keel over from a heart attack or get hit by a car all at once. Conventional insurance is based on rare events. As the entire economy is at the mercy of monetary waves, every business in America can decline at once, resulting in massive bond defaults. Millions of mortgages can be defaulted on at once. Sellers of CDSs can suddenly be asked to payout claims on most of their CDS insurance “policies” all at once.

Excerpts Main Page

Read the beginning of Bubblenomics

Your web browser must have the Adobe Acrobat Plugin installed.

Download the beginning of Bubblenomics in PDF

To save the file, right click on the link above and select Save As. Your computer must have Adobe Acrobat Reader installed to open PDF documents.