July 15 2009Since looking for work these days mostly involves at least having to hear about "times like these" I thought this would be an appropriate place to put in my two cents worth about what makes the economy tick and tock.
I think that one of the big problems with a "bubble," like the dot com bubble, or the real estate bubble, is that they involve people being out simply to make money. What I mean is, what we do all day is important. So important that it generally involves money moving in one direction or another. It might be that the problem with people who simply want to "make money" is that they misunderstand just what money is in the first place.
In any of its many forms, money is an abstract thing. It isn't real. Sure, you can touch a dollar bill, but the intrinsic value of a one dollar bill is exactly the same as the intrinsic value of a hundred-dollar bill, since they're made out of identical materials. And, frankly, it isn't much. If a dollar bill didn't represent money, what could you do with it? Start a fire? Sneeze into it? Maybe, but not much else. To understand what money is, you have to look at the broad history of money.
Back in the day, and I mean way, way back, people would do favors for each other knowing that the favor would be returned when the need arose. In a hunter-gatherer group of twenty-five people, it was pretty simple to keep track of who owed a favor to whom. In fact, most of the time I imagine the entire group knew the score, so there was no money at all, just favors and good will being traded around. Sort of like "I'll carry that extra flint if you make me real nice set of arrow points," I suppose.
But eventually people started settling down, and, well, it worked. Once in towns and growing food, population grew. Now you might be in a town with a thousand other people, maybe more. How could a thousand people possibly keep track of who owed favors to whom? They couldn't, of course. So instead of everybody knowing it all, tokens were invented to represent favors given. That is, you do me a favor, I give you a token. Now you can give that token to someone who does you a favor, and they can use it for somebody who does them a favor, and most likely that same token will come back to me sooner or later and I'll pass it on again. Those tokens are what we call money. A dollar bill is a token, and it passes from hand to hand.
A token for a favor is an abstraction already. It represents a favor, even if it has no real value itself. Like a dollar bill, it could be essentially worthless except for what it represents. We now, of course, have invented many sophisticated, and in some cases non-material, tokens that are so abstract that they're hard to think about. That's the sort of money that gets involved in a bubble, where people are trying to make money off of simply investing money.
In theory, the favor involved in an investment is the use of your money by the person you invest it with. They get to use your tokens, but they you profit when the enterprise profits, and with luck, you make a profit back. That's great, that's common stock ownership, and it works. In a bubble, though, people try to make money off of the abstract value of the investment, which like a dollar bill, is in reality very little. In the housing market we saw investors "flipping" houses by buying, repainting, and reselling them quickly for a profit. For a while the abstractions worked, but as they had no intrinsic value, the bubble, like all bubbles, burst. You can get a house in Vegas today for one-quarter what it would have cost you two years ago. That three-quarter value (it's not that bad in most cases, actually, but I like a good extreme example) was the abstract value of the investment itself, not the intrinsic value of the property.
Those are some nasty big words. Here it is in simple language: When the value of an investment is rising like crazy, and people are saying things like "there's no telling how high it will go," you're looking at a bubble that's bound to burst. If you have money in it, sell now while there are still fools willing to buy. A real investment, and I'm getting this figure from the book
Securities Analysis, will repay you a modest amount over a rather long time. If you reinvest your profits, you can eventually make a living off of investments. You may even get rich, slowly.
There is only one way to get rich fast: luck. Comstock was lucky in Nevada. The early oilmen were lucky in Oklahoma and Texas. And so it goes. The alternative to luck is steady investment looking for a steady return. And that, friends, is how I bring this back to job seeking, which is actually nothing more than a steady investment in yourself that will pay a steady return in the form of a career you're glad to be in.
There will always be fools falling for bubbles, but you don't have to be one of them.
Steve
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