Once upon a time in a galaxy far far away there was a strange planet upon which lived three different kinds of creatures, bulls, bears, and sheeple. The bulls were eternally optimistic risk-takers and speculators, always willing to strike a quick a deal, forever living in the present, and sometimes borrowing to increase their standard of living. The bears, on the other hand, were always pessimistic, never believing in the lofty promises of the bulls and generally thinking that things would turn out for the worse. The bears liked to call themselves realists preferring a steady paycheck and building up their nest eggs for their long hibernation.
The sheeple were the most exciting. They never had any opinions of their own. Instead they pretended to be either bulls or bears depending on the fashion of the season. Sometimes they wanted to speculate and sometimes they wanted to save all their money. Being more unpredictable they were the source of endless analysis and statistical forecasts and backcasts which was kinda boring, but hey, it’s a living. Contrary to another strange planet where one species eventually managed to eradicate all its competitors, the bulls, the bears, and the sheeple lived in a dynamic balance being divided into three almost equally large groups.
And so it came to be that some of the sheeple who had for a long time listened to the bears and learned to hoard their possessions noticed a group of bulls that after having built new haymaking factories seemed to enjoy plenty of hay, always chewing the cud, and also driving convertibles. As time passed, the last of the few bulls that sometimes fraternized with the bears also dipped into savings or borrowed money and built their own factories, and soon they too were driving convertibles and John Deere tractors as well (imported from a strange planet in a galaxy far far away). This lead to a growing demand for goods and increasing interest rates and the economy expanded.
After a generation of extraordinary increases in living standards, many sheeple also started getting into the new spirit of things and building their own factories so that they too could partake in the party. Previous hardships were forgotten, and these sheeple now believed along with the bulls that progress would last forever. It was a new era and soon everybody would own their own green tractor, yo!
As more sheeple joined the party this substantially increased the demand for credit. The bears which had plenty of credit due to their boring way of life obliged to lend their money out. While they would not speculate in stocks they were willing to lend at lower interest rates while new speculators as well as old speculators were expanding productive capacity at a rampant rate building factories, houses, cars, boats, and bridges to anywhere and nowhere.
At the same time the growing amount of money circulating in the system were driving up prices of fuel, corn, other raw materials and agricultural products, especially hay, and also green paint. Many, even some bears (well, not officially), believed that this would continue forever. However, the bears, being pessimistic as always, were focusing on the increasing cost of raw materials, the bulls were talking up a new era in capital expansion, while the sheeple just enjoyed their green tractors.
What nobody noticed was that real interest rates were dropping like a rock as inflation drove commodity prices up. This left less money for doing business while at the same time leaving less money in the pockets of consumers to buy hay. And thus the consumers could no longer afford all the capital goods from the factories.
Read part II here
- This post was part of The Carnival of Financial Planning November 8th edition
Originally posted 2008-10-30 06:50:58.