I’m trying to get into a habit of reading one book every weekend or so… so far, two weeks in a row, fooo~! (By the way, the other book was trash so I’m not gonna post about it.)
Today I finished Daniel Gross’s Pop! Why Bubbles Are Great For the Economy. Title’s pretty self-explanatory. I hope.
I actually got introduced to the term “bubble” after learning about Japan’s price asset bubble, when land prices got ridiculous (like, 100 times what they are today?) and the land under the imperial palace was supposedly worth more than California at one point. Apparently, although I knew of the Dot-Com bust, what it was didn’t register all through undergraduate studies? Anyway, the book gives an treatment of the unique nature of American bubbles.
While we usually associate bubble with bad, like, “Bad! Bad 15 years of economic recession in Japan! Down! I mean up! Please!” there’s a good argument for why they are good. Many of the bubbles in American history laid the foundations for what came right afterward. Using the Dot-Com bust as my best example, we saw a bunch of companies blow through enormous amounts of cash (billions and billions and billions). And ultimately fail because their business model was retarded and looked something like this:
1. Get a lot of investors.
2. ???
3. Profit!
However, in two years these companies also laid generations of infrastructure that they themselves barely used, but it all allowed the things that followed to be successful. From Google, whose public offering single-handedly made its founders billionaires and whose culture is the envy of everyone and their extended family, to Myspace, the collection of the worst websites in existence, to Youtube, on which everyone with a broadband connection spends far too much time on, the inundating presence of these new generation of internet powers would not be possible without the widespread broadband access and infrastructure that failed businesses built not even 10 years earlier. Gross makes an argument that this is an uniquely American trend for companies and investors to get sucked into an extravagant heyday of laying massive infrastructure, and then end up crashing and burning in spectacular ways. But the same trend causes new blood to spring up upon the same things with better models that never would have been possible without the initial heyday.
Think of it this way: do you think the average user of Myspace would want to wait 5 minutes waiting for whoever he/she is stalking’s page to load? I mean, who would have known something so ugly could take so long to load? Would you want to wait 20 minutes for Youtube videos to load on non-broadband connections? Or, for that matter, any page? Because that’s how long it would have taken without the efforts of these now-dead (or mostly now-dead) internet giants.
Whereas European companies proceeded at a methodical and gradual pace in building their telegraph and railroad networks, US companies raced – literally – each other, trying to see who could build the most extensive and best railroads. Fiber optics were thrown into the ground at an rate at the end of the 90s with the same fervor.
But is this phenomenon uniquely American? Daniel Gross seems to think so. The same mindset Americans have that allows people to invest in terrible ideas at the height of bubbledom also contribute to the spring of ideas afterward. In the end, barely any of the above – telegraph, railroads, and fiber optics – were actually used by those who laid them. Generally, they went kaput from the costs, and were sold to other companies that consolidated the now low prices to build massive empires on top of them. (J.P. Morgan being one for the railroads, in case you didn’t know.) Even more importantly, the demand for this massive capacity created by these infrastructure efforts – bandwidth, if you will – eventually caught up to the capacity itself.
So, many of these ideas end up benefiting many of the people that weren’t even involved. (So if you were a sucker that plunged $70 into Cisco, Gross jokingly says you should feel okay about it because you were doing your part in the economy.) The use of telegraph and railroad wasn’t very integral to the way people ran businesses when they were placing them in place. Within a few decades, though, they were indispensable, just like how the internet is today. And it was cheap because there was so damn much of it! In the Dot-Com bust, we see this all happen at breakneck “internet speed” (I find this term ironic since running around the internet was slow as hell before broadband became widely accessible – in part because of the bust), with the companies involved blowing through their millions or billions in just a few years. But in the same amount of years, the overabundance of bandwidth and infrastructure that we were left with drove prices down for consumers, allowing everyone to access more robust content, and send it out at a fraction of the cost and in a fraction of the time.
Being who I am, I have to ask what will happen in China. We’re seeing stupendous growth in Asia, spearheaded by China and India, and backed by massive funding from foreign investment and the government itself. But if what Gross suggests is true, that the use of bubbles for economic betterment is due to a uniquely American mindset as a whole that does not exist in Chinese firms, then what happens when a China bubble bursts? (And if it is a bubble, it will burst.) Some people think “just” a 1% drop – probably less, really – in China’s 8% growth rate is enough to start the downward spiral.
Who will be caught in the rush? Or more importantly, who will be able to take advantage of the ashes to build a more risk-adverse, stable, and responsible China that continues to utilize the money already invested?
