Show me the Money

With the Global economy lurching from one largely unexplainable catastrophe to the next. I’d like to draw a couple of parallels which may help to illuminate the inherent ridiculousness of trading without substance.

In 1593 Tulip bulbs began to become popular across Europe. Particularly sought after were those affected by a virus which caused a distinctive ‘flame’ pattern on the petals. Tulip connoisseurs began to buy at inflated prices and soon Tulip bulbs were seen as an investment. At the height of Tulip bulb mania the value of just one bulb could increase twenty times in a month and ordinary people were swapping their homes, savings and businesses for one or two bulbs. These bulbs were never planted, so their intrinsic worth was never relevant. When the crash came the whole continent was brought to its knees. This has long been held as an example of economic naivety.

Moving swiftly forward to the 1990’s and here we go again. This time Beenie Babies are the fantastic investment. A $10 toy that you can sell on for thousands – understandably (perhaps) a lot of people were very interested. The company that produced them had a fantastic marketing strategy which involved releasing small numbers of each design in different areas to perpetuate the myth that these were limited edition toys. People would miss work and travel hundreds of miles to acquire the one toy that would be their pension plan.

Nobody seemed to realise that there were thousands of complete collections and that the rarity just was not there. Even the famous ‘Royal Blue Peanut’ an elephant produced in the ‘wrong’ colour only ever topped the scales at just over $3,000. A good investment by any standard but not one that was repeatable for every collector. Ten years on from the end of production the average Beenie Baby kept in pristine condition is worth approx $15 - $20. This is held as an example of economic naivety.

Scrolling forward to today - and please bear in mind that I profess to only a lay mans grasp of international economics. I have a house that I could mortgage for approximately three times what it would cost me to build an identical replacement, so which figure represents its actual value? Unfortunately both figures are correct. One to me (how much would it cost me to replace?) and one to the banking world (how much is it worth to mortgage?).

This means that 66% of the value of my house does not, in real terms, exist. With over 25 million homes in the UK, the difference in one country, relating only to property must be absolutely mind boggling. I think that this should be seen as an example of economic naivety.

Am I worried? Not really, I’ve got a garden full of tulips and a loft full of Beenie Babies!