When Economies Blow Bubbles

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When I was little, I knew a kid who would always blow bubbles. All the rest of us would gather around to watch them grow and grow. Then, naturally, the rest of us would buy our own soap (or blow bubbles with our mouths, if one was an economical chap.) Pretty soon, everyone in class was blowing bubbles. It was glorious! And us kids could not have been happier. I wish that were the end of the story.

But then it began to rain.

When each bursting bubble brought waterworks to that child’s eyes, I thought this was just the kids game, recess economies like trading lunches. But then I saw it during my time at Georgetown. And now, I see it again living in Silicon Valley. Bubbles and bursts. Bubbles and bursts.

Economies are like playgrounds, and we’re all just little kids — groups of random individuals, each with their own needs and desires, brought together in one way or another. Some kids build their own businesses (our economical friends and their homemade bubbles) and others buy existing businesses (the bubble gun); but the most foolish of them— like yours truly, for example — fundraise ungodly amounts of money with Amazonian dreams (the bubble wand).

You can view the last few years — let’s say everything post-2016–as a stunning example of bubble-blowing. Masterful, one might say.

To name a few: (1) the meteoric rise of Bitcoin and Blockchain (2) Wooly Mammoths like Amazon — which I will elaborate on in a moment — and (3) new companies like Beyond Meat (BYND), Lyft (LYFT), and soon Uber (May 9.)

Why do these bubbles occur? Are they a result of the current administration? Is there foul play involved? The economic invisible hand? Nope.

I humor myself by quoting now from two geniuses, as they quote one another.

“Studies show that we have excessive confidence in what we believe we know and inability to acknowledge our ignorance and the world’s uncertainty. We are prone to overestimate our understanding and underestimate the role of chance.”

- Daniel Kahneman from Nassim Nicholas Taleb

It’s not that Beyond Meat, or any of the mentioned, are “bad” companies. Rather, it’s that they are, quite simply, overvalued. Why are they overvalued? Well, look no further than our writers above. We humans are, in the most empirical sense, silly and unreasonable creatures. Children, whom enjoy blowing bubbles that are all too large to float (@rayKurzweil cue the AI conversation.)

Still, even the too-big-to-survive bubbles can thrive for a while, given the right circumstances — reason being that these companies are fundamentally good at what they do. Bitcoin is an excellent store of value. Lyft is a revolutionary mode of transport. Plant-based Meat is part of the future. Amazon? Mozart could not have written a more cohesive symphony.

What happens next is natural. If Mrs. Adamo puts out a bucket of soap for the class, it’s not long before all the kids want to play. When all the kids begin to play, one of three things happens:

1. There are too many bubbles for one playground — 💢

2. There are too many bubbles — they become one mega bubble and soon meet death-by-blacktop. 💢💢

3. A cloud brings in the rain — “Class! Recess is over!” 💢💢💢

We look at recessions as if they were harbingers of dystopia.

But a world with no bubbles is not a dystopia. A bubble-free world is a return to the way things were. A reality check. A return to Geometry class.

While the weather is nice, the bubbles will enjoy their time in the sun. But, in the business of life, something always happens. In fact, it has to happen, lest we all be dead. Wind blows, clouds roll, rain falls. It doesn’t matter what the change is, all it takes is that one cloud to pour rain on them all

If you are clever, you will take advantage of this trend. But if we are smart, we will stop taking advantage of it all, and stop hemorrhaging our future.

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When Economies Blow Bubbles🌬 was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.